U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22321 / April 6, 2012
Accounting and Auditing Enforcement Release No. 3378 / April 6, 2012
SEC v. Anthony J. Nocella and J. Russell McCann, Case No. 4:12-cv-1051 in the United States District Court for the Southern District of Texas.
The Securities and Exchange Commission today charged Anthony J. Nocella and J. Russell McCann for their involvement in a financial fraud at Franklin Bank Corp., a Houston-based bank holding company. The SEC’s complaint alleges that Franklin CEO Nocella and CFO McCann implemented increasingly aggressive loan modification programs during the 3rd and 4th quarters of 2007 to hide from investors the true amount of Franklin’s non-performing assets and to artificially inflate Franklin’s net income and earnings.
According to the SEC’s complaint filed in U.S District Court for the Southern District of Texas, Nocella and McCann knew that the delinquencies and non-performing loans in Franklin’s single family and residential construction loan portfolios increased significantly during the summer of 2007. The SEC alleges that Nocella and McCann implemented three loan modification schemes that caused Franklin to account for delinquent and non-performing loans as performing, thereby concealing that the quality of the Bank’s loan portfolio was deteriorating. By the end of September 2007, Nocella and McCann had allegedly used the loan modification programs to conceal from shareholders over $11 million in non-performing single family residential loans and $13.5 million in non-performing residential construction loans.
The SEC’s complaint further alleges that, as a result of the loan modification scheme, Nocella and McCann understated Franklin’s non-performing assets by 44%, and overstated Franklin’s net income by 317% for the quarter ended September 30, 2007. The complaint also alleges that Nocella and McCann overstated Franklin’s earnings by 77% for the 3rd quarter of 2007. Specifically, Nocella and McCann represented that Franklin earned $0.30 per share, which improperly included $0.23 per share directly attributable to the loan modification scheme.
The SEC has alleged that Nocella and McCann committed direct violations or aided and abetted violations of Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 12b-20, 13a-11, 13a-13, 13a-14, 13b2-1, and 13b2-2 thereunder. The SEC’s complaint seeks permanent injunctions, disgorgement with prejudgment interest, civil penalties, officer-and-director bars, and repayment of bonuses pursuant to Section 304 of the Sarbanes Oxley Act of 2002.