U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 22493 / September 25, 2012
Accounting and Auditing Enforcement Release No. 3410 / September 25, 2012
SEC v. Gilbert G. Lundstrom et al., Civil Action No. 8:12-cv-00343 (D. Neb., filed September 25, 2012); SEC v. Don A. Langford, Civil Action No. 8:12-cv-00344 (D. Neb., filed September 25, 2012)
SEC Charges Bank Executives in Nebraska with Understating Losses During Financial Crisis
The Securities and Exchange Commission today charged three former bank executives in Nebraska for participating in a scheme to understate millions of dollars in losses and mislead investors and federal regulators at the height of the financial crisis. One of the executives and his son also are charged with insider trading.
The SEC alleges that Gilbert G. Lundstrom, who was the CEO and chairman of the board at Lincoln, Neb.-based TierOne Bank, along with president and chief operating officer James A. Laphen and chief credit officer Don A. Langford played a role in TierOne understating its loan-related losses as well as losses on real estate repossessed by the bank. TierOne had expanded into riskier types of lending in Las Vegas and other high-growth geographic areas in Arizona and Florida, and the bank was experiencing a significant rise in high-risk problem loans. TierOne's primary banking regulator, the Office of Thrift Supervision (OTS), directed TierOne to maintain higher capital ratios as a result of the bank's increase in high-risk problem loans. To appear to comply with these heightened capital requirements, Lundstrom, Laphen, and Langford disregarded information showing that the collateral securing certain TierOne loans and real estate repossessed by the bank was overvalued due to the bank's reliance on stale and inadequately discounted appraisals. The losses were understated by millions of dollars in multiple SEC filings.
According to the SEC's complaints filed in U.S. District Court for Nebraska, the truth about TierOne's losses did not become publicly known until late 2009 after OTS required TierOne to obtain new appraisals for its impaired loans. TierOne, in turn, disclosed more than $130 million in loan losses. Had these loss provisions been booked in the proper quarters, the bank would have missed its required capital ratios as far back as the fourth quarter of 2008. Following the announcement of these loss provisions, TierOne's stock price dropped more than 70 percent, and the bank filed for bankruptcy shortly after it was shut down by OTS in June 2010.
With regard to the insider trading charges against the Lundstroms, the SEC alleges that Gilbert Lundstrom tipped his son in 2009 with confidential details about a proposed asset sale between TierOne and Great Western Bank. Based on this material, nonpublic information, Trevor Lundstrom bought nearly 210,000 TierOne shares between June and September 2009 in anticipation of the asset sale. Following a September 4, 2009 public announcement about the transaction, Lundstrom sold his TierOne holdings for $225,921 in illicit profits.
Laphen consented to a final judgment enjoining him from violations of Exchange Act Sections 10(b) and 13(b)(5) and Rules 10b-5, 13b2-1, and 13b2-2 and from aiding and abetting violations of or controlling any person who violates Exchange Act Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13; barring him from serving as an officer or director of a public company; and imposing a civil penalty of $225,000.
Trevor Lundstrom consented to a final judgment enjoining him from violations of Exchange Act Section 10(b) and Rule 10b-5; imposing disgorgement of $225,921, plus prejudgment interest of $16,507; and imposing a $225,921 civil penalty.
The SEC's case against Langford is ongoing. The SEC alleges that Langford violated Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5(a) and (c), 13b2-1, and 13b2-2, and aided and abetted violations of Exchange Act Sections 10(b), 13(a), and 13(b)(2)(A) and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13. The SEC's complaint seeks a permanent injunction, civil money penalties, and an officer and director bar against Langford.