Semiannual Report to Congress

Investigations

The OIG’s Office of Investigations conducts criminal, civil, and administrative investigations related to Board and CFPB programs and operations. The OIG operates under statutory law enforcement authority granted by the U.S. Attorney General, which vests our Special Agents with the authority to carry firearms, seek and execute search and arrest warrants, and make arrests without a warrant in certain circumstances. OIG investigations are conducted in compliance with CIGIE’s Quality Standards for Investigations and the Attorney General Guidelines for Offices of Inspector General with Statutory Law Enforcement Authority.

State Member Banks

The Board is responsible for supervising and regulating state-chartered member banks that are members of the Federal Reserve System. Under delegated authority from the Board, the Federal Reserve Banks execute the day-to-day supervision of state member banks, and BS&R is responsible for overseeing the Reserve Banks’ supervisory activities. Our office’s investigations concerning state member banks typically involve allegations that bank officers have falsified financial records, lied to or misled examiners, or obstructed examinations in a manner that may have affected the Board’s ability to carry out its supervisory and regulatory responsibility over state member banks. Such activity may result in criminal violations, such as false statements or obstruction of a bank examination.

Our office’s investigative efforts in such cases typically consist of interviewing witnesses and subjects; identifying and obtaining critical Board documents; issuing subpoenas; analyzing financial records; and coordinating work between the U.S. Department of Justice, other law enforcement partners, and Board and Reserve Bank staff. Examples of investigations affecting the Board’s ability to carry out its supervisory and regulatory responsibilities over state member banks are provided below; however, due to prosecutorial discretion and the nature of the investigative process, certain criminal allegations investigated by our office may not appear in U.S. Department of Justice indictments or plea agreements.

Former CEO of the Bank of the Commonwealth Sentenced to 23 Years in Prison for Fraud

On November 6, 2013, the former CEO and Chairman of the Board for the Bank of the Commonwealth, Norfolk, Virginia, was sentenced to 23 years in prison, followed by 5 years of supervised release, for conspiracy to commit bank fraud, false entry in a bank record, unlawful participation in loans, false statements to a financial institution, misapplication of bank funds, and bank fraud. The court further ordered the defendant to pay $333,569,732 in restitution to the FDIC. The defendant was found guilty on May 24, 2013, after a 10-week jury trial.

Evidence presented at trial demonstrated that the defendant engaged in an illegal reciprocal relationship with certain troubled borrowers to mask the bank’s deteriorating financial condition. Other conspirators testified at trial that, at the request of the defendant and another bank executive, they performed favors, such as buying Bank of the Currituck stock, bailing out the defendant’s son on bad investments, and purchasing bank-owned property with fully funded Bank of the Commonwealth loans. In return, they received preferential treatment, such as being afforded large overdrafts, sometimes for hundreds of thousands of dollars, at below-market interest rates; granted loans to make interest payments on other loans; and provided easy access to credit. Additionally, the defendant funded, without the approval of the bank’s board of directors, three loans totaling $11 million to another troubled borrower who was in bankruptcy and was the subject of a federal grand jury investigation. Later, the defendant made false entries in bank records to conceal the fact that he authorized the funding of these loans without proper approval.

The defendant’s crimes contributed to the failure of the Bank of the Commonwealth on September 23, 2011. As a result of this failure, the FDIC’s DIF has sustained at least $333 million in losses.

The case was the result of a joint investigation by the Board-CFPB OIG, the Federal Bureau of Investigation (FBI), the Internal Revenue Service–Criminal Investigation Division, SIGTARP, and the FDIC OIG. This case was prosecuted by the U.S. Attorney’s Office for the Eastern District of Virginia.

Former Vice President of Fifth Third Bank Charged in Scheme to Defraud

On February 19, 2014, the U.S. Attorney’s Office for the Middle District of Florida charged a former Vice President of Fifth Third Bank, Jacksonville, Florida, with one count of bank fraud. Fifth Third Bank is a state member bank with its headquarters in Cincinnati, Ohio. The defendant was employed by Fifth Third Bank for six years and served as a Vice President in 2009.

According to the charges, the defendant engaged in a four-year scheme to defraud the bank, whereby he embezzled a total of approximately $10,542,374 from the accounts of one major corporate bank customer and two retail bank customers. The defendant allegedly embezzled funds from individuals’ and corporate customers’ accounts for his personal and other uses, including making home mortgage payments, installing a pool at his home, and other personal living expenses; funding off-the-book loans for customers who had previous loan requests denied; making off-the-book interest payments on the off-the-book loans; paying off troubled loans in his portfolio of customers; and depositing the embezzled funds into other customers’ deposit accounts to fraudulently bolster the customers’ creditworthiness.

This is a joint investigation by the Board-CFPB OIG, the FBI, and Fifth Third Bank’s Protection Division. This case is being prosecuted by the U.S. Attorney’s Office for the Middle District of Florida.

Bank Holding Companies

The Board is responsible for supervising and regulating bank holding companies, including financial holding companies formed under the Gramm-Leach-Bliley Act, on a consolidated basis. Under delegated authority from the Board, the Federal Reserve Banks execute the day-to-day supervision of bank and financial holding companies, and BS&R is responsible for overseeing the Reserve Bank’s supervisory activities. Our office’s investigations concerning bank holding companies typically involve allegations that holding company directors or officers falsified financial records, lied to or misled examiners, or obstructed examinations in a manner that may have affected the Board’s ability to carry out its supervisory and regulatory responsibilities over bank holding companies. Such activity may result in criminal violations, such as false statements or obstruction of a bank examination.

Our office’s investigative efforts in such cases typically consist of conducting witness and subject interviews; identifying and obtaining critical Board documents; issuing subpoenas; analyzing financial records; and coordinating work between the U.S. Department of Justice, other law enforcement partners, and Board and Reserve Bank staff. Examples of investigations affecting the Board’s ability to carry out its supervisory and regulatory responsibilities over bank holding companies are provided below, although due to prosecutorial discretion and the nature of the investigative process, certain criminal allegations investigated by our office may not appear in U.S. Department of Justice indictments or plea agreements.

Seven Former Bank Officers Pleaded Guilty in Loan-Fraud Scheme That Preceded Collapse of First National Bank of Savannah

Seven former officers of First National Bank of Savannah, Savannah, Georgia, pleaded guilty before a United States District Court Chief Judge, Southern District of Georgia, for their role in a massive loan-fraud scheme against First National Bank of Savannah and other federally insured banks. The defendants pleaded guilty to various charges in a 47-count indictment returned by a federal grand jury in Savannah in January 2013. First National Bank of Savannah is a subsidiary of First National Corporation, a bank holding company regulated by the Board.

The officers were

• the former Vice President of Credit Administration of First National Bank of Savannah, who pleaded guilty on October 25, 2013, to a single count of bank fraud
• the former President and CEO of First National Bank of Savannah, who pleaded guilty on November 12, 2013, to conspiring to defraud First National Bank of Savannah and other federally insured banks
• the former Executive Vice President and Chief Financial Officer of First National Bank of Savannah, who pleaded guilty on January 15, 2014, to two counts of bank fraud
• the former City President of the Richmond Hill branch and a Commercial Loan Officer of First National Bank of Savannah, who pleaded guilty on January 15, 2014, to a single count of false entries made in bank records
• a former Senior Vice President and Commercial Loan Officer of First National Bank of Savannah, who pleaded guilty on January 16, 2014, to two counts of bank fraud
• the former City President and Senior Lending Officer of First National Bank of Savannah, who pleaded guilty on January 17, 2014, to two counts of bank fraud
• the former City President of the Tybee Island branch and a Commercial Loan Officer of First National Bank of Savannah, who pleaded guilty on January 21, 2014, to two counts of bank fraud

According to evidence presented during the guilty plea hearings, as First National Bank of Savannah’s financial condition began to deteriorate, the defendants attempted to conceal from the bank, the bank’s board of directors, and federal regulators millions of dollars in nonperforming loans. The defendants accomplished their scheme by unlawfully loaning money to unqualified nominees to make interest and other payments on other nonperforming loans and by enticing others to take over nonperforming loans with hidden promises, side deals, and other terms unfavorable to First National Bank of Savannah and by recruiting other banks to fund nonperforming loans based on fraudulent misrepresentations about the quality of the loans. To assist in their scheme, the defendants falsified and fabricated numerous bank documents and records. First National Bank of Savannah failed and was taken over by the FDIC as receiver on June 25, 2010. The FDIC estimates that First National Bank of Savannah’s failure will cost the DIF over $90 million.

The defendants will be sentenced after the United States Probation Office completes its presentence investigations. The defendants remain on bond pending sentencing. This case was the result of a joint investigation by the Board-CFPB OIG, the FDIC OIG, and the Treasury OIG. This case is being prosecuted by the U.S. Attorney’s Office for the Southern District of Georgia.

Missing Georgia Bank Director, Accused of Embezzling More Than $20 Million, Arrested

A former Bank Director, originally from Lyons, Georgia, who was indicted in July 2012 by a federal grand jury in the Southern District of Georgia on a charge that he defrauded the Montgomery Bank & Trust, Ailey, Georgia, of over $21 million, was arrested on December 31, 2013, by members of the Glynn County Sheriff’s Department who were conducting a random vehicle and traffic stop. Montgomery Bank & Trust is a subsidiary of Montgomery County Bankshares, Inc., a bank holding company regulated by the Board.

According to the allegations in the indictment against the former Bank Director, in 2010, an investment group he controlled invested approximately $10 million in the failing Montgomery Bank & Trust. He was then made a director of Montgomery Bank & Trust and became responsible for investing the bank’s capital. The indictment alleged that over the next 18 months, he stole, misappropriated, and embezzled over $21 million from Montgomery Bank & Trust. To cover up his fraud, he allegedly provided bank officials with false account statements that indicated that the bank’s capital was safely held in an account at a financial services firm.

Before the arrest, the former Bank Director was last seen in June 2012 boarding a ferry in Key West, Florida, bound for Fort Myers, Florida. He disappeared after writing a letter to acquaintances and regulators indicating that he had lost a large amount of money and that he planned to take his own life. The FBI had been actively searching for him since the date of his disappearance. He was stopped by deputies from the Glynn County Sheriff’s Department on Interstate 95 in Brunswick, Georgia. When deputies learned of his true identity, he was arrested and taken into custody.

The former Bank Director is charged with one count of bank fraud in the Southern District of Georgia, which carries a maximum sentence of 30 years in prison and a fine of up to $1 million. He faces additional charges in New York. This case was the result of a joint investigation by the Board-CFPB OIG, the FDIC OIG, and the FBI. This case is being prosecuted by the U.S. Attorney’s Office for the Southern District of Georgia.

Two Former United Commercial Bank Officials Charged in Superseding Indictment

On March 11, 2014, a former Executive Vice President and a former Senior Vice President of United Commercial Bank were charged with additional federal offenses in a superseding indictment returned by a federal grand jury in San Francisco, California. Both officers had been previously charged in an earlier indictment, dated September 15, 2011, on several counts, including securities fraud, falsifying corporate books and records, and false statements to accountants of a publicly traded company. The superseding indictment contains all of the previous charges and includes additional counts. United Commercial Bank is a subsidiary of UCBH Holdings, Inc., a bank holding company regulated by the Board.

According to the superseding indictment, the former Executive Vice President and the former Senior Vice President worked for United Commercial Bank from September 2008 through April 2009. These former executives allegedly engaged in a fraudulent scheme to deceive United Commercial Bank, the bank’s depositors, the investing public, the Securities and Exchange Commission, auditors, and bank regulators by manipulating United Commercial Bank’s books and records in a manner that misrepresented and concealed the bank’s true financial condition and performance and caused United Commercial Bank to issue false and misleading statements and representations.

As a further part of the scheme to defraud, the defendants and others allegedly misled and lied to the bank’s auditor and failed to disclose facts necessary to make their statements and representations complete and accurate. The defendants and others allegedly misrepresented various bank loans and collateral securing those loans and concealed and omitted material information related to (1) the existence of recent appraisals of collateral that secured various bank loans, (2) the value of repossessed assets and collateral, and (3) the bank’s intention to sell various loans as well as pending loan sales.

This case was the result of a joint investigation by the Board-CFPB OIG, the FDIC OIG, SIGTARP, and the FBI. This case is being prosecuted by the U.S. Attorney’s Office for the Northern District of California.

Former One Bank & Trust N.A. Vice President Indicted for Bank Fraud and Money Laundering

On November 8, 2013, an indictment was unsealed in the Eastern District of Arkansas charging a former Vice President and Controller of One Bank & Trust N.A., Little Rock, Arkansas, with 30 counts of bank fraud and 30 counts of money laundering. According to records from Treasury’s Troubled Asset Relief Program (TARP), One Financial Corporation, the bank holding company for One Bank & Trust N.A., received $17.3 million in June 2009 in federal taxpayer funds through TARP.

The indictment alleges that while employed with One Bank & Trust N.A., the defendant obtained 30 cashier’s checks from January 2009 to October 2011 by using his position to sign cashier’s checks drawn on a One Bank & Trust N.A. clearing account. He would then mail the cashier’s checks to two credit card companies with which he had personal accounts to pay off the credit card bills. In total, the defendant is alleged to have stolen approximately $74,974. When confronted by One Bank & Trust N.A. management, he admitted his actions. He was allowed to resign, and he paid back the amount he had stolen.

The case was investigated by the Board-CFPB OIG, the Internal Revenue Service–Criminal Investigation Division, SIGTARP, the FBI, and the FDIC. The case is being prosecuted by the U.S. Attorney’s Office for the Eastern District of Arkansas.

Former Bank Holding Company Officer Sentenced

On March 25, 2014, the former Chairman, President, and majority shareholder of Calvert Financial Corporation (CFC), Ashland, Missouri, the bank holding company for Mainstreet Bank, was sentenced in United States District Court to two years of probation, during which he will serve eight months in a halfway house to be followed by four months of electronically monitored home detention. The former CFC officer was also ordered to make restitution to CFC in the amount of $96,978 and was assessed a criminal fine of $10,000 and a special assessment of $25. Additionally, the former officer executed a consent order with the Board agreeing not to become or continue serving as an officer, director, employee, or institution-affiliated party as originally agreed to in his plea agreement.

Previously, the former CFC officer entered into a plea agreement on August 26, 2013, with the U.S. Attorney’s Office for the Western District of Missouri. The former CFC officer, who also served as the Chairman and Chief Financial Officer of Mainstreet Bank, pleaded guilty to an information in federal court to one count of making a false writing in violation of 18 U.S.C. § 1018.

According to the plea agreement, in November 2008, CFC applied to receive TARP funds. In January 2009, CFC received $1,037,000 through TARP. The Chairman, as the duly authorized Senior Executive Officer of CFC, signed all transaction documents related to the acquisition of the TARP funds. On February 2, 2009, the Chairman used $381,487 of the TARP funds to purchase a luxury condominium in Fort Myers, Florida. The Chairman arranged the transfer of funds for the purchase of the condominium and executed all transaction documents for the purchase.

As part of its duty to supervise, audit, and investigate institutions that received TARP funds, SIGTARP was required to annually submit to Congress a report detailing how those institutions that received TARP funds used their funds. Pursuant to its duty, SIGTARP transmitted letters to various financial institutions seeking specific information as to how TARP funds were used by the institution.

In a letter transmitted to SIGTARP dated February 10, 2009, the Chairman responded to the SIGTARP use-of-funds inquiry. In his letter, the Chairman failed to disclose that a significant portion of TARP funds had been used to acquire the condominium. According to the plea agreement, the failure by the Chairman to disclose the purchase of the condominium was a material misrepresentation of facts relating to the true use of TARP funds by CFC.

As part of the plea agreement, the Chairman agreed to enter into a consent order of removal and prohibition with the Board in which he agreed not to become or continue serving as an officer, director, employee, or institution-affiliated party without the prior approval of the appropriate federal financial institution regulatory agency.

This is a joint investigation by the Board-CFPB OIG, the FBI, and SIGTARP. This case is being prosecuted by the U.S. Attorney’s Office for the Western District of Missouri.

Table 9: Summary Statistics on Investigations During the Reporting Period^a