SEC: BankAtlantic Defrauded Investors On CRE Loans
The Securities and Exchange Commission has charged the holding company for one of Florida’s largest banks and its top executive with misleading investors about growing problems in one of its significant loan portfolios early in the financial crisis.
The SEC alleges that BankAtlantic Bancorp and its CEO and chairman Alan Levan made misleading statements in public filings and earnings calls in order to hide the deteriorating state of a large portion of the bank’s commercial residential real estate land acquisition and development portfolio in 2007. BankAtlantic and Levan then committed accounting fraud when they schemed to minimize BankAtlantic’s losses on their books by improperly recording loans they were trying to sell from this portfolio in late 2007.
“BankAtlantic and Levan used accounting gimmicks to conceal from investors the losses in a critical loan portfolio,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “This is exactly the type of information that is important to investors, and corporate executives who fail to make that required disclosure will face severe consequences.”
According to the SEC’s complaint filed in U.S. District Court for the Southern District of Florida, BankAtlantic and Levan knew that a large portion of the loan portfolio – which consisted primarily of loans on large tracts of lands intended for development into single family housing and condominiums – was deteriorating in early 2007 because many of the loans had required extensions due to borrowers’ inability to meet their loan obligations. Some loans were kept current only by extending the loan terms or replenishing the interest reserves from an increase in the loan principal. Levan knew this negative information in part from participating in the bank’s Major Loan Committee that approved the extensions and principal increases. BankAtlantic and Levan also were aware that many of the loans had been internally downgraded to non-passing status, indicating the bank was deeply concerned about those loans.
“BankAtlantic and Levan publicly minimized the risks in the bank’s commercial residential loan portfolio when in reality, they had significant concerns about the borrowers’ ability to pay,” said Eric I. Bustillo, Miami Regional Office Director. “Investors had a right to know this key information.”
The SEC alleges that despite this knowledge, BankAtlantic’s public filings in the first two quarters of 2007 made only generic warnings of what may occur in the future if Florida’s real estate downturn continued. BankAtlantic failed to disclose the downward trend already occurring in its own portfolio. The steady deterioration of this portfolio constituted a known trend that should have been disclosed in the Management’s Discussion and Analysis (MD&A) section of BankAtlantic’s filings, which were signed by Levan. During earnings calls in the same time period, Levan made further misleading statements to investors about the portfolio. BankAtlantic finally acknowledged the problems in the third quarter of 2007 by announcing a large unexpected loss. The investing public did not expect a loss of that magnitude, and BankAtlantic’s share price immediately dropped 37 percent.
According to the SEC’s complaint, BankAtlantic and Levan attempted to sell some of the deteriorating loans after this announcement. However, they failed to account for them properly as being “held for sale,” which is required by Generally Accepted Accounting Principles (GAAP). BankAtlantic concealed the attempted sales from auditors and investors alike, because proper accounting would have required BankAtlantic to write them down and incur immediate additional losses. Instead, BankAtlantic schemed to understate its net loss by more than 10 percent in its 2007 annual report.
The SEC’s complaint seeks financial penalties and permanent injunctive relief against BankAtlantic and Levan to enjoin them from future violations of the federal securities laws. The complaint also seeks an officer and director bar against Levan.
The SEC’s investigation was conducted by Senior Counsel Brian P. Knight and Senior Accountant Fernando Torres under the supervision of Assistant Regional Director Thierry Olivier Desmet in the Miami Regional Office. C. Ian Anderson and Adam L. Schwartz will lead the SEC’s litigation efforts.
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