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Archives for October 2011

20 Oct

Did New Canaan Patch Hold a Bank Fraud story to Appease Advertisers?

Yesterday the FDIC took depositions of borrowers who say Fred DeCaro Jr. and his son Fred DeCaro III committed serious lending violations while running now failed USA Bank. The publicly traded institution which focused on construction lending to some of Greenwich and New Canaan McMansion developers, was the subject of an investigative report I published at DealFlow Media this May. But nearly a year before I went to print the New Canaan Patch (an AOL Publication) had commissioned the same story from me and then decided not to run it because their Regional Editor was afraid it would upset their local advertisers.

On July 14th, 2010, a fresh out of journalism school Patch editor, Max Schlesselberg met with me in New Canaan to discuss the story angle and the documents/sourcing I had developed. I told him Peter Keller, who was then an executive at Bank of New Canaan, could be implicated in the alleged fraud for being aware of the DeCaros actions but did nothing to stop it. Schlesselberg had a monthly budget of only $500 to buy freelance work and appeared so excited about the story he offered me more than half of his budget, $300, to run it. I immediately began calling around the area notifying sources in town it was a go and asking for others in town to go on the record.

Within 24 hours though I got an odd email from Schlesselberg:

Hi Teri,

I spoke to my editor about the pitch, without mentioning any names, and he asked that I pass on the story. Unfortunately I’m going to have to obey and pass on it. However, I’d love to contract you on a piece about the closure of storefronts in downtown New Canaan. If that’s something you’d be interested in, we could definitely work something out. Sorry for having to pass on this, I was really excited by it too. Let me know about the storefront story.

Thanks again,
Max

—
Max Schlusselberg
Editor, New Canaan Patch
max@patch.com
203.309.7165

I spoke on the phone with Max about this the next day and asked what had happen. He said his regional editor was ‘too worried to rock the boat with local advertisers’. Bank of New Canaan was one of those advertisers. While it was disappointing to watch the local online publication turn away from the story for those reasons I knew I could sell it elsewhere. I kept watching the progress of a federal investigation into the failure of USA bank and saw the office of the inspector general for the FDIC bring their team into New Canaan to interview USA Bank whistleblowers and borrowers.

Schlesselberg didn’t last long as the editor of the New Canaan Patch and was replaced with an older New Canaan native Sheryl Shaker. After Shaker first started I had a short conversation with her about the story and she acted surprised a story like that was held. Shaker said “Oh no we would definitely want stories like that. I’ll get back to you when I talk to my editor.” But once again I got no response from the Patch team on running the story.
I sent an email to Shaker today asking if she’d like to comment again on why Patch held the story. I haven’t heard back from her.

Last October when I saw Business Insider run a series of stories on the journalism ethics problems at Patch (which ranged from plagiarism to political operatives being hired as editors) I decided to share my story with their team. Joe Pompeo wrote about the incident and when he went back to Patch’s press person, Janine Iamunno, to get a comment she responded the story was pulled because the sourcing wasn’t good.

Now when I heard that I knew someone at Patch was lying. First, the regional Patch editor never saw copies of my emails and documents to source the story. Second, I know the local New Canaan editor who saw a small part of my sourcing emailed me ‘great stuff’ after he reviewed it. I had people on the record willing to speak out about being interviewed by Federal agents regarding what they saw the Decaros do to alledgedly violate lending laws. What I don’t know is if the Patch pressperson, Iamunno, was just making up an excuse to cover their tracks or if the regional editor lied to cover his ass.

I called Max Schlesselberg on his cell phone when I saw the Patch’s response to the Business Insider story asking who he thought lied here but didn’t get a call back.

Business Insider has continued to do a bang up job on covering the problems at Patch. They recently broke news that Patch was asking local editors to help with ad sales. A total no-no for the Chinese wall that exists at most other publications between editorial and publishers.

The USA Bank story, which I ended up making a lot more money selling to DealFlow has made a big impact. It was followed by Connecticut WatchDog who said it was their most viewed story of the month and local Greenwich blogger Christopher Fountain got a big response from his readers when the story ran. After we went to print at DealFlow this May, more on record sources came forward explaining how Peter Keller, former executive at Bank of New Canaan, was also going to whistleblow to the FDIC in 2006 but backed out because he was afraid of what the DeCaros could do to him within the Fairfield County, CT banking community. Ruth Jones, a well known real estate developer who grew up in New Canaan and has an office in town was also on the record in my coverage stating she was given cash by USA Bank’s president to keep some of her loans paying and make the FDIC think the loan was current.

It’s clear there would have been lots of angles for the New Canaan Patch to cover with all the local players coming forward about USA Bank’s problems. It’s a story I’ve continued to report on and Greenwich Time recently figured out there are a lot of abandoned McMansions around Fairfield County because of the USA Bank lending problems. There are two other long time print newspapers in New Canaan who the Patch has to compete with for ad dollars and eye balls. I’m not sure what their editorial agenda or goals are these days but it appears they aren’t focused on impact reporting that informs the local readers about accurate news they can’t read elsewhere.

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19 Oct

Occupy Wall Street’s New Bank Responds to Reports

It took them more than 24 hours but Occupy Wall Street’s new Union owned bank has decided to respond to reports that an FDIC enforcement action showed some not so safe banking practices. I’ve still been denied an interview with any of the banks newly placed executives nor have they answered questions about the glaring number of loans on their books that are not paying. So all we have is a public relations crafted statement that has been approved by the Bank’s new president Edward Grebow.

From the Bank:
“Amalgamated Bank was founded by the Amalgamated Clothing Workers of America and chartered by New York State in 1923. Its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). Amalgamated has been a bank for America’s working men and women since its inception and has always operated in a safe and sound manner.
In the aftermath of the financial crisis, Amalgamated Bank’s Board of Directors agreed (without admission of any violation) to the issuance of essentially identical Consent Orders by the FDIC and the New York State Banking Department. The Orders became effective on August 31, 2011.
Information provided by a former federal regulator, who was quoted in a recent news report about the Bank’s handling of its non-performing loan charge-offs, is totally inaccurate. The conclusion that the Bank was engaged in potentially fraudulent activity is both false and misleading.
Specifically, with regard to non-performing assets, all charge-offs identified during the 2009 examination were taken during the examination or shortly thereafter and are fully reflected in the Bank’s audited financial statements. Also, the Bank in late 2008 put in place a detailed process to identify and address loans that have the potential to be classified as non-performing assets, including an independent outside firm that reviews the Bank’s loan portfolio and related provisions for loss. Problem loans are monitored on a monthly basis through a rigorous quality review process, which the Bank’s Board and the regulators are familiar. In addition, the Bank identifies, and appropriately classifies, reserves and charges off problem loans in accordance with the relevant accounting and regulatory guidance. “

The banks have used ‘the financial crisis’ as an excuse for their underwriting that lead to non performing loans for a while now and the FDIC often takes the path to least resistance in getting them to admit to unsound or unsafe lending practices. In the case of Amalgamated it’s odd that they didn’t not deny the FDIC consent order if they just stated above they are operating within regulatory parameters. The FDIC on the other hand was pretty clear on detailing that the Bank has to make sure they are charging off the loans that have stopped paying for more than 90 days correctly.

The FDIC enforcement action states, “Elimination or reduction of such assets with the proceeds of other Bank extensions of credit shall not be considered ‘collection’ for purposes of this paragraph.”

Meaning the bank can’t just extend more credit to borrowers that don’t pay to make the loans look performing. If they do it effects their risk-based capital levels and bottom line numbers. In fact according to the Banks 6-30-2011 Call Report they have $122 million of nonaccrual loans. When you compare that to their Allowance for Loan and Lease Loss (ALLL) it shows a 3:1 ratio.

Ralph Hutchinson, a 20 yr former federal regulator who now consults to banks who get in trouble with the FDIC says, “Their noncurrent loans to their ALLL(loan loss allowance) is out classed. Typically this ratio for a sound bank is a 1:1 ratio. They have approximately only $35 million in ALLL to cover the $122 million in non performing loans on their books.”

Hutchinson thinks their loan loss reserves are under reserved by about $100 million.

“In my opinion the bank will need another $100 million in ALLL reserves and on top of the $75 million to recapitalize the bank because the ALLL will burn right through.”

Until the FDIC and the banks shareholders approve the $100 million common stock investment by WL Ross VI fund and The Yucaipa Companies fund, their Tier One risk based capital is only $304 million. The FDIC has stated within a year they have to get their capital level to 7% and within two years up to 8%. Now with the $100 million investment added into the capital, stated on their last Call Report, it would raise the capital level to 9%. From the outside that makes it look like they fixed one of their problems.

Amalgamated said in their statement this morning, “A key goal of the Bank, which is also reflected in the Orders, is to raise its capital levels to current industry standards. The investments by Yucaipa Companies and WL Ross will enable the Bank to comfortably exceed the increased capital levels established in the Consent Orders well ahead of the time frames set forth in the Orders.”

But Hutchinson who reviewed Amalgamated’s uniform bank performance report back to 2008 thinks otherwise and says this bank is really on the verge.

“Because they don’t have enough loan loss reserves set aside they will burn through at a third to half of that investment instantly. In reality the capital ratios are now just above 3% and at 3% the charter can be seized,” says Hutchinson. “The UBPP report shows they are in the top percentile compared to their peers with their noncurrent/nonperforming loans at $122 million. Half or more could tank in the next few quarters so the burn rate is significantly higher to recapitalize the bank and maintain 7% stepped up to 8% capital levels the next year per the FDIC consent order.”

The bank also appears to be downplaying the seriousness of the FDIC consent order. This morning they said in a written email statement, “The Orders contain specific commitments by the Bank to resolve certain issues identified by the FDIC and the Banking Department in their Joint Report of Examination of the Bank as of December 31, 2009, which was conducted during the summer of 2010. Since the time of the examination, the Bank has been working to resolve these issues, and has largely completed addressing them. “

Really – Certain Issues? Why not just name them such as the fact that prior management had to be cleaned up and the board was ordered to do more oversight of management actions.

Hutchinson explains “This is a formal action they received. It’s has the same teeth as a Cease & Desist Order and it’s legally binding in a court of law. If the Bank had addressed everything the FDIC was asking it to do they wouldn’t have issued a formal action almost two years later.”

Amalgamated Bank’s next set of financials to be stated in a Q3 Call Report has to be in by the end of the month. It’s likely they are negotiating with the FDIC still about how those numbers will look. Hutchinson still thinks some of those call reports will have to be restated. But still it could be 90-120 days before changes show up in the FDIC database and it will be interesting to see if the outside private equity investment has to pony up more to keep the bank capitalized or just bows out of the deal all together.

A spokesperson for Occupy Wall Street has not responded to questions regarding if they will keep the donated funds in Amalgamated Bank.

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17 Oct

Occupy Wall Street’s New Bank Under FDIC Enforcement Action

Occupy Wall Street has deposited donated funds in New York-based Amalgamated Bank but the FDIC has a bulls eye on the bank’s executives. At the end of August the federal regulator issued a scathing enforcement action calling for a third party review of the banks management and issuing a directive for the bank to lower its leverage ratios to 7 percent within a year. But that’s not all the FDIC is unhappy about. It appears some creative accounting for non performing loans are an issue.

According to the FDIC enforcement action the bank isn’t charging off its nonperforming loans that are more than 90 days delinquent. Instead it appears the bank’s been issuing new loans (through a restructuring) to pay off the delinquent loans and not booking the delinquent loans as a charge off.

This is important to the bank’s bottom line because they are required to book a charge off, which would affect the banks earnings, their loan loss reserves or their capital levels.

Ralph Hutchinson, a former federal regulator who now consults on bank fraud says, “They are masking the strength of the bank. The FDIC goes ballistic when they see banks do this. Essentially they are falsifying financials which could be considered fraud.”

The FDIC gave the bank 60 days to start booking loss charge offs and are not allowed to extend credit to borrowers over 90 days delinquent unless they can prove there is a viable workout plan.

The enforcement action states: “The bank shall eliminate from its books, by charge-off or collection, all assets or portions of assets classified “Loss” in the report of examination dated June 14th 2010 issued jointly by the FDIC and the New York State Department of Banking that have not been previously collected or charged off.”

It’s no wonder some of the banks executives have jumped ship in the last six months. According to people who have worked for the bank there has been mass exodus of bank executives recently that includes the president. There is also the issue of board member Bruce Raynor who had to resign from his garment union leadership position after allegations of misconduct regarding his union expense reports.

CNBC’s John Carney reported last week that Occupy Wall Street raised $75k in about a week via small individual donations of up to $85 a person. Today we learned that total has grown to $300k. Except it’s odd that the Bank protestors, who inspired an international protest on Saturday, choose to put their money in a community bank that appears to be executing some of the fraud they are speaking out against.

I am still awaiting a call back from an Amalgamated Bank press person. Stay tuned as this story develops.

UPDATE 4pm: An outside press person for Amalgamated confirmed Patrick O’Sullivan, who ran the asset management group, left also this summer. You know before the enforcement action was made public.

UPDATE 5pm: An Amalgamated outside press person points out Wilbur Ross and Ron Burkle investment funds have verbally committed to invest $50 million each in the bank’s common stock. The FDIC and other common shareholders will have to approve this but if it goes through that could help solve their leverage ratio problems. According to Ralph Hutchinson the bigger issue though is the likelihood the bank will have to restate bank call reports. These are the financial loan level operating reports FDIC-backed banks are required to file.

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10 Oct

FDIC calls USA Bank Borrowers in to Testify Against DeCaro

It looks like the FDIC is finally building a case against the DeCaros for their role in the failure of USA Bank. Borrowers who spoke out in my DealFlow stories about alleged lending abuse and forged mortgage documents were subpoenaed by the FDIC two weeks ago. Ron Scheckter, James Scheckter, and Maurizio Carusone have all confirmed they will testify latter this month against the father-son team who the Office of Inspector General says ran USA Bank into the ground.

Last week Lisa Chamoff of Greenwich Time inaccurately reported that the FDIC already had a case against Fred DeCaro III. DeCaro III was the bank president when the FDIC seized the institution last summer and is also an elected official in charge of Republican voter registration in Greenwich, CT.

A FDIC spokesperson confirmed there has been no officers and directors suit filed against the DeCaros or any other USA Bank board members. But after the Office of Inspector General wrote a report on the lack of FDIC oversight of the failed bank it appears the FDIC decided to get their rear in gear and prepare for a civil suit. I reported on the OIG’s findings in July at The Distressed Debt Report which detailed how the board and the DeCaro’s lied to its bank regulators and violated lending limits.

USA Bank borrowers who have spoken with the FDIC say senior attorney Jose Rivas is leading the investigation. Rivas LinkedIn profile says he joined the FDIC last year from the big bank regulator the Office of the Comptroller of the Currency.

The federal regulator has three years to file a civil claim against executives of failed banks in a move to recover some of the millions they have to pay out of the FDIC insurance fund after they seize a bank. Unfortunately this money doesn’t go back to burned borrowers or investors in these failed banks. We usually don’t see the FDIC file a suit unless it thinks the alleged bank fraudsters have money stowed away to recover or there is a large directors and officers insurance policy. In the case of USA Bank I previously reported the insurance policy was minimal so if we see the FDIC file it means they think DeCaro and board members like Zeisler & Zeisler attorney Jim Verrillo or New Canaan bank executive Peter Keller have deep pockets.

On Friday, the FDIC filed a suit against the board of Georgia-based Alpha Bank & Trust. The suit came over a year after Alpha Bank investors had filed similar charges laying out a clear case of the bank’s board lying to investors about the health of the bank while they continued to encourage more investments. Unfortunately for these Georgia investors after the FDIC becomes the receiver for a failed bank they can supersede prior legal claims against the bank executives.

Attorney Kevin LaCroix wrote last year, “The FDIC may yet of course attempt to assert its right to priority over the claims of the plaintiffs have asserted, and even assert its own claims, based on its status as the bank’s receiver.” LaCroix believes the federal regulator can do this because of their rights under FIRREA.

Net Net this means investors in failed banks who sue first can end up with hefty legal bills and a big zero if their litigation plan isn’t clever enough to circumvent FDIC claims. Which is what happen to Sal Pani, the original USA Bank whistleblower who went to the FDIC in the fall of 2006 (less than a year after the bank was founded) to warn them of executive lending abuses and fraud. It took the FDIC four more years to shut down the DeCaro’s who meanwhile enticed around 3,000 main street investors to pump their life saving into the bank’s penny stock. Earlier this year Pani dropped his suit against USA Bank and the DeCaro’s although he says if there is a criminal fraud suit brought he’d think about restarting litigation.

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5 Oct

NIR Group Investors say Ribotsky Commited More Fraud during Reorganization

Corey Ribotsky was charged by the SEC for misappropriation of assets in his NIR Group hedge funds but DealFlow Media is reporting the alleged fraud doesn’t stop there. Investors are now being told by PricewaterhouseCoopers, the fund’s court appointed liquidator, Ribotsky never signed the legal document that assigned collateral rights from the old AJW Master Fund to the new Master Fund 2 that was set up during the 2008 reorganization. This means PwC would have to pursue another legal battle for investors if they plan to kick Ribotsky out as collateral manager and stop paying him fees. In June, I reported at The PIPEs Report, PwC had been assigned liquidator for the Master Fund 2 and the Offshore fund; the reorganized funds where Ribotsky had told investors all the convertible PIPE notes sit.

Besides an obvious breach of contract dispute the SEC could now lobe another fraud charge on Ribotsky if they can prove he pushed investors into signing new offering documents in 2008 based on false promises. The problem for the SEC is since the funds are domiciled in the Cayman Islands and PwC is assigned by a Cayman Island court; the federal securities regulator has no real jurisdiction to subpoena PwC . In fact, the SEC might have to depend on the help of investors communicating with the funds liquidators to continue building their case.

But the SEC isn’t the only government agency still on Ribotsky’s tail. According to NIR Group portfolio companies (penny stocks who issued convertible notes to NIR in exchange for a loan) the DOJ has issued subpoenas last month for their transfer agents. Sources familar with the situation say this move means the DOJ is looking at all the penny stock sold and issued to NIR Group for at least the last five years. While the SEC sued NIR Group and Ribotsky for investor fraud we didn’t see any charges for illegal moves in the PIPE deals NIR Group invested in. Naked short selling is one complaint NIR Group portfolio companies have listed in their civil suits against the hedge fund over the years but Ribotsky always settles these suits before it’s time for him to testify during the discovery process.

The SEC lawsuit said Ribotsky’s former right hand man Daryl Dworkin was working with the government to help them build their case in return for lighter sentencing. Dworkin plead guilty to criminal charges for taking bribes last year but his sentencing was delayed. A DOJ spokesperson said normal time to sentencing is 10 weeks. The DOJ’s Brooklyn office told me last week Dworkin is now finally scheduled to be sentence on January 20th. So for now we wait and see if Ribotsky will need to add to his legal bills and also face fraud charges from the DOJ.

NIR Group Investors can read more about the NIR Group problems I was first to report on yesterday for The PIPES Report here.

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