(Updates with United Commercial’s sale in ninth paragraph.)
Oct. 20 (Bloomberg) -- Former United Commercial Bank executives Ebrahim Shabudin and Thomas Yu pleaded not guilty to hiding loan losses from auditors and investors in the failed San Francisco-based bank.
Shabudin, a former chief credit officer, and Yu, a former credit risk manager, were charged by federal prosecutors with six counts including securities fraud. The pair and Thomas Wu, the bank’s former chief executive officer, were also sued by the U.S. Securities and Exchange Commission and accused of hiding $65 million in loan losses before the bank collapsed.
Shabudin and Yu were the first senior bank officials charged with fraud at a financial institution that got money from the government’s Troubled Assets Relief Program, known as TARP. The program was meant to shore up financial institutions hit with losses from property loans and mortgage-backed securities.
United Commercial received $298 million from TARP in November 2008 after Yu and Shabudin manipulated books and records to conceal the amount of bad loans and avoid publicly reporting losses, according to a Sept. 15 indictment.
The losses came after United Commercial almost doubled its lending portfolio to $8 billion in 2007 from 2004, prosecutors said.
In September 2008 Yu, of San Ramon, California, and Shabudin, of Moraga, California, began manipulating books and records to conceal nonperforming loans and avoid publicly reporting losses from bad loans, according to the government. The executives hid the fact that loan collateral and repossessed property had declined in value, the government said.
Their conduct caused the bank to issue false and misleading information through a press release, an earnings call and its annual report in early 2009, prosecutors said.
The bank failed in November of that year and was taken over by the government, which has paid out $397 million. The failure has cost the Federal Deposit Insurance Corp.’s insurance fund $2.5 billion, the SEC said in its complaint. No TARP funds have been repaid.
United Commercial was one of the 10 biggest bank failures to result from the 2008 credit crisis, the SEC said. The bank was acquired in 2009 by East West Bank, based in Pasadena, California, which paid the FDIC a premium of 1.1 percent for the right to assume $7.5 billion of United Commercial’s deposits.
Shabudin and Yu were released today after the judge ordered them each to post a $500,000 property bond. The next court hearing is scheduled for Nov. 4.
The criminal case is U.S. v Shabudin, 3:11-cr-00664, U.S. District Court, Northern District of California (San Francisco). The SEC case is Securities and Exchange Commission v. Wu, 4:11-cv-04988, U.S. District Court, Northern District of California (Oakland).
--Editors: Charles Carter, Peter Blumberg
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