Bloomberg News

SEC Claims KPMG Auditors Failed to Scrutinize Nebraska Bank

January 09, 2013

Two KPMG LLP auditors are facing U.S. Securities and Exchange Commission claims that they failed to properly scrutinize a Nebraska bank that hid millions of dollars in loan losses from investors during the credit crisis.

John J. Aesoph, a partner, and Darren M. Bennett, a senior manager, didn’t get evidence to back up TierOne Bank’s allowance for loan and lease losses when issuing opinions on the bank’s 2008 financial statements, the SEC said in an administrative release today. Instead of independently testing TierOne’s value for collateral, the auditors accepted the bank’s “biased and inconsistent” estimates, the SEC said.

“Aesoph and Bennett merely rubber-stamped TierOne’s collateral value estimates and ignored the red flags surrounding the bank’s troubled real estate loans,” SEC Enforcement Director Robert Khuzami said in a statement. “Auditors must adhere to professional auditing standards and exercise due diligence rather than merely relying on management’s representations.”

Lawyers for the auditors, who are contesting the claims, didn’t respond to phone messages seeking comment.

“Our partner and senior manager look forward to presenting the facts in support of the work that was performed at TierOne,” said Tim Connolly, a spokesman for KPMG in Montvale, New Jersey.

The SEC previously filed claims against three executives of TierOne, which filed for bankruptcy amid loan losses stemming from the financial crisis, the agency said. Two agreed to settle, and a case is continuing against the third, according to the SEC.

Virginia Bank

In a separate case today, the SEC sued three former executives of Virginia-based Bank of the Commonwealth for understating loan losses by 17 percent to 25 percent from November 2008 to August 2010, according to a statement. The Norfolk bank failed in 2011, costing the Federal Deposit Insurance Corporation $268 million.

Edward J. Woodard, the bank’s former chief executive officer, Cynthia A. Sabol, its former chief financial officer, and Stephen G. Fields, who was an executive vice president, either hid problems with deteriorating loans or knew about the problems while approving misleading investor disclosures. The former executives are contesting the claims.

“During times of financial stress, it’s more important than ever for executives to make full and honest disclosure to the investing public,” Scott W. Friestad, associate director of the SEC’s enforcement division, said in a statement. “Commonwealth’s executives did the opposite and hid the company’s worsening performance from shareholders through masking practices that understated the losses on its most troubled loans.”

Separately, Woodard and Fields, as well as Woodard’s son and another former vice president, face criminal charges stemming from the bank failure including conspiracy to commit bank fraud. A criminal trial is scheduled for March 19 in Norfolk.

Andrew Sacks, an attorney for Woodard in Norfolk, Virginia, said his client hadn’t committed any violations of securities law.

“We intend to vigorously oppose their suit and work hard on behalf of Mr. Woodard to clear him of these accusations,” Sacks said in a telephone interview.

Solomon L. Wisenberg, a Washington-based attorney for Fields, said his client will dispute the SEC’s claims in court.

“We are deeply disappointed that the SEC chose to file this complaint and issue a prejudicial press release on the eve of a major criminal trial,” Wisenberg said in a phone interview.

An attorney for Sabol didn’t return a phone message seeking comment.

To contact the reporter on this story: Dave Michaels in Washington at dmichaels5@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net


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