(AP) — After a six-week trial, jurors began deliberating Wednesday in the fraud and conspiracy case against four former executives of the only financial institution to be criminally charged in connection with the federal bank bailout program.
The judge gave the case to the jury after attorneys for the former Wilmington Trust executives finished closing arguments and prosecutors offered a brief rebuttal.
At issue is whether the bank’s practice of “waiving” hundreds of millions of dollars in loans from reporting requirements for past due loans amounted to criminal fraud, or just a continuation of a decades-long practice that defense attorneys say bank officials never tried to conceal.
Former Wilmington Trust president Robert Harra Jr., former chief credit officer William North, former chief financial officer David Gibson and former controller Kevyn Rakowski are charged with fraud, conspiracy and making false statements to federal regulators.
Prosecutors allege that, in the wake of the 2008 financial crisis, the defendants deliberately misled regulators and investors about Wilmington Trust’s massive amount of past-due commercial real estate loans before the bank was hastily sold in 2011 as it bordered on collapse.
Founded by members of the DuPont family in 1903, the bank imploded despite receiving $330 million from the federal government’s Troubled Asset Relief Program.
Before the fire sale to M&T Bank, Wilmington Trust raised $287 million in a 2010 stock offering, intended to help repay the TARP funds, while concealing the truth about its shaky financial condition from investors, prosecutors claim.
“They misled the Federal Reserve, they misled the public, and they turned around and raised $287 million off of that lie,” prosecutor Jamie McCall told jurors.
Defense attorneys maintain that their clients did nothing wrong and were simply trying to steer the bank through difficult times.
Henry Klingeman, an attorney representing Rakowski, told jurors that bank officials recognized there were serious credit issues and tried to address them, “doing their best to weather this storm.”
“Keeping the bank afloat is a noble motive,” he added.
Prosecutors argued that the executives had a duty to tell the truth about the bank’s financial condition.
“The fact that the economy wasn’t doing well is not an excuse,” McCall said.
Prosecutors allege that Wilmington Trust concealed the quantity of past due loans on its books from October 2009 through November 2010, failing to disclose its practice of “waiving” matured loans that were designated as current for interest and in the process of being extended from the reporting requirements for past due loans.
In the fourth quarter of 2009, for example, Wilmington Trust officials reported only $10.8 million in commercial loans as 90 days or more past due, concealing more than $316 million in past due loans subject to the waiver practice, according to prosecutors.
That discrepancy was due in part to designating many loans that were well past the date for repayment as “current for interest,” even though the bank was lending even more money to struggling developers just so they could make the interest payments on underlying loans.
“That’s the bank paying itself,” McCall said.
One way the bank provided such supplemental financing to borrowers was through the “10 percent rule,” which gave loan officers the authority to approve an additional loan of up to 10 percent of the original loan amount, up to $1 million, without seeking approval by the loan committee.
The 10 percent rule was frequently used by loan officers, or “relationship managers,” such as Joseph Terranova, former manager of the bank’s Delaware commercial real estate division, with little scrutiny.
Terranova and two other former Wilmington Trust officers, Delaware Market Officer Brian Bailey and loan officer Peter Hayes, have pleaded guilty and are awaiting sentencing. Terranova testified for the prosecution.
Two other co-conspirators already have been sentenced. James Ladio, former CEO of MidCoast Community Bank, was sentenced to two years in prison and ordered to pay $700,000 restitution. Salvatore Leone, a business partner of Zimmerman, was sentenced to a year and a day in prison and ordered to pay $784,000.