Executives, Borrowers Indicted in Massive Fraud

Bank Collapse Called Largest in Virginia Since 2008
   NORFOLK, Va. – 7/14/2012 - Top executives and favored borrowers have been indicted by a federal grand jury in Norfolk, Va., accused of masking non-performing assets at the Bank of the Commonwealth for their own personal benefit and to the detriment of the bank. This long-running scheme allegedly contributed to the failure of the bank in 2011, which the Federal Deposit Insurance Corporation (FDIC) estimates will cost the FDIC deposit-insurance fund $268 million.
   Neil H. MacBride, U.S. Attorney for the Eastern District of Virginia; John Boles, Special Agent in Charge (SAC) of the FBI’s Norfolk Field Office; Rick A. Raven, Special Agent in Charge (SAC) of the Internal Revenue Service Criminal Investigation (IRS-CI)’s Washington, D.C., Field Office; Christy L. Romero, Special Inspector General for the Troubled Asset Relief Program (SIGTARP); and Jon T. Rymer, Inspector General of the Federal Deposit Insurance Corporation (FDIC-OIG), made the announcement.
   “The Bank of the Commonwealth’s high risk lending practices resulted in soaring losses after the 2008 financial crisis. Led by former CEO and Board Chairman Edward Woodard, these bank insiders and their favored borrowers allegedly conspired to hide the rapidly deteriorating financial condition of the bank through fraud,” MacBride said. “For more than 30 years, this community put their trust – and their money – in the Bank of the Commonwealth. These charges portray a bank leadership that betrayed that trust for their own profit at the detriment to their own bank, its shareholders and the community it served.”
    The 25-count indictment was returned on July 11 and made public July 12 after the following individuals from Norfolk were taken into custody:
  • Edward J. Woodard , 69, who served as the bank’s chief executive officer and chairman of the board for more than three decades until he was forced to step down as chairman in April 2010 and forced to retire from the bank in December 2010. Woodard is charged with conspiracy to commit bank fraud, bank fraud, false entry in a bank record, multiple counts of unlawful participation in a loan, multiple counts of false statement to a financial institution and multiple counts of misapplication of bank funds.
  • Simon Hounslow , 47, who served as an executive vice president and chief lending officer until the bank closed in September 2011. Hounslow is charged with conspiracy to commit bank fraud, misapplication of bank funds, false statement to a financial institution and multiple counts of false entry in a bank record.
  • Stephen G. Fields , 48, who served as an executive vice president and commercial loan officer until he was terminated in December 2010. Fields is charged with conspiracy to commit bank fraud, multiple counts of false entry in a bank record, multiple counts of false statement to a financial institution and multiple counts of misapplication of bank funds.
  • Troy Brandon Woodard , 35, the son of Edward Woodard, and who was employed by a wholly-owned subsidiary of the bank as a vice president and mortgage loan specialist until he was terminated in January 2011. Brandon Woodard is charged with conspiracy to commit bank fraud, bank fraud and multiple counts of unlawful participation in a loan.
  • Thomas E. Arney , 56, who leased office space on the third floor of the bank’s headquarters and owned and operated a residential development company, several restaurants, rental properties and a car restoration business. Arney is charged with conspiracy to commit bank fraud, bank fraud, unlawful participation in a loan, misapplication of bank funds and multiple counts of false statement to a financial institution.
  • Dwight A. Etheridge , 47, who owned and operated a residential and commercial development company, as well as an employment staffing company. Etheridge is charged with conspiracy to commit bank fraud, misapplication of bank funds and multiple counts of false statement to a financial institution.
   Each charge contained in the indictment carries a maximum penalty of 30 years in prison, if convicted. Criminal indictments are only charges and not evidence of guilt. A defendant is presumed to be innocent until and unless proven guilty.   According to the indictment, in 2006, leaders at the Bank of the Commonwealth began an aggressive expansion beyond its traditional focus on Norfolk and Virginia Beach, Va. to include branches in northeastern North Carolina and the Outer Banks, N.C. By December 2009, the bank’s assets reached approximately $1.3 billion, built largely through brokered deposits, a financial tool that allows investors to pool their money and receive higher rates of return. Because of the high-volatility of these deposits, an institution must remain well-capitalized to accept and renew brokered deposits.
   The indictment alleges that many of the bank’s loans were funded and administered without regard to industry standards or the bank’s own internal controls, and by 2008 the volume of the bank’s troubled loans and foreclosed real estate soared. From 2008 through 2011, bank insiders – Edward Woodard, Hounslow and Fields – allegedly masked the bank’s true financial condition out of fear that the bank’s declining health would negatively impact investor and customer confidence and affect the bank’s ability to accept and renew brokered deposits.
   To fraudulently hide the bank’s troubled assets, bank insiders allegedly overdrew demand deposit accounts to make loan payments, used funds from related entities – at times without authorization from the borrower – to make loan payments, used change-in-terms agreements to make loans appear current, and extended new loans or additional principal on existing loans to cover payment shortfalls.
   In addition, the indictment alleges that bank insiders also provided preferential financing to troubled borrowers – including Arney, Etheridge and others – to purchase bank-owned properties. These troubled borrowers were already having difficulty making payments on their existing loans; however, the financing allowed the bank to convert a non-earning asset into an earning asset, and the troubled borrowers obtained cash at closing to make payments on their other loans at the bank or for their own personal purposes.
   The indictment also alleges that troubled borrowers purchased or attempted to purchase property owned by bank insiders and Brandon Woodard. These real estate loans were fraudulently funded by the bank.
According to the indictment, in November 2008, the Bank of the Commonwealth sent to the Federal Reserve an application requesting approximately $28 million from the Troubled Asset Relief Program (TARP). Based on its regulator's concerns about the health of the bank, the Federal Reserve later requested that the bank withdraw its TARP application, which the bank did.
   From 2008 up to its closing in 2011, the bank lost nearly $115 million. The indictment alleges that the bank’s failure will cost the federal government through the deposit insurance fund in excess of $260 million. The forfeiture notice in the indictment attributes at least $71 million as illegal proceeds of the fraud.
Others charged as part of this ongoing investigation include the following:
  • Business partners Eric H. Menden, 53, of Chesapeake, Va., and George P. Hranowskyj, 47, of Chesapeake, pleaded guilty to engaging in a $41 million bank fraud scheme that contributed to the failure of the Bank of the Commonwealth. They also pleaded guilty to a separate fraud involving a six-year historic tax credit scheme that cost state and federal governments over $12 million and investors more than $8 million.
  • Menden faces a maximum penalty of five years in prison for each count of conspiracy to commit wire fraud, making false statements and conspiracy to commit bank fraud when he is sentenced on Sept. 26, 2012. Hranowskyj faces a maximum of 20 years in prison for conspiracy to commit wire fraud and a maximum of five years in prison for conspiracy to commit bank fraud when he is sentenced on Oct. 15, 2012.
  • Natallia Green , 29, of Norfolk, and formerly employed by Menden and Hranowskyj, pleaded guilty to making a false statement on a loan application to the Bank of the Commonwealth. In January 2012, Green was sentenced to five years probation.
  • Maria Pukhova , 30, of Virginia Beach, and formerly employed by Menden and Hranowskyj, has been charged with making a false statement on a loan application to the Bank of the Commonwealth.
  • Jeremy C. Churchill , 35, of Norfolk, and a former vice president and commercial loan officer at the bank, pleaded guilty to conspiring with others to cause the bank to suffer millions of dollars in losses from loans meant to conceal financial problems at the bank and with one of its customers. Convicted of conspiracy to commit bank fraud, he faces a maximum penalty of five years in prison when he is sentenced on Aug. 24, 2012.
  • Recardo S. Lewis , 61, of Norfolk, and a former employee with by Tivest Development & Construction LLC, pleaded guilty to conspiring with others to defraud the Bank of the Commonwealth by submitting fraudulent draws on a multi-million construction project in Virginia Beach. Convicted of conspiracy to commit bank fraud, Lewis faces a maximum penalty of five years in prison when he is sentenced on Sept. 19, 2012.
    The investigation is being conducted by the FBI’s Norfolk Field Office, IRS-CI, SIGTARP and the FDIC-OIG. Assistant U.S. Attorneys Melissa E. O’Boyle, Katherine Lee Martin and Uzo Asonye of the Eastern District of Virginia are prosecuting the case on behalf of the United States. It has been coordinated by the Virginia Financial and Securities Fraud Task Force, an investigative arm of the President’s Financial Fraud Enforcement Task Force (FFETF) , an interagency national task force.
   Related court documents and information may be found on the website of the District Court for the Eastern District of Virginia at www.vaed.uscourts.gov or on https://pcl.uscourts.gov.
   Source: Financial Fraud Enforcement Task Force


Photo by Steve Rensberry (c) 2014