The Securities and Exchange Commission (SEC) recently brought down the hammer on Fifth Third Bancorp (the holding company of Fifth Third Bank) and its former chief financial officer and charged them with performing improper accounting practices on their commercial real estate loans during the height of the financial crisis.
The SEC charges resulted in a fine of $6.5 million to Fifth Third Bancorp and another $100,000 fine to the company’s former CFO, Daniel Poston. In addition to this fine, Poston is suspended from practicing as an accountant for any publicly traded company that is regulated by the SEC. He may apply for reinstatement after a year.
Desperate Times, Desperate Measures
The trouble started in 2007 when Fifth Third Bank began suffering from non-performing assets (i.e., borrowers weren’t paying on their loans). To mitigate their damages, Fifth Third began selling off many of these troubled loans toward the end of 2008, something that wasn’t uncommon at the time.
But instead of cataloguing these loans as “held for sale” at their current market value (a U.S. GAAP requirement), they marked them as “held for investment,” which deceived investors into thinking they had not sold the loans.
Deceiving Investors Has Serious Implications
The actions of Fifth Third gave many investors a false sense of security and held the company’s financial distress from them. Poston, although aware of Fifth Third Bank’s improper loan and value classifications, the SEC reports that he did nothing to correct the situation, even certifying to the company’s financial results in the third quarter of 2008.
Fifth Third Bank, although not admitting or denying their actions, will pay the fine and agree to not committing any future violations. They have also agreed to the SEC’s finding that they violated or caused violations of federal security laws.