WASHINGTON (Reuters) - The government charged two former executives of Franklin Bank Corp, a Houston-based lender founded by a mortgage bond pioneer, with a fraudulent scheme to conceal how badly the bank was doing during the height of the financial crisis.
The U.S. Securities and Exchange Commission on Friday said former Franklin chief executive Anthony Nocella and the bank's former chief financial officer, J. Russell McCann, inflated the bank's reported earnings and tried to conceal its loan quality during the second half of 2007.
Franklin Bank eventually filed for bankruptcy in November 2008.
The bank was founded by Lewis Ranieri, who is sometimes called "the father of securitization" for popularizing mortgage-backed securities in the 1980s, while he was at Salomon Brothers Inc.
"Nocella and McCann used the loan modification scheme like a magic wand to change non-performing loans into performing assets," said Robert Khuzami, director of the SEC's division of enforcement.
"Their disclosure and accounting tricks misled investors into believing that Franklin was outperforming other banks during the height of the financial crisis."
In three schemes, Nocella and McCann said loans that were delinquent or non-performing were actually performing, concealing $11 million in non-performing single-family residential loans and $13.5 million in non-performing residential construction loans.
Because of the scheme, Franklin overstated its third-quarter net income in 2007 by 317 percent, and its earnings by 77 percent.
The SEC filed its complaint in the U.S. District Court for the Southern District of Texas late on Thursday. It seeks financial penalties, permanent injunctive relief, and officer and director bars against Nocella and McCann.
It also wants them to give back any bonuses they got, under a law that allows for "clawbacks" of executive bonuses if the company must later restate its earnings.