The ""Securities and Exchange Commission"":http://www.sec.gov (SEC) on Wednesday charged the holding company of Cincinnati-based ""Fifth Third Bank"":https://www.53.com and its former CFO with improper accounting of loan losses in the midst of the financial crisis.[IMAGE]
Fifth Third agreed to pay $6.5 million to settle the SEC's charges. Former CFO Daniel Poston agreed to pay a $100,000 penalty and has been suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.
According to ""the SEC's order"":http://www.sec.gov/litigation/admin/2013/33-9490.pdf, Fifth Third experienced a substantial increase in non-performing assets in its commercial real estate portfolio as the market declined in 2007 and 2008 and borrowers failed to make their payments. Fifth Third decided in the third quarter of 2008 to sell off large pools of these troubled loans, and the SEC explained that once Fifth Third formed the intent to sell the loans, U.S. accounting rules required the company to classify them as ""held for sale"" and value them at fair market value.
According to the SEC, proper accounting would have increased Fifth Third's pretax loss for Q3 2008 by 132 percent. Instead, the federal agency says Fifth Third continued to classify the loans as ""held for investment,""[COLUMN_BREAK]
falsely suggesting the company had not decided to sell the loans.
""Improper accounting by Fifth Third and Poston misled investors during a time of significant upheaval and financial distress for the company,"" said George S. Canellos, co-director of the SEC's division of enforcement. ""It is important for investors to know the financial consequences of decisions made by management, so accounting rules that depend on management's intent must be scrupulously observed.""
According to the SEC's order, Poston was aware the company had entered into agreements with brokers during the third quarter of 2008 to market and sell the commercial real estate loans. Despite understanding the relevant accounting rules, agency officials say Poston failed to direct Fifth Third to classify and value the loans as required. The SEC alleges Poston also made inaccurate statements to Fifth Third's auditors about the company's loan classifications and then certified the company's inaccurate results.
""By failing to classify large pools of loans as required, Fifth Third and Poston kept investors from knowing the full truth behind its commercial real estate loan portfolio,"" said Stephen L. Cohen, an associate director in the SEC's enforcement division.
Fifth Third and Poston consented to the entry of the order finding that they violated or caused violations of Sections 17(a)(2) and (3) of the Securities Act of 1933 as well as provisions of federal law that govern reporting, books, records, and internal controls related to securities.
Without admitting or denying the findings, the bank and its former CFO agreed to cease and desist from committing or causing further securities violations. Poston is suspended from appearing or practicing before the SEC as an accountant but has the right to apply for reinstatement after one year.