SEC Charges Former CEO and CFO of Franklin for Loan Mod Schemes

The ""Securities and Exchange Commission"":http://www.sec.gov/ (SEC) filed a complaint against former executives of Franklin Bank for using loan modification programs to cover up its non-performing loans.

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Franklin CEO Anthony J. Nocella and CFO J. Russell McCann applied loan modification programs during the third and fourth quarters of 2007, masking how many of Franklin's loans were actually non-performing and artificially boosting its net income and earnings, the SEC announced Friday in a statement.

According to the SEC's complaint filed in U.S. District Court for the Southern District of Texas late Thursday, as Franklin's holdings of delinquent and non-performing loans rose significantly in the summer of 2007, Nocella and McCann used three loan modification schemes to classify non-performing loans as performing.

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By the end of September 2007, the two executives hid more than $11 million in non-performing single family residential loans and $13.5 million in non-performing residential construction loans.

As a result of the loan modifications, Franklin overstated its third-quarter 2007 net income and earnings by 317 percent and 77 percent respectively, and reported that it earned $0.30 per share, of which $0.23 per share was directly attributable to the loan modifications.

On May 2, 2008, in a Form 8-K report filed with the SEC, Franklin acknowledged that the accounting for the loan modifications should under go revisions and Franklin's Form 10-Q for the quarter ended September 30, 2007 was not reliable for investors, according to the SEC statement.

The Houston-based bank declared bankruptcy in 2008 and was taken over by Prosperity Bank.

""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.""

The SEC’s complaint seeks financial penalties and the repayment of bonuses since the bank had to restate its earnings. The SEC also seeks officer-and-director bars and permanent injunctive relief against the two executives.