Was the way Wilmington Trust Corp. counted bad loans a decade ago part of a multimillion-dollar fraud perpetrated by top executives to enrich themselves — or was it just business as usual for American bankers?
That was a central question in a Delaware courtroom Monday as federal prosecutors squared off against four former executives' defense lawyers in opening arguments of one of the few criminal trials to come out of the financial crisis that convulsed U.S. banking in the late 2000s.
Wilmington Trust, founded by members of the du Pont family in 1901, was once the largest bank based in the Philadelphia region. But in 2010 it was forced to sell its assets, including branches across Delaware and Southeastern Pennsylvania and tax-shelter offices from London to Las Vegas, to Buffalo-based M&T Corp. at a steep discount after acknowledging it was carrying hundreds of millions of dollars in bad loans to developers.
Last fall, the bank agreed to pay $60 million to shareholders to settle fraud charges in the case. A string of lower-ranking Wilmington Trust lending officers had earlier pleaded guilty to fraud charges in relation to questionable loans, and at least two are expected to testify against Robert V.A. Harra, the bank's former president; ex-chief financial officer David Gibson; former chief credit officer William North; and bank controller Kevyn Rakowski.
The four "lied repeatedly about the bank's loan portfolio to investors, regulators, and the public," prosecutor Lesley Wolf told the jury in her opening arguments. "Banks and bankers enjoy the special privilege of taking care of other people's money" — but with that privilege comes the legal obligation "to fully disclose the bank's books and records, and to tell the public what is going on with the bank, whether it is good news or bad news."
The bank's leaders "instead chose to lie repeatedly" and hide "a growing wave of past-due commercial loans" that were three or more months behind, at the same time that they were selling new bank securities to investors who trusted their reports that the bank was in much better financial condition than it was, with few bad loans.
The four are accused of fraud for lying to investors, the Federal Reserve, and the U.S. Securities and Exchange Commission in an attempt to cover up the losses so they could keep the bank going, while also collecting millions in yearly compensation.
Defense lawyers have sought to make the accused's conduct sound like everyday banking practice, at least at the executive level. The case is entirely "about reporting" and the proper definition of what is a bad loan and what bankers do and don't have to report, argued Harra's lawyer, Michael Kelly, partner at McCarter & English LLP and a prominent Wilmington bar owner and political donor.
"Everybody knew" that Wilmington Trust had been giving developers extra time for many years when they couldn't pay land and construction loans, Kelly added. "They did the same things they always did."
Kelly noted that Harra, Gibson, and North reported to the one senior officer who hasn't been indicted, Ted Cecala, the bank's former chief executive officer and chairman. (Cecala has been represented by Colm Connolly, the former U.S. attorney in Wilmington, whom President Trump has nominated to serve as a federal judge.)
Kelly noted that Cecala, during the period covered by the alleged conspiracy, was a member of the board of directors of the Federal Reserve Bank of Philadelphia, the same regional regulator to which he and his ex-colleagues are accused of lying. Kelly depicted this as a sign that regulators understood and approved of the conduct of Cecala's bank on his watch. Until the bank was near collapse, "nobody said, 'That's against the law, don't do this,' " Kelly said. "These people never intended to commit a crime. These people never even thought about a crime."
Lawyers also sought to convince the jury that the bankers are hometown good guys, not greedy financiers. Character witnesses for Harra are to include a Catholic nonprofit leader and a Wilmington city councilwoman. "This case is not about the 'Wolf of Wall Street,' subprime mortgages, collateralized mortgages, or Lehman Bros.," the investment bank that failed in the late 2000s due to bad mortgage debt, Kelly told the jury.
He projected signed loan agreements on a courtroom screen, arguing that they showed the bank had the power to extend the term of a late loan "at any time," so the bank was justified in not listing them with bad loans for investors or regulators to see.