Securities Regulation Daily Wilmington Trust, KPMG settle private fraud suit for $210M
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Tuesday, May 29, 2018

Wilmington Trust, KPMG settle private fraud suit for $210M

By Anne Sherry, J.D.

Wilmington Trust agreed to settle financial-crisis-era fraud claims for $200 million; its outside auditor, KPMG, will pay $10 million. The settlement follows the fraud conviction earlier this month of four Wilmington Trust executives. The private lawsuit, however, alleges more misconduct, and over a longer period of time, than the criminal case. The plaintiffs’ memorandum in support of the proposed settlement says that the relief amounts to nearly 40 percent of the class’s maximum likely recoverable damages, compared to a median of 2.4 percent in the Third Circuit (In re Wilmington Trust Securities Litigation, May 25, 2018).

The private class action complaint alleged a scheme whereby Wilmington Trust fraudulently concealed billions in past-due and maturing loans by waiving their terms and extending their maturities. As a result of these and other practices, the bank materially understated its allowance for loan and lease losses, or ALLL. The ALLL is inversely related to the bank’s net income, so the understated reserve resulted in overstated net income, the plaintiffs allege.

Wilmington Trust has also been the subject of civil and criminal enforcement actions. The bank settled SEC charges and agreed to pay $44 million in forfeiture. The SEC also charged four former officers, who were convicted in a parallel criminal case.

In their memorandum supporting the motion for preliminary approval of the settlement, the plaintiffs tout the 40-percent recovery as a win considering the significant risks of the litigation. They cite a Cornerstone Research study placing the median recovery of damages in the Third Circuit at 2.4 percent, and the median recovery against financial institutions nationwide at 2 percent. The calculation is based on maximum possible damages offset by the $44 million in forfeiture, which is expected to be distributed to shareholders.

Furthermore, much of the criminal trial was not relevant to the additional issues in the plaintiffs’ case, they submit. The class period begins nearly two years prior to the conduct charged in the criminal action. While the government focused on the bank’s practice of waiving past-due loans, the private plaintiffs also alleged fraud based on the understated ALLL, outdated appraisals, and using supplemental financing, including extending additional loans under the "10-percent rule," to inflate loan risk ratings.

The case is No. 10-cv-00990.

Attorneys: Lesley F. Wolf, U.S. Attorney's Office, for the United States. Norman M. Monhait (Rosenthal, Monhait & Goddess, P.A.) for Pipefitters Local 537 Annuity Fund. Robert J. Kriner, Jr. (Chimicles & Tikellis LLP) for Merced County Employees Retirement Association. Jesse L. Jensen (Bernstein Litowitz Berger & Grossmann LLP) for Coral Springs Police Pension Fund. Jamie Lynne Edmonson (Venable LLP) for Wilmington Trust Corp. Jaclyn C. Levy (Potter Anderson & Corroon LLP) for J.P. Morgan Securities and Keefe, Bruyette & Woods Inc. Virginia Gibson (Hogan Lovells) for KPMG LLP.

Companies: Pipefitters Local 537 Annuity Fund; Merced County Employees Retirement Association; Coral Springs Police Pension Fund; Wilmington Trust Corp.; J.P. Morgan Securities; Keefe, Bruyette & Woods Inc.; KPMG LLP

MainStory: TopStory AccountingAuditing FraudManipulation PublicCompanyReportingDisclosure DelawareNews

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