2. 3. 4. Docket Number: 02745 If activity occurred at branch office(s), identify: Asset Size of Financial Institution: $8.9 billion Approximate date and dollar amount (prior to any allowances for or recovery) of suspected violation Date: October 25/26, 1989 Amount: $101,250 restitution Summary characterization of the suspected violation. Mark appropriate box(es) with an X. [ ] Defalcation/Embezzlement [ ] Bribery/Gratuity [ ] Bank Secrecy Act/ [x] False Statement [ ] Check Kiting [] Bank Fraud 5. 6. [x] Misuse of Position [ ] Unexplained Loss Has there been any admission or a confession? [ ] Yes [x] No If so, by whom? Money Laundering Explanation/Description of Suspected Violation (Give a brief summary of the suspected violation, explaining what is unusual or irregular about the transaction.) Senior officers of CenTrust, primarily Chairman Paul, represented on several Occasions to examiners that the bank could not conduct transactions involving Integrated Resources subordinated debt because the bank had become a member of the Creditors' Steering Committee in August 1989 and that such transactions would be illegal insider trading. (CenTrust Bank had purchased $39 million of Integrated debt in April 1986, which had since declined in value to about $1-2 FEDERAL HOME LOAN BANK BOARD CRIMINAL REFERRAL FORM (FHLBB 366) FHLBB DOCKET NUMBER OF THE million.) However, in late 1989 CenTrust's Supplemental Executive Retirement Plan (SERP), which benefits only selected senior executives including Mr. Paul, purchased $3,000,000 face value of Integrated bonds at approximately $.03 on the $1.00, total purchase price of $101,250. Mr. Paul is one of the three trustees of the SERP. It is apparent that either 1) Chairman Paul and other senior management members misrepresented certain facts to the examiners about Cenfrust not being allowed to trade Integrated securities or 2) insider trading was in fact conducted by the SERP based on inside information intending to benefit certain senior executives at the expense of the institution and, ultimately, the taxpayers. Further, management would not provide documents pertaining to the SERP which disclosed the Integrated purchases until ordered to do so in a Temporary Cease and Desist Order. Therefore, statutes violated fall into one of two groups, depending on the true facts, as follows: 1. Insider Trading Title 15 U.S.C. sec. 78££: Criminal violations of securities laws. Title 18 U.S.C. sec. 371 · Conspiracy of two or more persons to either comit a federal offense or to defraud the United States (or any agency of the U.S.). Title 18 U.S.C. sec. 1001 - General false statements statute knowingly and willfully falsifying or concealing a material fact or making a false statement or making or using false writing knowing it to be false. Title 18 U.S.C. sec. 1006 - False entries and reports or statements. including material omissions, made with the intent to injure or defraud an insured institution or deceive a Federal Home Loan Bank examiner; receipt of any benefits by an officer, agent or employee of the institution from a transaction of the institution with intent to defraud by the individual. 2. If not Insider Trading, as represented by management: Title 18 U.S.C. sections 1001 and 1006 False statements to examiners representing that such transactions would be insider trading. FEDERAL HOME LOAN BANK BOARD CRIMINAL REFERRAL FORM (FHLBB 366) FHLAB DOCKET NUMBER OF THE SECTION B TO BE COMPLETED IN REFERRAL CASES WHERE SUSPECTED CRIMINAL ACTIVITY INVOLVES PROBABLE LOSS (BEFORE REIMBURSEMENT OR RECOVERY) OF $10,000 OR GREATER OR IN ALL CASES, REGARDLESS OF AMOUNT, INVOLVING AN AFFILIATED PERSON WITHIN THE MEANING OF 12 C.F.R.§ 561.29. 1. Give a chronological and complete account of the suspected. violation. (If necessary, use Continuation Sheet.) Relate key events to document and attach copies of those documents. - Explain who benefited, financially or otherwise, from the transaction, how much and how. - Furnish any explanation of the transaction provided by the suspect and indicate to whom and when it was given. - Furnish any explanation of the transaction provided by any other person. - Furnish any evidence of cover-up by the suspect or evidence of an attemp to deceive federal or state examiners or others. - Indicate where the suspected violation took place(e.g. main office, branch, other). - Recommend any further investigation that might assist law enforcement authorities in fully examining the potential violation. On April 25, 1986, CenTrust Bank purchased Integrated Resources 10.75% subordinated debt with a face value of $39.0 million at a price of 99.2438. CenTrust purchased these bonds at issuance and its holdings represent 13.0% of the entire $299.0 million issue. The bonds were underwritten by Drexel Burnham Lambert, Inc. and are actively traded on the New York Stock Exchange. In mid-1989, Integrated defaulted on interest payments on certain of its debt issues and thus a Creditors' Steering Committee (the Committee) was formed to oversee the restructure of Integrated's debt. Chairman Paul and various other members of CenTrust management stated that CenTrust became one of the members of this committee on August 16, 1989, and thus CenTrust was precluded from transacting any trades of Integrated due to this "Insider position. The examiners accepted management's representations as fact. On October 25 and 26, 1989, CenTrust's Supplemental Executive Retirement Plan (SERP) purchased a total of $3.0 million face value of Integrated bonds in three separate transactions at a weighted average cost of 3.25%, or $101,250 including commissions. While the SERP is managed by a company in England (Dinam Finance and Management Co., Ltd.), and the purchases were transacted there, this company would have had the same "inside" knowledge as CenTrust for the following reasons: 1) the management company is controlled by Sir Edward Davies, who is a CenTrust director and thus would have been well aware of CenTrust's ownership of Integrated and its "insider" position. 2) Sir Edward Davies is one of three trustees for the SERP, the other two being Chairman Paul and Peter Moser, a long-time friend of Paul REV: June 1988 Page No. 5 FEDERAL HOME LOAN BANK BOARD CRIMINAL REFERRAL FORM (FHLBB 366) FHLBB DOCKET NUMBER OF THE and also a CenTrust director. The beneficiaries of the SERP are a small group of the most senior executives of CenTrust, with Chairman Paul receiving by far the majority of the benefits. During the examination, Paul continually represented to the examiners that the true value of Integrated debt was far greater than the value represented by the market price due to a lot of intangible assets and other unrecognized worth. This would have been represented to the board of directors (including Davies and Moser) at board meetings as Paul fought the regulators over the amount of writedown required on the $39 million. Thus, it appears that the SERP purchased the $3.0 million in Integrated debt at the deeply discounted price of 3.25% feeling that it would in time reach a much higher value; any increase in price from 3.25% would greatly benefit the handful of SERP beneficiarias even as CenTrust Bank was incurring losses of approximately $37-38 million on its Integrated debt. Adding further to the allegations that these individuals conducted these transactions with knowledge that they were improper is the fact that the examiners attempted for months to get accounting records for the SERP from England, but were refused access to those records by CenTrust management. Finally, said records were slowly made available in December 1989 and Jamiary 1990 following the issuance of a Temporary Cease and Desist Order by the Offica of Thrift Supervision which required production of the records. At that time the examiners discovered the purchases of Integrated by the SERP. If it is determined that such transactions are in some way not insider trading in violation of securities laws, certain CenTrust officers nevertheless sade false statements to Federal and state examiners. rther recommended action would be a judgment by the SEC as to whether the itions as described would, in fact, constitute violations of securities laws. 2. Indicate whether the suspected violation appears to be an isolated incident or whether it relates to other transactions. (Explain) Isolated. 3. Exclusion of Information from the Referral: Has any pertinent information been excluded from this referral as a result of any legal or other restraint? () Yes (x) So If yes, why? Save the excluded information and/or documents been segregated for later retrieval? [] Yes [] No N/A Vitnesses: List any vitnesses who might have information about the suspected violation and describe their position or employment. Indicate whether they have been interviewed. Name: Possibly employees of the Dinan company in London, England. Position: address available on attachments) Address: Possibly Centrust Senior EV7 Angel Cortina, since vas RIV: June 1988 Page No. 6 2. 3. (street) Docket Number: C3745 100 S.E. Second Street 33131 If activity occurred at branch office(s), identify: Asset Size of Financial Institution: $8,961,146,000 (as reported on the September 20, 1989 Thrift Financial Report). Approximate date and dollar amount (prior to any allowances for restitution or recovery) of suspected violation Date: Various (Month) (Day) (Year) Amount: S Unknown 4. Summary characterization of the suspected violation. Mark appropriate box(es) with an X. [ ] Defalcation/Embezzlement [ ] Bribery/Gratuity [ ] Bank Secrecy Act/ 6. [ ] Yes [X] No If so, by whom? None Explanation/Description of Suspected Violation (Give a brief summary of the suspected violation, explaining what is unusual or irregular about the REV: June 1988 Page No. 1 |