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Another Benefit of TARP: Uncovering Bank Fraud

Stocks in this article: BAC C JPM WFC MS

Former Bank of the Commonwealth CEO Edward J. Woodard, his son Troy Brandon Woodard, the former VP and "mortgage specialist" of a bank subsidiary, and Stephen G. Fields, the banks former EVP and commercial loan officer, were convicted in May of conspiracy to commit bank fraud, along with other charges, in a scheme to hide the bank's assets. One of the bank's borrowers, Dwight A. Etheridge, was also convicted of conspiracy to commit bank fraud, along with several other charges.

"To fraudulently hide BOC's troubled assets, the bank insiders overdrew demand deposit accounts to make loan payments, extended new loans or additional principal on existing loans to cover payment shortfalls, changed the terms of loan agreements to make loans appear current, and used funds from related entities (sometimes without authorization from the borrower) to make loan payments. In addition, the BOC executives hid millions of dollars of non-performing loans from the bank's board of directors," according to the SIGTARP report.

The former executives of Bank of the Commonwealth went so far as to cause the bank "to fund loans to troubled borrowers to purchase or attempt to purchase properties owned by Edward Woodard and Troy Brandon Woodard. BOC subsequently charged off $9 million of these loans as a loss," according to the report.

Just to add a heartwarming personal touch to the fraud activity, "Edward Woodard and Troy Brandon Woodard caused BOC to pay fraudulent invoices for construction costs for a bank branch when the true costs were incurred for renovations to Troy Brandon Woodard's personal residence."

Bank of the Commonwealth applied for $28 million in TARP money in November 2008, but was subsequently forced by its primary regulator to withdraw the application. The bank's failure in September 2011 cost Federal Deposit Insurance Corp.'s deposit insurance fund an estimated $268 million.

Seven other people were charged as a result of investigations of Bank of the Commonwealth by SIGTARP, the Federal Bureau of Investigation, the Internal Revenue Service, the Securities and Exchange Commission, and the inspector general offices of the FDIC and the Federal Reserve. The three bank officer names above, along with Etheridge, will be sentenced in September.

SIGTARP expects its investigation activity to continue for many more years. We can only hope that similar fraud activity, which can continue for very long periods at otherwise "healthy" banks, will be detected by bank examiners, irrespective of TARP, with very stiff prison terms acting as a deterrent.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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