The SEC on Aug. 16, 2022, charged Eagle Bancorp, Inc. and its former Chairman and Chief Executive Officer Ronald Paul over “material misstatements and omissions” stemming from related-party loans by the Maryland-based bank holding company’s principal subsidiary, EagleBank.
Both Paul and the Maryland-based bank holding company have agreed to settle with the SEC. Paul, who retired in March 2019, agreed to pay a $300,000 penalty and disgorgement of $109,000 with $22,216 in prejudgment interest, along with an officer-and-director bar for two years, subject to court approval. The bank will pay a $10 million civil penalty, along with $2.6 million in disgorgement with $750,493 in prejudgment interest. Neither party admitted nor denied the SEC’s findings as part of the settlements.
The SEC filed its complaint against Paul in U.S. District Court for the Southern District of New York, while it issued its order for Eagle as part of an administrative proceeding. The Federal Reserve Board also announced parallel settled charges, in which EagleBank will pay a $9.5 million fine, and Paul will pay a $90,000 fine while being permanently barred from employment in the banking industry.
The SEC’s charges relate to loans extended by EagleBank to trusts Paul established for his family, which the company did not include on its related-party loan balances in annual reports and proxy statements between March 2015 and April 2018, according to the order. Those omissions, according to the commission, were in violation of both U.S. GAAP and the SEC’s own rules.
FASB Topic 850, Related Party Disclosures, mandates companies disclose material related party transactions in their financial statements, while Rule 9-03 of the SEC’s Regulation S-X requires banks holding companies to disclose loans of greater than $60,000 to directors, officers, or shareholders, or their associates, if the aggregate amount of those loans is greater than 5 percent of stockholders equity.
In 2017, a short seller going by Aurelius Value issued a report alleging significant undisclosed related party loans to the Paul family trusts, which the company disputed via press releases.
“After the release of the short seller report, numerous Eagle investors inquired of Eagle and Paul about the nature and amount of these loans to Paul’s family trusts, and whether they were or should be disclosed as related party loans,” the SEC stated in its order. “Despite being aware of these inquiries, and instead of undertaking a thorough and independent investigation of the short report’s allegations, Eagle relied on Paul’s false assertions about the facts necessary for an accurate analysis of whether the loans to Paul’s family trusts were related party transactions that should have been disclosed.”
In response to those questions, Paul “falsely asserted that, due to certain facts about his relationship with the trusts, the loans were not related party transactions and that Eagle’s related party loan disclosures were accurate,” the order stated, adding that in January 2018, “Paul learned from Eagle’s primary regulator that it considered his family trusts to be related interests under applicable banking regulations.”
The company in March 2018 omitted the loans from its related party balances in its 2017 annual report and a later proxy statement, while disclosing their existence. The following year, the bank disclosed the loans in its related party balances, along with other related party loans to other directors and families, after it “reassessed and enhanced its process for identifying and disclosing related party loans,” according to the order.
The change resulted in Eagle increasing its related party loan balances to $238 million as of year-end 2017, up from the previously reported $61 million, and to $138 million as of year-end 2016, up from $53 million.
Lance Wade of Williams & Connolly LLP, counsel for Paul, in a statement said that: “In his 20 years of service, Mr. Paul and a team of talented and dedicated colleagues built EagleBank into one of the premier regional banks in the country. Mr. Paul is proud of what they built.”
“With these settlements, he and the bank can put these legal matters behind them and allow the bank to move forward with complete focus on serving the banking needs of the businesses and people of the Washington Capital Region,” Wade said in the statement.
The district court complaint against Paul contains less extensive allegations against the former Eagle Bancorp chief compared to the separate order against the bank.
“The consent order filed by the SEC against EagleBank included certain allegations relating to Mr. Paul that are false, misleading, and unsupported by credible evidence,” Wade said in the statement. “The SEC did not include those allegations in its separate action against Mr. Paul — and knew that if it did, Mr. Paul would have refused to settle his case and would have aggressively disputed those false and misleading allegations.”
EagleBank CEO Susan Riel, in a statement posted on the bank’s investor relations page, said “we are pleased that the SEC and [Federal Reserve Board] have approved the settlements and we can now put these legacy matters behind us and continue our focus on running one of the most profitable community banks in the Washington, DC region.”
This article originally appeared in the August 18, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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