In June 2021, the Third Circuit Federal Court of Appeals denied the prosecution’s request for rehearing on a case that reversed the convictions of four Wilmington Trust Corp. executives. The decision leaves in place a unanimous panel decision that dismissed all but two counts of the case against former Wilmington Trust president Robert V.A. Harra and three other bank executives.
The ruling set a high bar that prosecutors must reach to convict someone of fraud for making false statements to government regulators. In reaching its decision, the Third Circuit found that when a regulation is ambiguous, prosecutors must prove that a defendant’s statements were false under all possible reasonable interpretations of the statement. The case was one of the first impression in which the government tried to convict people for the alleged misuse of federal bailout money that was issued in response to the Great Recession of 2008.
In 2016, federal prosecutors accused Harra and his co-defendants of misrepresenting Wilmington’s financial health, claiming that the bank underreported $338 million of “past due” loans in order to paint a better picture of the bank’s financial health.
Before the Great Recession, Wilmington maintained a significant commercial lending practice and issued “term loans” under which the borrower would make monthly interest payments and repay the principal when the loan was “mature” (i.e. the date on the promissory note and loan agreement). Because the loans were typically used to finance construction projects, the terms were short—often two to three years—and, upon expiration, could be repaid, extended, or refinanced. Extensions were common, and Wilmington reserved the right to “renew or extend (repeatedly and for any length of time) this loan...without the consent of or notice to anyone.”
Wilmington did not classify these extended loans as “past due.” Instead, as long as the loans were in the process of renewal and interest payments were current, the bank treated them as a “waiver practice.”
The waiver practice had been a minor feature of the bank’s portfolio. But in 2009, after the bank had taken on an increasing number of commercial real estate loans, the volume of mature loans without full principal repayment exploded to more than $300 million. As a federally insured bank, Wilmington Trust was subject to federal oversight, and regulators required that the bank report “past due” loans. None of the regulatory agencies, however, defined the term “past due.”
In 2016, the defendants were charged with conspiracy, securities fraud, making false statements to federal regulators, and falsely certifying financial reports. Each count of the indictment was premised on the alleged falsity of Wilmington’s reporting of “past due” loans, and the prosecution’s claim that the defendants knew that their “past due” loan statements were false yet nonetheless made the false statements with criminal intent.
At trial, the defendants claimed that they never made false statements because the federal reporting instructions were ambiguous and, under a reasonable interpretation of those standards, they were not required to report waived loans as “past due.”
In 2018, the defendants were convicted on charges of conspiracy, securities fraud, and making false statements. Defendants Harra and David Gibson were each sentenced to six years in prison and fined $300,000 each. Defendant William North was sentenced to four and a half years in prison and ordered to pay a $100,00 fine, while defendant Kevyn Rakowski was sentenced to three years in prison and the fine was waived.
The defendants appealed, arguing that the definition of “past due” was unclear and that, in order to secure a conviction, the government needed to prove that the defendants understood that their interpretation of the term was incorrect but decided to follow it anyway.
The Third Circuit agreed, finding that because the reporting rules were ambiguous, federal prosecutors were required to show that the defendants’ statements were false under all reasonable interpretations. As a result, the defendants’ convictions were reversed and a rehearing was denied. The case represents a major setback for federal prosecutors in their efforts to investigate and prosecute financial institutions in the aftermath of the 2008 financial crisis.
Since 2008, federal prosecutors have aggressively pursued charges of financial and securities fraud. This has resulted in the criminalization of many legitimate business activities. The Third Circuit’s decision in the Wilmington Trust case is a victory for American businessmen and businesswomen and will make it more difficult for federal prosecutors to convict people for allegedly making false statements to government regulators.
Nonetheless, if you are under investigation or have been charged with fraud or another white collar crime, it is critical that you contact an experienced federal criminal defense attorney immediately.
Federal criminal defense attorney Hope Lefeber has been defending people accused of financial crimes in federal court for more than 30 years. She began her career as an Enforcement Attorney with the United States Securities and Exchange Commission (SEC), where she learned first-hand how the government prepares and prosecutes white collar criminal cases. Today, she uses that experience to defend people who are facing charges of financial crimes in federal court.
Ms. Lefeber has earned a reputation as a fierce and tenacious defender of her clients’ rights. She is meticulously prepared and will thoroughly investigate each and every piece of evidence the government intends to introduce to try to find her clients guilty.
If you are under investigation or have been charged with a financial crime in federal court, contact Hope Lefeber today.
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