FDIC Warns Weak Banks About Con Artists, But Is It Too Late?

Troubled-bank executives, there might be a snake-oil salesman headed your way.

Many bankers already know that four years after the financial crisis hit, but federal regulators saw fit to offer the alert this week.

Sandra L. Thompson, the director of risk management supervision for the Federal Deposit Insurance Corp., warned of multiple instances of investment advisors who promised financially weak banks capital if they forked over due diligence fees. The capital never materialized.

"These parties also may claim that the investors, or individuals associated with the investors, include prominent public figures and that the investors have been approved by one or more of the federal banking agencies to invest substantial capital in the targeted institutions," Thompson wrote in a memo to chief executives of banks.

The alleged fraudsters often seek the fees up front.

"Once paid, the parties have failed to conduct substantive due diligence or to actively pursue the proposed investment. Institutions should be extremely cautious if approached by any party in a similar manner," she wrote.

Bankers and their advisors said the alert was well-intended but tardy.

"I guess it is better late than never, but the barn door is open and the cows already out," said B.T. Atkinson, a partner at Bryan Cave in Charlotte, N.C. "This has been going on since the earliest days of the crisis and is not unique to the banking industry. In any crisis, there are always folks who come out of the woodwork promising solutions."

The FDIC declined to comment on the specific reason for the alert, but said it felt it was important and encourages all institutions to conduct due diligence on any advisors or capital-raising proposals.

There have been various forms of fraud involving failed and struggling banks.

In early July regulators closed Montgomery Bank & Trust in Ailey, Ga., following the discovery of alleged fraud by director Aubrey Lee Price. Price led a successful recapitalization of Montgomery in early 2011 and was given control of the bank's investment portfolio. In a letter written in June, Price said he created fraudulent bank statements to hide as much as $17 million in bank losses.

The U.S. Attorney's Office for the Eastern District of New York has charged Price with embezzlement. Though Price said in the letter he planned to kill himself, the FBI believes he may have fled to South America.

Pat Rusnak, the chief financial officer of Sterling Financial in Spokane, Wash., agreed that the FDIC alert should have come earlier, but he cut the regulators some slack.

"It would have been helpful had this guidance been issued two years ago, but realize that the process for getting this type of problem formally addressed takes a pretty long time," Rusnak said in an email on Wednesday.

Rusnak was the chief executive of the $1.6 billion-asset AmericanWest Bank, which narrowly escaped failure in late 2010 by putting its holding company into bankruptcy. SKBHC Holdings bought it for $6.5 million and recapitalized it.

Rusnak encountered at least a couple of people along the way who would have fallen under the guidance issued by the FDIC, he said. He stopped short of calling them crooks but said they were either disingenuous or lacked credibility.

"It is hard to say what is fraudulent. I think there were many people who thought they were going to participate in the recapitalization of the banking industry and it turned out to be a lot harder than everyone thought it was going to be," Rusnak said in an interview Thursday.

Rusnak avoided one bad encounter but paid another advisor "less than $100,000" in 2010 as AmericanWest languished. The advisor, who Rusnak declined to name, claimed to have close regulatory connections and committed money.

"When you are a CEO of a troubled bank, you spend every waking hour trying to find a solution. It is music to your ears to hear someone interested and who says they have a potential solution," Rusnak said.

Within weeks, he said he quickly realized it was a dead end. Rather than pursue it, he instead turned his attention to finding another solution.

"The last thing I had time to do was settle a score because I thought they misled me," he said. "The sand was running out of the hourglass for us. One of your most precious assets when you are struggling is time and I had just wasted time with someone who wasn't credible."

Christopher Zinski, a partner at Schiff Hardin in Chicago, said that earlier in the cycle many banks quickly went from strugglers to failures and that desperation may have made them easy prey. The current pool of strugglers should be more vigilant, he said.

"We all know more today about the recap market than what we did three or four years ago," Zinski said.