A Maryland-based bank and bank holding company agreed to pay nearly $23 million in penalties for improperly loaning approximately $90 million to family trusts controlled by its former chief executive officer over three years, then misleading investors about the loans.
Eagle Bancorp, parent company of EagleBank, was fined $9.5 million by the Federal Reserve Board on Tuesday for violating the board’s insider lending regulation. The bank agreed to pay an additional $13.4 million to settle charges laid by Securities and Exchange Commission (SEC).
The SEC alleged EagleBank violated negligence-based antifraud, proxy, reporting, books and records, and internal accounting controls provisions of the federal securities laws when it did not disclose the existence of the loans to investors. When the bank’s improper lending practices were exposed by a short seller, it made false and misleading statements about the loans, the agency continued.
Along with the two enforcement actions against EagleBank, former EagleBank CEO Ronald Paul was permanently barred from employment in the banking industry by the Fed. He agreed to a two-year ban on being an officer or director and will pay a total of approximately $521,000 in fines and penalties.
The terms of the SEC’s settlement with Paul must still be ratified by the U.S. District Court for the Southern District of New York. Eagle Bancorp, EagleBank, and Paul did not admit nor deny the agency’s findings.
In November 2021, the Fed barred EagleBank’s former general counsel, Laurence Bensignor, from banking for his role in EagleBank’s “unsafe and unsound lending practices.”
Compliance considerations: From 2015-18, Eagle Bank “had deficient internal controls over insider lending practices,” which “allowed the bank to extend credit totaling nearly $100 million to entities that Paul owned or controlled, including certain family trusts, without making appropriate disclosures to, or obtaining required approvals from, a majority of the bank’s board of directors,” the Fed said in its press release.
Those deficiencies extended to the bank’s lending staff, the Fed said, who permitted Paul to participate in matters in which he had a conflict of interest. In addition, the board cited the bank for third-party risk management deficiencies that resulted in “inadequate oversight of contracts between the bank and a local government official.”
The improper loans came to light in 2017, when a short seller accused EagleBank and Paul of improperly benefitting from bank loans at shareholders’ expense. EagleBank and Paul responded in statements and press interviews that the accusations were false.
The SEC said from 2015-18, EagleBank failed to include those loans in the related party loan balances disclosed in its annual reports and proxy statements filed with the agency. The loans were considered material by SEC regulations and generally accepted accounting principles (GAAP), the agency said in its complaint against Paul.
The bank did not disclose the loans to the SEC until March 2019, when it filed its 2018 annual report. That report also disclosed “other, previously undisclosed related party loans to Eagle directors and their families,” the SEC stated.
Paul was negligent when he failed to disclose these related party loans in filings and statements, and Eagle’s internal processes were inadequate in that they failed to prevent such a disclosure failure, the SEC said.
EagleBank’s response: “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, D.C. region,” said Susan Riel, CEO at EagleBank, in a statement.