Appellate Circuit

The Wilmington Four Won’t Be Headed to Jail. The Third Circuit Introduces The Bankers’ Waiver Doctrine.

The Government’s burden to prove falsity in the face of an ambiguous reporting requirement is a matter of first impression in this Circuit e.g. the panel can interpret it how it wants to.

3rd Circ. Won’t Revisit Wilmington Fraud Conviction Reversal

June 8, 2021: The Third Circuit’s reversal of fraud convictions for four former Wilmington Trust Corp. executives will stand after judges denied the government’s request for a rehearing Monday, cementing a decision that the judiciary is corrupt and bankers above the law.

U.S. appeals court tosses former Wilmington Trust executives’ crisis-related convictions

Wilmington Trust financed construction projects. Extensions were commonplace. Wilmington’s loan documents reserved its right to “renew or extend (repeatedly and for any length of time) this loan . . . without the consent of or notice to anyone.” Wilmington’s internal policy did not classify all mature loans with unpaid principals as past due if the loans were in the process of renewal and interest payments were current, Following the 2008 “Great Recession,” Wilmington excluded some of the loans from those it reported as “past due” to the Securities and Exchange Commission and the Federal Reserve. Wilmington’s executives maintained that, under a reasonable interpretation of the reporting requirements, the exclusion of the loans from the “past due” classification was proper. The district court denied their requests to introduce evidence concerning or instruct the jury about that alternative interpretation. The jury found the reporting constituted “false statements” under 18 U.S.C. 1001 and 15 U.S.C. 78m, and convicted the executives.

The Third Circuit reversed in part. To prove falsity beyond a reasonable doubt in this situation, the government must prove either that its interpretation of the reporting requirement is the only objectively reasonable interpretation or that the defendant’s statement was also false under the alternative, objectively reasonable interpretation. The court vacated and remanded the conspiracy and securities fraud convictions, which were charged in the alternative on an independent theory of liability.

JAN 12, 2021 | REPUBLISHED BY LIT: FEB 13, 2021


LIT’s reviewed the credentials of the 3 panel assigned to this case. Alas, Judge Greenberg passed in January 2021, so that leaves two active judges, namly new federal Judge Phipps and Judge Krause. Neither of them appears to have an accounting background and accounting is a complex area, its why accountants and tax accountants take as long to qualify, if not longer, than judges. Yet they are allowed to “interpret” the law and wordsmith opinions in this case.

We look at the likes of Chief Judge of the Court of Appeals for the Federal Circuit, Sharon Prost. She has a verifiable accounting background in her resume; “She was an Attorney at the Internal Revenue Service from 1983 to 1984, and Field Attorney at the Federal Labor Relations Authority from 1980 to 1983. Judge Prost also served as Labor Relations Specialist/Auditor at the United States General Accounting Office from 1976 to 1980 and Labor Relations Specialist at the United States Civil Service Commission from 1973 to 1976.”

Now that’s a judge that could sit on a panel in a complex case like this and the public would have more confidence in her assessment of the law versus the accounting practices the bankers invoked, based on their own skewed assessment.

Judges cover a lot of industries as well as deciding criminal cases and civil disputes. That’s a stretch, for any competent person. Whether any of the judges at the Third Circuit have experience in complex accounting standards when interpreting the law is unknown and not reviewed here, but it’s clear that an opinion was reached by a 3-panel that was not experienced in the core question[s] presented in this case.

This should be addressed by congress and/or the courts.

Jan 12 (Reuters) – A federal appeals court on Tuesday overturned the convictions by The Honorable Richard G. Andrews of four former Wilmington Trust Co executives charged with concealing from regulators the amount of troubled loans on the company’s books following the 2008 global financial crisis.

Former President Robert Harra, Chief Financial Officer David Gibson, Controller Kevyn Rakowski and Chief Credit Officer William North had been charged with underreporting the amount of Wilmington’s “past due” commercial real estate loans to the Federal Reserve and the Securities and Exchange Commission.

Prosecutors said the defendants wanted to make Wilmington’s finances look better, enabling it to raise $273.9 million in a February 2010 stock offering, just over a year after accepting $330 million from the federal government’s bank bailout program.

But a unanimous three-judge panel of the 3rd U.S. Circuit Court of Appeals in Philadelphia agreed with the defendants that the reporting rules were ambiguous, and that prosecutors failed to prove that only their own view of the rules was objectively reasonable.

In voiding the May 2018 convictions, the appeals court ordered acquittals on charges of making false statements and certifications, and returned conspiracy and securities fraud charges to a lower court for a possible new trial.

Wilmington was founded by the du Pont family in 1903. M&T Bank Corp, of Buffalo, New York, bought Wilmington in 2011 after loan losses prompted Wilmington to sell itself at a fire-sale price, 46% below its market value.

The office of U.S. Attorney David Weiss in Delaware was not immediately available for comment.

The appeals court panel creates a new “Waiver” Doctrine, a new accounting standard, which allows Bankers to call Past Due/Matured Loans as current [by inferring these matured or past due loans were going to be extended and/or modified] and exclude those from reporting as ‘past due’. As a result it vacates the ‘falsity’ charges which in effect ends the case (the other two remand items we interpret as being dependent on the falsity charges and as  this has been vacated, we don’t think the independent theory of liability will apply. In summary, as such those remanded charges will not result in a new trial but will end the case in a victory for the 4 corrupt executive bankers).

Rakowski’s lawyer Henry Klingeman called Tuesday’s decision a “vindication,” saying “it was never the defendants’ fault that the bank struggled.” Harra’s lawyer Lawrence Lustberg, Gibson’s lawyer Kenneth Breen, and North’s lawyer George Hicks were also pleased with the decision.

Wilmington was indicted in 2016 over the loans, becoming the first recipient of federal bailout money under the Troubled Asset Relief Program to be charged. It reached a $60 million settlement in 2017.

The case is U.S. v. Harra et al, 3rd U.S. Circuit Court of Appeals, No. 19-1136. The Judges on the appeal panel were; KRAUSE, PHIPPS, and GREENBERG.

After a reference to this case on Twitter, trial attorney Michael P. Kelly replied to our post and asked that we take on board his assertions and to “check the records”. We did, but not his trial records. No, we reviewed the more detailed audits and investigations from the related Investor law suit, the settlement summary which is provided below in a 729 page report. Unfortunately for Mr Kelly, his claims are rejected by the evidence and agreement to settle as a result of this litigation, investigation and resulting summary declaration. For example, he claimed the loan book in question was only a “small subset” attributing to only 3%. On the other hand, the settlement report claims it was 25% of the loan book with a value of $1.5 billion dollars.

It’s Taken Near Six Months for the Embers to Cool Enough So A Judicial Slap Rather than a Felony Charge Can Be Mandated.

Texas being Texas. We nailed it again when LIT announced; It all tastes like fudge from here. The corruption in Texas is a wildfire and needs a special team of firefighters to take Texas back under control.

Sizzlin’ Bacon Tweets Is Not Where Judge Don Willett’s Heart Is, He Claimed. How’s He Doin’ Nearly 3 Years Into His Life Tenure?

If you’re confirmed why would a transgender person with a case before you ever think they’d have a fair and impartial hearing? asked Sen Leahy

Justice by Hecht in The Judge “Fireman” Case Eventually Assigned to Special Prosecutor

Texas Supreme Court Chief Justice Nathan Hecht assigns case to Judge Peebles. He assigned a special prosecutor. It all tastes like fudge from here.

Former Wilmington Trust executives staying out of prison for now

FEB 27, 2019 | REPUBLISHED BY LIT: FEB 13, 2021

Four former Wilmington Trust executives facing multi-year prison sentences will avoid jail time, at least until an appeals court addresses the case.

U.S. District Judge Richard G. Andrews on Wednesday granted the executives’ request to remain free on bail pending the appeal of their criminal bank fraud and conspiracy convictions.

In an opinion, Andrews acknowledged that it is an uncommon reprieve. The law requires defendants seeking bail at this stage of a federal criminal case to show that their appeal raises a “substantial question of law,” the judge wrote.

In this instance, the legal question is over the hundreds of millions of dollars of delinquent loans to Delaware developers that were accumulating on Wilmington Trust’s balance sheet during the height of the Great Recession.

And how they should have been reported to financial regulators – and to investors.

It is the same question that persisted through six weeks of trial last year when prosecutors alleged that Wilmington Trust maintained “a second set of books,” separate from ones they disclosed to the feds, showing the true value of a deteriorating commercial real estate portfolio.

In an internal email, referenced in court documents, one Wilmington Trust banker had called those soured assets “credit turds.”

Attorneys for the convicted bankers repeatedly argued that past due is legally ambiguous, or as one claimed “a term of art.”
They pointed to a relatively obscure regulatory document from the federal Office of Thrift Supervision to make their case.

Written years before the bank’s 2011 demise, the document said a construction loan that had passed its due date with an outstanding principal remaining was not “past due” if a bank continued to receive interest payments and the debt was in the process of being restructured.

Wilmington Trust’s former President Robert Harra Jr., former Chief Financial Officer David Gibson, former Chief Credit Officer William North and former Controller Kevyn Rakowski were all convicted last May of more than a dozen criminal counts of bank fraud, conspiracy and making false statements.

Prosecutors said the former executives’ conspiracy led to Wilmington Trust’s fire sale to M&T Bank in 2011.

Hundreds of Delaware bank employees were laid off following the sale, and shareholders lost billions.

In December, Harra and Gibson were sentenced to six years in prison. North received four and a half years, and Rakowski three years.

All appealed their conviction to the 3rd U.S. Circuit Court of Appeals. Such federal appeals typically take no less than a year to decide.

Federal prosecutors had wanted them to self-report to prison in February.

In his ruling on Wednesday, Andrews said the bankers do not pose a flight risk or danger to the community.

Maturity Default

By Michael Sternlieb on March 3, 2009 | Republished by LIT: Feb 21, 2021


A maturity default occurs when the borrower under a mortgage loan fails to pay the lender the balloon payment, or principal balance, when due at the maturity of the loan.

This term, which has not seen widespread use in recent years, seems to be on everyone’s lips in real estate and banking circles.

While you can have a maturity default on a loan which was already in default for failure to pay debt service or breach of covenant, it is now not uncommon to see loans which were fully performing up to the maturity date, but the borrower is unable to pay off the loan at maturity.

This is the type of maturity default addressed in this article.

Few borrowers have the financial resources to pay off a substantial balloon payment on a commercial mortgage with their own funds. The traditional source of repayment is through a refinancing loan, either from the same lender or a new lender.

Many borrowers facing maturity are now finding that refinancing loans are unavailable. CMBS is moribund. Large banks and other traditional lenders have no liquidity as a result of the credit freeze.

Other lenders are not making loans because of the uncertainty of the value of real estate assets in the current market. There is some mortgage money out there, particularly from regional and local banks, which have lower lending limits. But wherever capital is available, the rules for real estate lending have changed dramatically.

The name of the game now is lower leverage and skin in the game. It is not uncommon to see lenders offering terms which include 60% to 65% loan to value; 1.30% to 1.35% debt service coverage; and partial, if not full, recourse.

With higher equity requirements and lower real estate values, many borrowers cannot come up with the cash now required to refinance.

Borrowers in these circumstances do have options. The number one option is to negotiate a restructuring and extension of the loan with the existing lender. The lender will not be happy to hear that the borrower is looking to extend the loan. After all, the borrower contracted to pay off the loan at maturity.

This will not, however, come as a surprise to the lender, who is now spending most of his time dealing with defaulted loans. A number of factors may cause the lender to favorably consider a restructuring and extension. This has been a fully performing loan, unlike many others, and ideally the property is generating sufficient net operating income to continue to pay debt service as well as leasing costs and capital expenditures. The lender wants to avoid a maturity default, which will require him to take a substantial write-down of the loan.

In a real estate market with increasing supply and decreasing demand, the lender doesn’t want the property stigmatized as “in foreclosure” or “REO property”.

The number of foreclosures is at an all time high, and in New Jersey an uncontested foreclosure may take 12 – 16 months. The lender really doesn’t want to take the property back. He has lots of other properties he has taken back or will be forced to take back, and there are not a lot of buyers out there. He knows that you can manage your own building better than third party management hired by the lender.

Finally, with several trillion dollars of commercial mortgage maturities occurring over the next few years, he knows that things are likely to get worse.

If the lender is inclined to extend the loan, he will squeeze the borrower to put some skin in the game with additional equity to pay down the loan and a partial guarantee.

The borrower should count to ten and think carefully before responding. If the original loan was made five years ago at 75% of the then value of the property, current value may not exceed the loan balance. The borrower must understand that, at this point, he has no equity in his building, other than emotional equity. Emotional equity has no value and should not be a factor in what is in reality a new investment decision. The borrower has nothing tangible to lose, but the lender has a lot to lose and knows that he will likely take a substantial haircut if he has to take back the building.

The borrower should resist any guarantee, and offer to put up equity so that he does have skin in the game, but insist that the lender forgive some substantial portion of principal.

Here is where the negotiation gets interesting. Every deal is different, and not all lenders can or will write down principal as part of a restructuring and extension, but some have and many more will. Other factors to be negotiated include interest rate, amortization, reserves, fees and term. If you are going for the extension, you want five years. Don’t count on the credit markets returning to normal, or real estate values recovering, in a year or two.

Some borrowers are interested in negotiating a payoff of their maturing mortgages at a substantial discount. Many lenders today would be happy to sell defaulted mortgages at a substantial discount, and are doing so. The amount of any discount will depend upon the lender’s perception of the value of the property, NOI, rent roll, condition of the property and other factors. Discounts usually require immediate payment in cash.

If the borrower doesn’t have the ready cash, and wants the lender to agree to a discount and then give the borrower time to come up with the money, it is a harder sell but by no means impossible. Many lenders are anxious to be taken out, and will give the borrower a forbearance period during which the lender will agree to accept a specified amount in satisfaction of the mortgage debt.

For the reasons given above, lenders are under siege. This is good news and bad news. The good news is that a borrower may well be able to get relief. The bad news is that it may not be the relief the borrower is looking for.

Lenders may be inclined to do the minimum needed to avoid the impending maturity default, and then sweep the problem under the rug. They are likely to offer an extension of six months or so, charge the borrower a fee and increase the interest rate.

Remember, things are likely to get worse, and this is only postponing the inevitable. It is in the interests of both parties to deal with reality, and many lenders are beginning to see the light.

What if your mortgage is maturing in a year or two or even three? If you have a performing loan, it is not too early to talk to your lender about extending the loan. Some lenders will understand that this makes sense. Unfortunately, in most circumstances, it may prove difficult to get the lender’s attention.

As always, a borrower should do his homework, understand his options and the lender’s options, and put together the best possible negotiating team.

The Wilmington Four Won’t Be Headed to Jail. The Third Circuit Introduces The Bankers’ Waiver Doctrine.
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