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1 Laurence M. Rosen, Esq. (CSB# 219683) THE ROSEN LAW FIRM, P.A. 2 355 South Grand Avenue, Suite 2450 Los Angeles, CA 90071 3 Tel: (213) 785-2610 Fax: (213) 226-4684 4 Email: [email protected]
5 -and-
6 Phillip Kim, Esq. (pro hac vice) THE ROSEN LAW FIRM, P.A. 7 275 Madison Avenue, 34th Floor New York, New York 10016 8 Telephone: (212) 686-1060 Facsimile: (212) 202-3827 9 Email: [email protected]
10 Lead Counsel for Plaintiffs and Class
11 IN THE UNITED STATES DISTRICT COURT 12 NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION
13
14 Case No.: CV-09-4208-JSW KYUNG CHO; REX DECHAKUL; AND CV-09-4429-JSW 15 CV-09-4449-JSW DAVID HWANG, INDIVIDUALLY AND CV-09-4513-JSW 16 ON BEHALF OF ALL OTHERS CV-09-4505-JSW SIMILARLY SITUATED, 17 CONSOLIDATED THIRD AMENDED Plaintiffs, COMPLAINT FOR VIOLATIONS OF 18 THE FEDERAL SECURITIES LAWS vs. 19 CLASS ACTION
20 UCBH HOLDINGS, INC.; THOMAS S. WU; THOMAS YU; EBRAHIM SHABUDIN; JURY TRIAL DEMANDED 21 CRAIG ON; DENNIS WU; ROBERT Hon. Jeffrey S. White 22 NAGEL; JOHN M. KERR; DANIEL M. GAUTSCH; DOUGLAS MITCHELL; 23 BURTON D. THOMPSON; JOHN CINDEREY; JOSEPH J. JOU; PIN PIN 24 CHAU; LI-LIN KO; QINGYUAN WAN;
25 GODWIN WONG; DAVID NG; DANIEL P. RILEY; RICHARD LI-CHUNG WANG; and 26 JOHN DOES 1-10,
27 Defendants.
28 1 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW
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1
2 Lead Plaintiff Kyung Cho and named plaintiffs Rex DeChakul and David Hwa
3 (collectively the “Plaintiffs”) individually and on behalf of all other persons similarly situated,
4 their undersigned attorneys, allege in this Consolidated Second Amended Complaint (
5 “Complaint”) the following upon knowledge with respect to their own acts, and upon
6 obtained through an investigation conducted by their counsel.
7 I. NATURE OF THE ACTION
8 1. This is a federal securities class action on behalf of a class consisting of al
9 persons and entities, other than defendants, who purchased the common stock of UCBH
10 Holdings, Inc. (“UCBH”) between January 24, 2008 through and including September 8, 2009
11 (the “Class Period”), seeking to recover damages caused by defendants’ violations of federa
12 securities laws (the “Class”).
13 2. UCBH is a bank holding company. UCBH conducted its principal busines
14 through its wholly owned banking subsidiary, United Commercial Bank (“UCB” or the “Bank”)
15 a California state-charted commercial bank. The Bank comprised 99.5% of UCBH’
16 consolidated assets and revenues.
17 3. UCBH was the first bank to receive funds through the U.S. Department
18 Treasury’s Troubled Asset Relief Program (“TARP”); on November 14, 2008 the Comp
19 received $298.7 million. The Bank was also the first depository institution to cause the treas
20 to take a loss on TARP funds, when on November 6, 2009 the Bank failed and was closed by
21 California Department of Financial Institutions (“CDFI”).
22 4. The Federal Deposit Insurance Corporation (“FDIC”) was named as receiver,
23 the Bank’s assets were sold to East West Bancorp.
24 5. On November 24, 2009 the Company filed a Chapter 7 Petition for Bankruptcy
25 the U.S. Bankruptcy Court for the Northern District of California.
26
27
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1 6. In the petition, the Company listed $9.7 million in assets and $289 million in
2 liabilities. As a result, UCBH’s stock became worthless, and Plaintiffs and investors lost their
3 I entire investment.
4 7. Following UCB’s failure the FDIC’s Office of Inspector General conducted
5 material loss review of UCB’s failure (the “MLR” or the “Review”). The purpose of th
6 investigation was to determine the cause of the Bank’s failure. A copy of the Inspector General’
7 material loss review report is attached as Exhibit A and is incorporated by reference herein.
8 8. The Review found serious misconduct. For example, the Review found that Ban
9 officials and senior executives had been intentionally delaying downgrades, modifying loa
10 terms to delay negative consequences, misrepresenting information to the Bank's auditor, an
11 even altering loan documents, all at the behest of "Senior Executives" who sought to mas
12 deteriorating financial conditions. (unnamed in the MLR).
13 9. The Review also specifically found that Defendant Wu had delayed the
14 of a negative internal report simply because it contained negative information, among
15 fraudulent behavior he was specifically identified as committing.
16 The Core Operations of UCBH
17 10. When evaluating UCBH’s performance, UCBH’s senior officers and dir
18 focused on five primary areas: (1) loan and deposit growth, (2) credit quality, (3) net inte
19 margin, (4) expense control and (5) capital adequacy. See UCBH 2007 Form 10-K, pg 27.
20 11. Credit quality is measured for financial reporting purposes by quantifying l
21 risk in the portfolio such as non-performing assets (which include non-accrual,
22 nonperforming loans and other real estate owned assets acquired through defaults on loans),
23 the allowance for loan losses (“ALL”) and the provision for loan losses (“Provision”).
24 12. Capital adequacy is function of the Bank’s earnings, its deposit growth
25 expense control. The ALL and Provision, and the amount of defaulted loans that are charged
26 directly affect earnings and hence capital adequacy of the Bank.
27 13. The ALL is, according to UCBH’s annual report, a critical accounting metric.
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1 14. UCBH senior executives regularly report and discuss the Bank’s ALL with
2 Audit Committee of the Company’s Board of Directors. 2008 10-K pg 33.
3 15. A Bank’s ALL and Provision consequently are very material to investors i
4 assessing the financial health of a bank.
5 16. An allowance for loan losses is a contra-asset account that appears on the ba
6 sheet as an offset to loans receivable. For example, if a bank has $100,000 in loans recei
7 and an allowance for loan losses of $20,000, the net realizable value of the loans recei
8 reported on the balance sheet would be $80,000 ($100,000 - $20,000). The allowance for
9 losses is reduced when a loan or a portion of a loan is written off as uncollectible. The allow
10 for loan losses is increased when a provision for loan losses is established.
11 17. The provision for loan losses is the current period expense for loan
12 established in the current period. This provision is reported in the statement of operations (o
13 income/loss statement). Therefore, any increases in the provision, will generally decrease th
14 Company’s net income (or increase net loss) for the period. It represents the amount that i
15 added to the allowance for loan losses in the current reporting period.
16 A Primer on How the FDIC Regulates and Examines Banks Such as UCBH
17 18. The FDIC examines banks through onsite visits on a regular basis.
18 19. Prior to an onsite visit, the FDIC will make a formal request for documents
19 information to the bank’s Chief Executive Officer.
20 20. During these onsite visits, FDIC examiners will meet with senior members
21 bank management to discuss areas of concern, including all troubled and non-performing loans.
22 21. Following an examination, the FDIC will assign each bank a rating under
23 CAMEL system from one to five as a whole (composite rating) and also assigns a rating for ea
24 of five areas. These are Capital, Asset Quality, Management, Earnings and Liquidity. A one
25 the highest rating. A five is the lowest. A three is less than satisfactory.
26
27
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1 22. If a bank receives a three rating in any two categories or a composite three ratin
2 than FDIC rules mandate that FDIC examiners must meet with the bank’s board of directors
3 discuss the problems identified in the examination.
4 23. If a bank receives a three composite rating, then it is typically the subject of
5 memorandum of understanding and may be categorized as troubled. The memorandum o
6 understanding is a means of seeking informal corrective administrative action from institu
7 considered to be of supervisory concern, but which have not deteriorated to the point where
8 warrant formal administrative action. UCB was the subject of a memorandum of understan
9 and was identified as troubled, in April 2009.
10 24. FDIC policy and practice has established the ratio of a bank’s adversely classifie
11 assets (non-performing loans and troubled loans) to total assets as a key metric to determine asse
1 12 quality and capital adequacy. This ratio is used throughout FDIC reports of examination and i
13 the MLR at pg. 13.
14 25. Serious asset quality problems in banks -- which are heavily dependent on volat
15 liabilities, including brokered deposits for their funding sources -- are notoriously lethal and ha
16 been documented in numerous FDIC IG Material Loss Reports on numerous banks since 2008.
17 26. As a rule of thumb, when the ratio of adversely classified assets to bank capi
18 (adding the ALL to capital) reach roughly 100% the regulators will normally rate the bank a
19 its asset quality a composite 4 (or lower) and issue the bank a cease and desist order that w
20 include a prohibition on accepting or rolling over the brokered deposits. As UCB had be
21 critically dependent on brokered deposits for its survival, it was imperative that it delay reachi
22 this adversely classified asset level.
23 Loan Risk Management At UCBH; The IARD Function
24
25 1 “Classified” loans is a FDIC regulatory term that is the total of loans classified as sub- 26 standard, doubtful or loss. Substandard is higher than normal risk of loss; doubtful is huge amount of loss but not certain what the amount of loss is; Loss means the loan must be charged 27 off immediately 100%. (virtually all nonaccrual loans are classified loans).
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1 27. “[A]n independent internal credit review function periodically conducts revie
2 of UCB's lending operations and loan portfolios. These reviews are designed to place
3 emphasis on the early detection of problem credits so that action plans can be developed a
4 implemented on a timely basis to mitigate any potential losses." UCBH Form 10-K for Fis
5 Year ended December 31, 2008.
6 28. At UCB, this “independent internal credit review function” was performed by
7 "Internal Asset Review Department (“IARD”). As referenced in the MLR, the IARD
8 synonymous with the "independent internal credit review function."
9 29. When the real estate market began to decline in 2007, UCB found itself
10 substantial exposure to loans concentrated in construction (“ADC”) (16.2%) and commercial
11 estate (“CRE”) projects, as they accounted for 16.2% and 52%, respectively, of UCB’s
12 capital. MLR pg. 9.
13 30. UCB’s significant ADC and CRE concentrations exceeded FDIC regula
14 guidance and made it more vulnerable to the decline in the commercial real estate sector,
15 which UCB suffered heavy losses. MLR pg 8.
16 31. As more and more of these loans became non-performing UCBH’s loan asse
17 quality and liquidity became stressed. The total of CRE and ADC loans represented at least 64%
18 of UCB’s total loans from 2002 to its failure in 2009. MLR pg 9.
19 32. From December 2006 to December 2007, UCBH’s liquidity risk increased
20 substantially because it became more dependent on non-core deposits for capital. UCB wa
21 forced to rely on “non-core” short-term funding sources such as brokered deposits, federal fund
22 purchases and FHLB advances. MLR pg. 11. Broker deposits are particularly risky because no
2 23 only are they expensive, but if the bank becomes less than “well capitalized” or is subject to a
24
25 2 “Well capitalized” is a regulatory capital rating the FDIC gives to banks, and means the bank 26 satisfies certain numeric ratios culled from the data provided in call reports. Well capitalized is the highest rating and entitles the bank to accept brokered deposits without specific approval of
27 FDIC, which approval is extremely rare.
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1 cease and desist order, the FDIC will prohibit the bank from rolling over or accepting
2 brokered deposits.
3 33. If a bank depends heavily on brokered deposits and it is cut-off, then the bank’
4 death is inevitable. As the brokered deposits mature, the bank must pay them off with its
5 cash.3 With neither new brokered deposits nor regular deposits available to it, the bank
6 I quickly lose all its cash.
7 34. From December 2007 to December 2008, brokered deposits rose from 2%
8 UCB’s total deposits to 13%. This put UCB at substantial liquidity risk should its access
9 brokered deposits be restricted by FDIC.
10 35. In short, were UCB to be subject to a cease and desist order, it would cause a
11 facto run. UCB was subject to a cease and desist order, and there was then a run on UCB, a
12 UCB thus failed. MLR pg 14.
13 36. Beginning in January 2007, as the quality of UCB’s loan portfolio deteriorated
14 and its liquidity worsened, UCB management concealed the Bank’s troubles from investors.
15 37. UCB wanted to hide its worsening financial condition for several reasons. Firstly
16 it was attempting raise much needed equity capital from outside investors. Secondly, it did no
17 want the market to perceive UCB’s financial instability, severe asset quality problems
18 understated ALL and overstated income, which would depress its stock price and cause
19 depositors to withdraw much needed deposits, further reducing bank capital and strainin
20 liquidity. Third, it wanted to conceal its financial weakness from the FDIC to prevent the FDI
21 from issuing a fatal Cease & Desist order against it.
22 38. The graph on page 12 of the MLR illustrates that at year end December 31, 2006
23 fully one-half of UCB was funded by volatile sources of short-term financing that could “run” as
24 large depositors and creditors often do.
25 Summary of Defendants Misrepresentations in 2008
26 3 Relying on short-term capital for funding and lending it out to distressed and long-term assets
27 is the essence of severe liquidity risk.
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1 39. This section sets out the case against defendants in summary format. The case
2 set out in greater detail in Sections IV and VII.
3 40. Defendants’ misrepresentations concerning UCBH’s financial condition began
4 January 24, 2008, when UCBH announced year-end 2007 financial results. The Compa
5 understated its provision for loan losses for the quarter and year ended 2007 by $6.0 million.
6 41. Just five weeks later on February 29, 2008, the Company filed its annual rep
7 that showed its provision and allowance for loan losses were actually $6.0 million larger.
8 42. Then on March 28, 2008, the Company filed a report with the Federal Financ
9 Institutions Examination Counsel (“FFIEC”) reporting that the true level of loan losses w
10 actually $2.0 million more than was reported in its Form 10-K – or $8.0 million greater th
11 reported in the January 24 press release.
12 Wu Intentionally Deceived the FDIC To Conceal UCBH’s Deteriorating Loans
13 43. As 2008 progressed, UCB’s loan portfolio and liquidity deteriorated rapidly.
14 44. Wu knew that UCBH’s liquidity and capital position was dire.
15 45. To mask its worsening financial condition, and forestall the FDIC issuing a
16 and desist order, as well as to obtain TARP funds to keep UCBH afloat, beginning in Octobe
17 2008, CEO Thomas Wu orchestrated a scheme to hide the deterioration in UCB’s loan portfolio.
18 46. The FDIC found that “various UCB officials misrepresented or omitted re
19 loan performance data, altered documents to improve the perception of loan quality, and
20 other misrepresentations that impacted UCBH’s financial statements." MLR pg. 5. The
21 did not contest the finding.
22 47. On December 1, 2008, FDIC examiners visited UCB to review its loan p
23 and earnings.
24 48. As is standard practice, prior to its December 2008 visit, the FDIC made a
25 request to CEO Wu to provide it with specific information concerning UCB’s loan po
26 specifically its non-performing and troubled loans.
27
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1 49. Instead of providing all of the documents requested by the FDIC examiners,
2 and other UCBH officials intentionally concealed from the FDIC an IARD report that
3 substantial deterioration in UCBH’s loan portfolio. MLR pgs. 16, 20.
4 50. UCBH’s board admitted that UCBH officials did not provide examiners with
5 I December 2008 IARD loan review report until approximately 3 months after it was
6 I and this report would have shed light on UCB’s declining loan performance and
7 I escalating, but concealed level of bad loans. MLR pg. 20.
8 51. Such a Report typically contains a list of loans recommended for downgrade
9 the Bank’s IARD. The IARD staff’s function is to risk grade the bank’s loan portfolio
4 10 identify loans that should be on non-accrual.
11 52. A critical part of Wu’s scheme to conceal bad loans from the FDIC examiners
12 shareholders necessarily relied on concealing bad loans identified by the bank’s own IARD in
13 December 2008 report.
14 53. “[Wu] delayed the issuance of the IARD loan review report to UCB’s Board
15 I FDIC examiners because it contained negative performance information about the loans
16 were reviewed, according to UCB and FDIC examination staff interviewed” for the MLR.
17 MLR pg. 20.
18 54. Thus, Wu spearheaded the fraudulent scheme because UCBH’s board
19 that Wu was the UCB bank official that was responsible for concealing the damaging December
20 2008 IARD report from FDIC examiners during the FDIC’s December visit to UCB. 6 MLR pg.
21 20.
22
4 23 Nonaccrual loans are loans that are 90 days or more past due. The bank must reverse accrued income that is uncollected on nonaccrual loans. From thence on each month, nonaccrual loans
24 do not accrue interest income. In unusual circumstances if well secured and in process of
25 collection, the bank may continue to accrue interest income on the loan. 5 The MLR also stated that Wu fostered a combative culture where management failed to
26 downgrade non-performing loans in a timely manner. 6 By accepting the findings of the audit committee’s investigation report, UCBH’s board 27 accepts as true, or admits, the findings in the report.
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1 55. While Wu was primarily responsible for concealing the critical IARD report
2 FDIC examiners in December 2008, other senior UCB officials knew of the concealed I
3 report, and the adverse information concerning the increased level of bad loans.
4 56. Defendant Gautsch, as UCB’s Chief Risk Manager, had the key responsibility
5 I monitoring the IARD. Gautsch would have been aware of, and would and should have
6 I and commented on the report after the IARD prepared it and before IARD submitted it to Wu.
7 57. Gautsch, as Chief Risk Manager would have known an IARD audit and re
8 was done because IARD is a risk management function over which Gautsch was responsible.
9 58. In addition, UCBH’s board, would have expected to receive the December 200
10 IARD report’s results prior to its quarterly board meeting which would have occurred within 30
11 45 days of the FDIC’s December 2008 site visit.
12 59. Board members would have noticed the absence of the IARD loan review
13 It is customary for the Board to receive IARD reports and for directors to discuss the
14 Report’s contents during Board meetings, which typically occurred within thirty days of the en
15 of the quarter and fiscal year.
16 60. The IARD loan review reports contained critical information during a critical tim
17 for UCBH. It was customary for the UCBH Board to receive the IARD reports results within
18 short time after the end of each quarter.
19 61. The Board was also required to review the IARD Reports results at fiscal year
20 end when UCBH must prepare and file its annual report.
21 62. The MLR found that UCBH officials presented FDIC examiners with inaccurate
22 information on several occasions regarding the loans they reviewed, and were not forthright with
23 examiners when questioned about loan loss provision expenses for the fourth quarter of 2008
24 MLR pg. 16.
25 63. It was Wu, among other unnamed senior UCB officials, who concealed
26 bad loans from FDIC examiners and the UCBH board. MLR pg. 20.
27
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1 64. The investigation conducted by UCHB’s audit committee and accepted by
2 board as conclusive identified serious financial reporting matters, as follows:
3 - Modification of loan terms to delay negative consequences . The investigation
4 instances where bank employees modified loan terms in an effort to delay the ne
5 consequences of a weakened borrower. The modifications were numerous and in
6 extending terms, lowering interest rates, and improperly using the interest r
7 account.
8 - Intentional delays in recognizing risk rating downgrades or specific reserves . The
9 investigation found instances where bank employees acted to delay the recognition of a
10 risk rating downgrade, or to minimize the loan loss allowance or write-down of REO
11 loans.
12 - Misrepresentation or omission of relevant information . The investigation found
13 numerous instances where relevant information was intentionally withheld from KPMG
14 misrepresented to KPMG, or both. It also found instances where information was
15 withheld from or misrepresented to the bank’s Finance Department.
16 - Inappropriate alteration of documents. The investigation found instances where ba
17 employees altered documents in an effort to improve the perception of credit quality.
18 some cases, the alterations either removed or ameliorated negative facts that w
19 material to the evaluation of a credit. Other cases included backdating documents to ma
20 them appear more reliable.
21 MLR pgs. 6-7.
22 65. The investigative report concluded that these improper activities were driven by
23 desire of UCB senior executives to mask UCB’s deteriorating financial conditions
24 I deliberately delaying risk rating downgrades and minimizing the bank’s overall loan 25 allowance. MLR pgs. 6-7.
26 66. Wu and other UCB officials concealed the Bank’s mounting bad loans to avoid
27 I FDIC cease and desist order.
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1 67. According to the MLR, UCB’s ratio of classified loans to Bank capital was 4
2 in December 2008, based on the fraudulent numbers defendants gave to the FDIC examiners.
3 68. By April 1, 2009, using the corrected but still understated amount for
4 loans, the ratio was 107%.
5 69. When a bank’s ratio of classified loans to total capital reaches 100%, the FDI
6 I will issue a cease and desist order to the bank.
7 70. Had the FDIC known the truth concerning UCB’s bad loans in December 2008
8 instead of being fooled by Wu and other UCBH officials, the FDIC would have issued to U
9 a cease and desist order in December 2008. The Order would have been fatal to the bank
10 and then.
11 71. On May 28, 2009, because of the extent of its non-performing assets, the FDI
12 restricted UCBH's ability to roll-over brokered deposits. On June 30, 2009, the FDIC formall
13 advised UCBH that it would issue cease and desist order. UCBH failed two months later.
14 Summary of Defendants’ Misrepresentations in 2009
15 72. On January 22, 2009, UCBH announced fourth quarter and full year 200
16 financial results. The release stated that the Company’s net loss before income taxes for th
17 fiscal year was $94,250,000; its provision for loan losses for the fiscal year was $222.9 million
18 the allowance for loan losses at the fiscal year ended 2008 was $190.4 million; and tha
19 nonperforming assets totaled $433.8 million.
20 73. On or about January 30, 2009, UCBH CFO Dennis Wu and two board
21 certified the accuracy of a “call” report filed with the FFIEC for the period ended December 31
22 2008. This report should have contained the same materially inaccurate ALL, Provision, and ne
23 loss as reported in the January 22, 2009 press release. 7
24
25 7 Call reports are prepared using Generally Accepted Accounting Principles and filed with the
26 Federal Financial Institutions Examination Counsel. They must be filed within 30 days of the end of each calendar quarter and must be signed by the CFO and two directors. Filing false
27 Call reports is a federal crime subjecting violators to a lengthy prison sentence.
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1 74. Six weeks later, on March 16, 2009, UCBH filed its annual report on Form 10-K
2 showing much worse financial performance then it reported in its January 22 press release.
3 75. In the March 16 annual report, UCBH’s allowance for loan losses at December
4 31, 2008 was $230.4 million, not the $190.4 million originally reported. Defendants understated
5 ALL by $40 million (21%) in the January 22, press release. Likewise the provision for loan
6 losses for fiscal 2008 was not $222.9, but at least $262.9 million as stated in the 10-K, an
7 understatement of $40 million (17.9%). Likewise the net loss before income taxes was not
8 $94,250,000 as reported in the press release, but at least $134,250,000 as reported in the 2008
9 10-K, a $40 million (43%) understatement. Non-performing assets were listed as $530.8 million
10 in the 10-K, almost $100 million more than the $433.8 million stated in the January 22, 2009
11 press release
12 76. This was the second year in a row that UCBH reported materially false
13 for ALL, Provision and non-performing loans in its January press release and then subsequently
14 corrected these amounts in its10-K just two months later.
15 77. Ten days later, on March 26, 2009, defendant On and two UCBH directors filed
16 an updated call report for the quarter ended December 31, 2008. The call report showed tha
17 UCBH's financial condition was dramatically worse than UCBH reported in either its January 22
18 press release or its March 16, 2009 10-K. The March 26 updated call report corrected the
19 December 31, 2008 financial data included in the call report that defendant Dennis Wu had filed
20 on January 30, 2009.
21 78. The March 26, 2009 updated call report showed non-performing assets of $589.4
22 million, nearly $190 million greater than the $433.8 million reported in the January 22 pres
23 release and $59 million more than the 10-K filed just 10 days earlier. Thus, on January 22
24 defendants understated non-performing assets by a whopping 37%.
25 79. Most of the difference between the $406 million of non-performing asset
26 reported in the press release and the $589 million in the call report should be inferred to have
27 resulted from defendant Wu’s concealment of the December 2008 IARD report from the FDIC
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1 and UCBH’s board because the report contained negative performance information about the
2 loans reviewed and would have shed light on UCB’s declining loan performance. MLR pgs. 16
3 20.
4 80. It is reasonable to infer that the changes reported in the updated March 26,
5 I call report data reflected the inclusion of downgrades from the December 2008 concealed
6 report, and that the press released data reflected understated nonperforming loans as a di
7 result of the concealed December IARD report because the updated March 26, 2009 call rep
8 was filed three months after Wu and others concealed the December 2008 IARD report from
9 FDIC in its December 2008 site visit and the MLR stated that Wu and other UCB bank offic
10 concealed the December 2008 IARD report for three months.
11 81. The three month gap of negative loan performance created by Wu’s concealin
12 the IARD Report data explains the difference in loan data between the January 22 press releas
13 and the March 26, 2009 updated call report.
14 82. In its April 6, 2009 examination of UCB, the FDIC identified an ALL shortfall o
15 $106.5 million, with adversely classified loans representing 107% of total capital. MLR pg. 13.
16 83. This level of classified loans exceeded the FDIC’s permissible ratio. The FDI
17 had finally received the information in the December 2008 IARD report (previously conceale
18 by Wu) and the corrected loan loss amounts in the March 26 2009 updated call report.
19 84. The ALL shortfall would increase the Provision expense and reduce UCB’
20 capital to a level the FDIC considered “under-capitalized”.
21 85. The magnitude of Wu and other UCBH officials’ fraudulent concealment of
22 Bank’s deteriorating loan portfolio at the time of the FDIC’s December 2008 visitation
23 demonstrated by the fact that the Bank’s Adversely Classified loans more than doubled fr
24 $655.2 million at the FDIC’s December 2008 visitation to $1.45 billion at FDIC’s April 6, 20
25 targeted review. MLR pg. 13.
26 86. The fraud perpetrated by Wu and other UCBH officials during the FDIC’s
27 December 2008 visit was so apparent to the FDIC that within two weeks of beginning its April 6
28 14 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW
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1 2009 examination, it took the unusual step of downgrading UCB to a 3 CAMEL rating,
2 UCB officially a “troubled bank”. MLR pg. 18.
3 87. Based on FDIC protocol, UCBH’s board would have been immediately noti
4 of the downgrade and assignment of UCB as a “troubled bank”.
5 88. On May 28 2009, the FDIC sent Wu a “Dear CEO” letter warning him that
6 I FDIC would soon issue a cease and desist order to UCBH and that it could no longer accept
7 rollover brokered deposits. MLR pg 18.
8 89. Wu’s scheme was unraveling. Without access to brokered deposits, UCBH
9 not survive for long.
10 90. With a much greater level of bad loans being recognized, and a reduction
11 available cash to run its business, UCBH was desperate for alternative sources of capital in
12 to remain in business.
13 KPMG Discovers the Fraud at UCBH
14 91. Shortly after issuing its opinion letter and during its 2009 first quarter review
15 UCBH’s financial information, KPMG became suspicious that UCB officials and/or employe
16 had engaged in illegal acts to conceal the bank’s true financial condition.
17 92. The FDIC’s San Francisco Regional Office officials stated that FDIC
18 California Department of Financial Institutions ("CDFI") examiners met with K
19 representatives on May 8, 2009, and informed KPMG that the FDIC's April 2009 targeted re
20 identified deterioration in UCB’s asset quality and overall financial condition and prom
21 UCB to write down a large number of loans reviewed by examiners.
22 93. Five days later, on May 13, 2009, KPMG alerted UCBH’s audit committee tha
23 illegal acts may have occurred at UCB and issued a related letter to the committee on May 15
24 2009, pursuant to section 10A of the Securities Exchange Act of 1934.
25
26
27
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1 94. KPMG stated that UCB’s potential illegal acts were related to an
2 of impaired and real estate owned loans, which resulted in a potential understatement of UCB’
3 ALL, in an effort to conceal the bank’s true financial condition. 8 MLR pgs. 6-7.
4 KPMG’s Discovery of the Fraud Prompts a Restatement and an Audit Committee
5 Investigation
6 95. On May 20, 2009 the Company announced that its previously issued financia
7 statements for the year ended December 31, 2008 and first quarter ended March 31, 2009 coul
8 no longer be relied upon and must be restated.
9 96. The restatement was required because, among other things, UCB materi
10 understated its provision for loan losses and related allowance for loan losses, concealing
11 Bank’s mounting bad loans.
12 97. The release further stated: “The Company identified corrections to date that i
13 result in an increase in its pre-tax loss of approximately $45 million to $55 million for
14 year ended December 31, 2008, but this analysis remains preliminary and has not yet b
15 finalized. The restatement will result in material adjustments to the loan loss provision
16 related allowance for loan losses, and the in
17
18 ended December 31, 2008 .”
19 98. Based on an increased loss of $50 million, the Restatement would have incr
20 UCBH’s ALL by about $50 million, and Provision by $50 million.
21 99. While the March 26, 2009 call report reflected the bad loans in the Dec
22 2008 IARD report concealed by Wu from the FDIC, the Restatement included the bad
23
24
8 25 “Impaired” loan is an accounting term for any loan in which principle and interest is not 100% recoverable. Under FASB 14 says that if principal and interest is not 100% recoverable, you 26 must write loan down the loan to fair market value of its collateral, less costs and fees to monetize it. This usually requires appraisal. If no collateral, the bank must estimate the amount 27 of any eventual recovery and must charge off any expected shortfall.
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1 concealed by Defendants’ illegal acts, such as falsification of records, and concealing
2 misrepresenting information to KPMG.
3 100. The Company also announced on May 20, 2009, that its Audit Committee
4 conducting an independent investigation regarding the recognition of impairment losses on n
5 performing loans and other real estate owned loans. (the “Internal Investigation”
6 “Investigation).
7 Defendants Brazenly Continue the Fraud Even After KPMG Discovered It.
8 101. In order to raise much needed capital for UCBH to stay in business, Defend
9 repeated additional similar misrepresentations in press releases filed for the first quarter en
10 March 31, 2009 and second quarter ended June 30, 2009.
11 102. On April 23, 2009, UCBH issued a press release announcing its first qua
12 March 31, 2009 financial results. It stated ALL was $276.5 million, Provision was $17
13 million and non-performing assets were $700.8 million.
14 103. Just one month later, on May 22, 2009, CFO On and two UCBH dire
15 certified and filed a call report with the FFIEC reporting ALL of $323.8 million (17% gre
16 Provision of $225 million (28% greater), and non-performing assets of $759.3 million
17 greater).
18 104. On August 6, 2009, UCBH issued a press release announcing second qua
19 ended June 30, 2009 financial results. UCBH estimated that Provision was $300-333 million
20 non-performing assets were $835-$875 million.
21 105. Yet that SAME DAY, August 6, 2009, defendant CFO On and two UCB
22 directors certified and field a call report with the FFIEC stating that Provision was $451
23 million and non-performing assets were over $1.0 billion.
24 106. The intentional nature of Defendants’ August 6 misrepresentations is crystal
25 as defendant CFO On filed a call report with materially greater Provision and non-perfor
26 assets amounts than defendants reported in the UCBH press release that very same day!
27
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1 107. The MLR stated that true level of Provision for UCBH was really $499 milli
2 for the second quarter ended June 30, 2009, based on FDIC’s August 2009 targeted review.
3 highlights the extent the UCBH management fraudulently concealed the Bank’s mounting
4 loans even while the Investigation was ongoing.
5 108. Defendants were unrepentant to the bitter end.
6 UCBH’s Audit Committee Investigation Found Intentional Fraud by UCBH Officials
7 109. UCBH’s audit committee investigation found that various UCB offi
8 I misrepresented or omitted relevant loan performance data, altered documents to improve
9 perception of loan quality, and made other misrepresentations that impacted UCBH’s
10 statements.
11 Defendants’ Criminal Conduct Has Prompted a Continuing Criminal Investigation
12 Resulting in Criminal Indictments
13 110. The FDIC’s Review found that UCBH’s “management controls were
14 sufficient to prevent apparent violations of the federal securities laws by UCB officials and
15 issuance of inaccurate financial statements.”
16 111. As a result of Defendants’ very serious criminal misconduct, the U.S. Attorney
17 for the Northern District of California is actively investigating defendant Wu and other UCBH
18 officials for securities fraud.
19 112. On September 15, 2011 defendants Thomas Yu and Ebrahim Shubudin were
20 indicted on counts of conspiracy to commit securities fraud, securities fraud, falsifying corporate
21 books and records, false statements to accountants of a publicly traded company, aiding and
22 abetting, and for forfeiture of fraud proceeds. A copy indictment is attached hereto as Exhibit B
23 and incorporated herein.
24 113. According to the indictment, Yu and Shabudin, “together with others” engaged in
25 a fraudulent scheme to misrepresent the Bank’s true financial condition beginning in or abou
26 September of 2008. In connection with the scheme to defraud, Shabudin, Yu and others caused
27 the bank to:
28 18 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW
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1 • “fraudulently conceal information showing the Bank’s loan
2 repossessed assets had declined in value”;
3 • “fraudulently rate the risk of certain loans”; and
4 • “fraudulently delay the downgrading of the risk ratings of certain loans”.
5 114. According to the indictment Yu, Shabudin, and others at the Bank, “falsified t
6 Bank’s books and records”; and “misled and lied to the Bank’s auditor” and caused the Bank
7 issue materially false and misleading public statements and reports:
8 115. On June 15, 2011, Lauren Tran, the Bank’s Vice President and Manager of Credi
9 Policy, guilty plea to a first count of an information, for conspiracy to commit securities fr
10 false statements to accountants of publicly traded companies and false corporate books
11 records was accepted. See Docket no. 13, U.S.A. v. Tran , no. CR-11-340-JSW (N.D. Cal.).
12 116. According to Tran’s criminal information, beginning no later than Decembe
13 2008, Tran together with others, misrepresented and concealed the Bank’s true financia
14 condition and performance, supported false and misleading public statements about the same, a
15 in an effort to, among other things, conceal, delay, and avoid publicly reporting the tru
16 magnitude of the Bank’s growing number of impaired loan, and persuade investors through fals
17 and misleading statements and hold the Bank’s stock.
18 117. Tran, Yu, Shabudin and the actions and knowledge of the “others” referenced i
19 the indictment and Tran’s information are imputed to the Company under the doctrine o
20 respondeat superior and/or agency.
21 Defendants’ Conduct Has Prompted Civil Enforcement Actions by the SEC
22 118. On October 11, 2011 the SEC commenced a civil enforcement action
23 defendants Thomas Wu, Thomas Yu, and Craig On for violation of among other things, Sectio
24 10(b) and Rule 10b-5 of the Exchange Act for connection with knowingly concealing the Bank’
25 bad loans and issuing materially false and misleading financial statements. A copy of the SEC
26 complaint is attached hereto as Exhibit E and is referenced herein.
27
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1 119. Concurrent with the filing of the SEC complaint, defendant Craig On, filed
2 consent to the entry of a final judgment which: (a) permanently restrained and enjoined him fro
3 violating certain federal securities laws; and (b) required On to pay a civil penalty in the amou
4 of $150,000.
5 120. In their various answers to the SEC complaint Yu, Shabudin, and Wu asserted t
6 Fifth Amendment privilege against self-incrimination.
7 Defendants’ Conduct Has Prompted An Enforcement Actions by the FDIC
8 121. On or about October 7, 2011, the FDIC filed a Notice of Intention to R
9 From Office and/or to Prohibit From Further Participation, Notice of Assessment of Civil
10 Penalties, Findings of Fact and Conclusions of Law, Order to Pay and Notice of Hearing agai
11 among others, defendants Thomas Wu, Ebrahim Shabudin, Craig On, Thomas Yu, and J
12 Kerr. The document is attached hereto as Exhibit F and is incorporated by reference. Consis
13 with the criminal and regulatory proceedings the respondents in the FDIC proceedi
14 knowingly concealed the Bank’s bad loans and true financial condition. E.g. Ex. F., at 11-67.
15 Defendants’ Fraud Caused UCBH to Fail Causing Investors Substantial Losses
16 122. The FDIC found that “[t]he investigation and UCBH’s inaccurate financial
17 statements made it harder for UCB to raise the capital the bank needed in 2009 to absorb
18 substantial provisions and losses associated with its loan portfolio” ultimately resulting in the
19 Bank’s failure and the complete loss of Class members’ investments.
20 123. As a result of the fraud and UCBH’s resulting inability to raise much needed
21 capital, banking regulators closed UCBH and UCBH entered bankruptcy liquidation
22 proceedings. MLR pg. 5.
23 II. JURISDICTION AND VENUE
24 124. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a)
25 the Exchange Act (15 U.S.C. § 78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder (17
26 C.F.R. § 240.10b-5).
27
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1 125. This Court has jurisdiction over the subject matter of this action pursuant to
2 Section 27 of the Exchange Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1331.
3 126. Venue is proper in this Judicial District pursuant to Section 27 of the Exchange
4 Act (15 U.S.C. § 78aa) and 28 U.S.C. § 1391(b) as a substantial part of the conduct complained
5 of herein occurred in this District.
6 127. In connection with the acts, conduct and other wrongs alleged herein, defendants
7 either directly or indirectly used the means and instrumentalities of interstate commerce,
8 including but not limited to the United States mails, interstate telephone communications and the
9 facilities of the national securities exchange.
10 III. PARTIES
11 128. Court appointed lead plaintiff Kyung Cho purchased UCBH common stock
12 during the Class Period and has suffered damages as a result. Lead Plaintiff’s certification was
13 previously filed with the Court, and is incorporated by reference herein.
14 129. Named Plaintiffs Rex DeChakul and David Hwang purchased UCBH stock
15 during the Class Period, as set forth in their respective certifications previously filed with the
16 Court, and are incorporated by reference herein. Each has suffered damages as a result of their
17 purchase of UCBH stock.
18 130. Defendant UCBH is a Delaware corporation with its principal executive offices
19 located at 555 Montgomery Street, San Francisco, CA. UCBH is a bank holding company
20 During the Class Period the Company’s common stock traded on the NASDAQ under ticker
21 “UCBH.” On November 24, 2009, UCBH filed a voluntary bankruptcy petition in the United
22 States Bankruptcy Court for the Northern District of California, Case No. 09-33701-TEC07
23 seeking relief under Chapter 7 of Title 11 of the United States Code.
24 131. Defendant Thomas S. Wu (“Wu”) was the Company and Bank’s Chairman of t
25 Board, President and Chief Executive from 2001 until he suddenly resigned on September
26 2009. Wu was forced out of the Company and the Bank because of his fraudulent misconduct.
27
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1 132. Defendant Ebrahim Shabudin (“Shabudin”) was the Company and Bank’s
2 Executive Vice President and Chief Operating Officer from 2005 until he suddenly resigned on
3 September 4, 2009. From January 2004 until his appointment as COO, Shabudin served as the
4 Company and Bank’s Executive Vice President and Chief Credit Officer. Shabudin was forced
5 out of the Company and the Bank because of his fraudulent misconduct.
6 133. Defendant Thomas Yu (“Yu”) was employed by the Bank from 2005 to June
7 2009. Yu was Product Manager for Retail Lending from 2005-2006; First Vice President, Retail
8 Product Manager from 2006 to February 2008; First Vice President, Manager of Credit Risk &
9 Portfolio Management from February 2008 to March 2009; Senior Vice President, Manager of
10 Credit Risk & Portfolio Management from March 2009 to June 2009.
11 134. Defendant Craig On (“On”) was the Company and Bank’s Executive Vi
12 President and Chief Financial Officer from October 2008 through the end of the Class Perio
13 From May 2008 through October 2008, On served as the Company and Bank’s Deputy CFO,
14 from June 2005 to March 2008, On served as the Company and Bank’s Senior Vice Presi
15 and Corporate Controller.
16 135. Defendant Dennis Wu (“Dennis Wu”) was the Company and Bank’s Execut
17 Vice President, and CFO from June 2005 through March 3, 2008. Dennis Wu served as
18 Company and Bank’s director from May 2005 through the end of the Class Period.
19 136. Defendant Robert Nagel (“Nagel”) was the Company and Bank’s Senior V
20 President and Chief Audit Executive from July 14, 2008 to the end of the Class Period. He a
21 served on the Company and Bank’s compensation committee during his tenure. As Chief Audi
22 Executive Nagel had responsibility for, and special knowledge of IARD.
23 137. Defendant John M. Kerr (“Kerr”) was the Company and Bank’s Executive Vice
24 President and Chief Credit Officer beginning January 1, 2008 until September 11, 2008, when he
25 was appointed Executive Vice President and Director of Portfolio Management and Credi
26 Compliance. On January 9, 2009, Kerr was appointed Executive Vice President and Chie
27 Lending Officer. He resigned his positions on or about June 30, 2009. Kerr exercised day to day
28 22 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW
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1 supervisory control over the process of evaluating and reserving for impaired loans.
2 supervised UCB’s lending officers, including those persons that the MLR found f
3 I documents.
4 138. Defendant Daniel M. Gautsch (“Gautsch”) was the Company and Bank’
5 Executive Vice President and Chief Risk and Compliance Officer from August 23, 2006 throug
6 I the end of the Class Period. As Chief Risk Officer Gautsch had direct supervisory
7 I over the IARD function.
8 139. Defendant Douglas Mitchell (“Mitchell”) was the Company and Bank’s Sen
9 Vice President and Director of Corporate Development and Investor Relations from March
10 2008 through the end of the Class Period. UCBH’s 2008 10K, states that “[o]ver the past thr
11 years, he has helped the Bank implement many risk management solutions, including t
12 Allowance of Loan Loss Methodology and Country Risk Management.”
13 140. Prior to joining the Company, Mitchell spent seven years helping large and sm
14 banks and financial services companies with technical accounting issues while working
15 Deloitte & Touche and Arthur Andersen. Certain UCBH press releases issued during the Cla
16 Period list him as the —contact for the Company with a different title, —Director of I
17 Relations and Capital Management. The Capital Management aspect of his role i
18 responsibility for the Company’s regulatory ratios in determining whether the Bank is w
19 capitalized (i.e. – whether impairments of loans and loan losses has affected the bank’s capi
20 base).
21 141. Defendants Burton D. Thompson (“Thompson”) was the Company and Bank’
22 Senior Vice President and Corporate Controller from August 1, 2008 through the end of th
23 Class Period. Thompson exercised direct day-to-day control over the financial operations an
24 financial reporting for UCBH and UCB.
25 142. Defendant John Cinderey (“Cinderey”) was the Company and Bank’s Execut
26 Vice President and Director of Commercial Banking from January 2008 through the end of
27 Class Period. Prior to his appointment to those positions, he had served as the Company
28 23 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW
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1 Bank’s Senior Vice President and Director of Real Estate Lending since 2006. Cinderey
2 exercised day-to-day control over ADC and CRE lending officers and lending functions. As a
3 result had had specific knowledge of UCB’s impaired CRE and ADC loans, which were the
4 loans that were the subject of the fraud alleged herein.
5 143. Defendant Joseph J. Jou (“Jou”) was at all relevant times the Company and
6 I Bank’s Lead Director. As Lead Director Jou was responsible to convene and chair
7 sessions of the Company and Bank’s independent directors, and to confer and provide fee
8 to the Company and Bank’s Chairman/CEO, Wu, on executive sessions. Throughout the
9 Period Jou variously served as a member of the Audit, Credit, Compensation, and Nomi
10 Committees.
11 144. Defendant Pin Pin Chau (“Chau”) was the Company and Bank’s Director from
12 May 17, 2007 until her resignation on July 25, 2008. During that time she served on the
13 Company and Bank’s Audit and Investment Committees.
14 145. Defendant Li-Lin Ko (“Ko”) was the Company and Bank’s Director from 2001
15 through the end of the Class Period. Ko is a Certified Public Accountant and licensed California
16 Real Estate Broker. At all times during the Class Period she served as Chair of the Audit
17 Committee and on the Investment Committee.
18 146. Defendant Qingyuan Wan (“Wan”) was the Company and Bank’s Director from
19 September 26, 2008 through the end of the Class Period.
20 147. Defendant Godwin Wong (“Wong”) was a Director of the Bank since 1994 and
21 the Company since 1998. At all relevant times, Wong served a Chairman of the Credi
22 Committee from at least 2004. He also served on the Company’s Compensation Committee.
23 148. Defendant David Ng (“Ng”) was the Company and Bank’s Director, a member o
24 the Audit Committee, Nominating Committee and Chair of the Investment Committee from the
25 beginning of the Class Period until his resignation on September 8, 2009.
26
27
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1 149. Defendant Daniel P. Riley (“Riley”) was the Company and Bank’s Director
2 member of the Company’s Investment Committee beginning on November 28, 2008 through
3 I end of the Class Period.
4 150. Defendant Richard Li-Chung Wang (“Wang”) was at all relevant times during
5 Class Period a Company and Bank Director since 2005. During the Class Period he served
6 the Company’s Compensation Committee and as Chair of the Nominating Committee.
7 John Doe Defendants 1-10
8 151. Defendants "John Does 1-10" are senior UCBH executives and directors
9 described by the MLR, as well as in UCBH's' September 9, 2009 Press Release as "UC
10 Management", "UCB officials", and "[UCB] Officers", and "UCB senior executives."
11 152. It is beyond doubt that "John Does 1-10" are named defendants in this lawsui
12 Which of the named defendants are the John Does 1-10 that committed the primary violations o
13 the securities laws is not certain, except that Defendant Thomas Wu was specifically id
14 as having violated the securities laws by concealing the December 2008 IARD loan
15 report from the FDIC and UCBH’s board.
16 153. Because discovery is stayed, it is not currently possible for plaintiffs to determin
17 the identity of some of the John Does, but their identity is definitely already known to Defendan
18 UCBH and certain of the individual director defendants herein. The identity of John Does 1-1
19 was revealed to the UCBH board of directors in the report of the audit investigation and th
20 UCBH board accepted the findings of the investigation.
21 154. The description of the John Does in the FDIC MLR and September 9, 2009, Pr
22 Release makes clear that John Does 1-10 made materially and misleading false statements
23 investors with scienter.
24 155. In particular, the John Does 9 "misrepresented or omitted relevant data, altered
25 documents to improve the perception of loan quality, and made other misrepresentations that
26 impacted UCBH's financial statements ." (MLR, Executive Summary) (emphasis added).
27 9 "UCB Officials".
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10 1 Moreover, the John Does "w[ere] reluctant to downgrade troubled loans in a timely manner,
2 an effort to mask deteriorating financial conditions. " (Id. ) (emphasis added). According to
11 3 Director of UCBH, the John Does "had begun to conceal serious financial reporting issu
4 around October 2008". (Id. ) (emphasis added).
5 156. In particular, UCB "senior executive" John Does committed or caused others
6 commit the following acts to mask deteriorating financial conditions:
7 -"committe[d] illegal acts" that materially affected audit results and were uncovered
8 the course of KPMG's audit of UCBH's 2008 financial statements, as provided in a let
9 from KPMG dated May 15, 2009. (MLR pg. 6)
10 -The senior executive John Does withheld relevant information from KPMG. ( Id.).
11 -The senior executive John Does "altered documents in an effort to improve the
12 perception of credit quality." (Id. )
13 -The senior executive John Does "intentionally" delayed in recognizing risk rating
14 downgrades. (Id.)
15 -The senior executive John Does modified loan terms to delay negative consequences.
16 (Id.)
17 157. As a result of the activities detailed in the FDIC Review and the Company's o
18 admission of wrongdoing, as outlined above, the John Doe defendants were intricately involv
19 in the drafting and had control over the contents of UCBH's statements to the investing public.
20 158. As a result of their senior positions within UCBH, and additionally because all o
21 the wrongful acts complained of herein were carried out within the scope of John Does
22 employment with authorization, UCBH is liable for the misconduct under principles
23 respondeat superior.
24 A. The Audit Committee
25
26 10 "UCB Management".
27 11 "UCB Management".
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1 159. According to UCBH’s and UCB’s pertinent Audit Committee Charters,
2 primary purpose of the Audit Committee was to assist the Board of Directors in fulfilling
3 responsibilities to “oversee the accounting, auditing, and financial reporting processes of
4 Company and the internal and external audit process.”
5 160. Under each of the charters that were in effect during the Class Period the Au
6 Committee was required to, among other things,
7 • Serve as an independent and objective party to monitor the Company’s finan
8 reporting process, internal control system, and resolution of regulatory examina
9 findings.
10 • Review and evaluate the audit procedures and results of the Company’s independ
11 and internal audit.
12 • Maintain free and open means of communication with the independent auditor,
13 Chief Audit Executive and management, including private sessions with each.
14 • Maintain free and open means of communication (including procedures fo
15 confidential and anonymous submissions) between employees and the Committee for the
16 receipt, retention, and processing of complaints regarding accounting or auditing matters
17 including suspicious or fraudulent activity.
18 161. The Audit Committee was also responsible for “oversee[ing] the internal audi
19 function to assess the adequacy and effectiveness of the internal control and financial reporting
20 systems to determine that the Chief Audit Executive is establishing, maintaining and executing
21 appropriate audit programs, policies and procedures that govern the examination and audit of
22 ledgers, records, procedures, systems, operations, and regulatory compliance of the Comp
23 and its affiliates.”
24 162. The Audit Committee was also responsible for, among other things, (a) rev
25 and discussion of the Company’s financial statements included in the Company’s periodic fili
26 made with the SEC and earnings press releases and whether such statements complied wi
27 GAAP; (b) review and discuss with management and/or the Company’s auditor abo
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1 management’s assessment of internal controls; (c) review of the Company’s anti-fraud progra
2 including management’s overall risk assessment, controls and testing performed; and (d) revie
3 the Bank’s regulatory compliance program and management reports required to be issued by t
4 applicable bank regulators.
5 B. The Credit Committee
6 163. The Credit Committee was responsible for approving credit policies, monitori
7 the overall credit risk profile for the Company and the Bank and the allowance for loan losses.
8 164. Wu, Shabudin, Yu, On, Dennis Wu, Nagel, Kerr, Gautsch, Mitchell, Thompso
9 Cinderey, Jou, Chau, Ko, Wan, Wong, Ng, Riley, and Wang, are collectively referred
10 hereinafter as the “Individual Defendants.”
11 165. Each of the Individual Defendants:
12 a. directly participated in the management of the Company;
13 b. was directly involved in the day-to-day operations of the Company at t
14 highest levels;
15 c. was privy to confidential proprietary information concerning the Compa
16 and its business and operations;
17 d. was directly or indirectly involved in drafting, producing, reviewing and/
18 disseminating the false and misleading statements and information alleg
19 herein;
20 e. was directly or indirectly involved in the oversight or implementation of t
21 Company and Bank’s internal controls;
22 f. was aware of or recklessly disregarded the fact that the false and misleadi
23 statements were being issued concerning the Company; and/or
24 g. approved or ratified these statements in violation of the federal securiti
25 laws.
26 166. UCBH is liable for the acts of the Individual Defendants and UCBH’s employe
27 under the doctrine of respondeat superior and common law principles of agency as all of t
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1 wrongful acts complained of herein were carried out within the scope of their employment
2 authorization.
3 167. The scienter of the Individual Defendants and other employees and agents of
4 Company is similarly imputed to UCBH under respondeat superior and agency principles.
5 IV. DEFENDANTS’ FALSE AND MISLEADING STATEMENTS OF MATERIAL
6 FACT
7 A. Fourth Quarter and Fiscal Year Ended December 31, 2007
8 168. The Class Period begins on January 24, 2008 when the Company issued
9 materially false and misleading press release announcing its fourth quarter and fiscal year
10 December 31, 2007 results.
11 169. In the announcement, the Company stated that its provision for loan losses
12 $14.2 million for the full year ended 2007 and $8.1 million for the fourth quarter. The Com
13 also reported an allowance for loan losses of $74.6 million for the fiscal year end. The Com
14 also noted that the increase in the loan loss provision and corresponding allowance for
15 losses was to strengthen the balance sheet of the Company.
16 170. The announcement states in relevant part:
17 Net income for the year ended December 31, 2007, was $106.2 million, an increase o $5.3 million, or 5.3%, from $100.9 million for the year ended December 31, 2006 18 The diluted earnings per common share were $0.19 for the fourth quarter of 2007
19 compared with $0.27 for the corresponding period of 2006. The diluted earnings pe common share were $1.01 for the year ended December 31, 2007, compared 20 with$1.03 for the year ended December 31, 2006. * * * 21
22 The provision for loan losses was $8.1 million for the fourth quarter of 2007 compared with $1.4 million for the corresponding quarter of 2006. The larger loan 23 loss provision in the fourth quarter of 2007 reflects an addition to the allowance fo
24 loan losses during the quarter to strengthen the balance sheet in consideration o current economic conditions, changes in the loan mix and the loan growth during the 25 fourth quarter of the year. The provision for loan losses was $14.2 million for the ful year 2007, compared with $3.8 million in 2006. The ratio of provision for loan losse 26 to net loan charge-offs for 2007 was 1.87.
27
28 29 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page30 of 81
1 171. Commenting on the increase in the Company’s loan loss allowance,
2 I Wu stated:
3 "In light of the current uncertain economic environment, we provided an additional 4 loss allowance during the fourth quarter even though the credit quality in our
5 portfolio continues to be strong. We believe this prudent action will further streng our balance sheet, and we anticipate a record year in 2008"[.]
6 172. During the Company’s earnings conference call on January 25, 2008,
7 repeated the materially false provision for loan losses set forth in the press release and he
8 reassured investors that “[w]e will be conservative in loan loss provision in 2008 given
9 current uncertain economic conditions.”
10 173. The Company’s statements about its provision and allowance for loan losses
11 materially false and misleading. As demonstrated by the Company’s Form 10-K filed with
12 SEC on February 29, 2008, the Company underreported its provision and allowance for l
13 losses by $6 million. The provision for loan losses was actually $20.2 million for the year
14 $14 million for the fourth quarter-- representing 42% and 72% understatements, respectively.
15 174. During a March 11, 2008 conference call with investors at the Sandler O
16 West Coast Financial Services Conference, the late John Downing, the Company’s CFO
17 acknowledged that the Company was aware of the then accurate amounts for the provision for
18 loan losses and yet did not file an 8-K with the SEC correcting the press release. Downing
19 commenting on the situation stating:
20 “hopefully nothing like this will happen again if we need to have a differenc 21 between the press release and the 10-K filing, I will assure you there would be an 8- filing....” 22 175. Notably, within three days following the filing of the 10-K, on March 3, 2008 th 23 Company announced that Dennis Wu had resigned his position as the Company’s CFO. 24 176. According to a 8-K filed with the SEC on March 12, 2008, on March 6, 2008 25 Company’s independent auditor, PricewaterhouseCoopers, LLP advised the Company that i 26 declined to stand for re-election. 27
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1 177. In 2007 and 2006, UCBH had paid Pricewaterhouse approximately $2.2
2 and $1.9 million in fees, respectively.
3 178. The provision for loan losses contained in UCBH’s February 29, 2008 10-K
4 $20.2 million is also materially false and misleading. In a call report certified by UCBH’s C
5 and two directors and filed with the FFIEC on March 28, 2008, the Company lists $22,246,
6 million for its provision for loan losses for fiscal 2007 – compared to $20.2 million in its f
7 10-K.
8 179. Thus, the Company understated its fiscal 2007 provision for loan losses
9 $2,046,000 or 10%. The Company never corrected these contradictory figures in t
10 subsequent 10-K filed for the fiscal year ended December 31, 2008, which incorporated
11 figures from the 2007 10-K. Nor did the Company issue an 8-K advising investors of
12 material difference.
13 180. The Material Loss Review states that an FDIC and CDFI exami
14 commenced on February 27, 2008 concerning the Bank’s financial condition as of December 31
15 2007, recommended to the Company that it increase its allowance for loan losses by $35 million.
16 181. An increase of $35 million in the allowance for loan losses would have resulted in
17 a $35 million increase in the provision for loan losses, and a decrease in the Company’s
18 income reported in the 10-K for the fiscal year ($102.3 million) and fourth quarter ($27 mill
19 by no less than $35 million. The Company did not accept or heed the FDIC’s recommen
20 increase of $35 million. Had UCBH accepted the FDIC’s recommendation to increase ALL
21 $35 million, UCBH’s Provision would have also increased $35 million.
22 182. Defendants failed to disclose to investors in their fiscal 2007 10-K that the FDI
23 had recommended the Company increase its allowance for loan losses by $35 million.
24 omission was material and misleading, especially given Defendants’ assurances that UCBH
25 conservatively and properly accounting for loan losses.
26 183. The Company’s fiscal 2007 10-K, which was signed by defendants Wu, De
27 Wu, Chau, Jou, Ko, Ng, Wang and Wong, falsely stated that the Company’s internal control
28 31 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page32 of 81
1 financial reporting was effective as of December 31, 2007 and that there were no
2 deficiencies. The 10-K states in relevant part:
3 Management’s Report on Internal Control over Financial Reporting 4
5 Management of the Company is responsible for establishing and maintaining adequ internal control over financial reporting. As defined in Rule 13a-15(f) under t 6 Exchange Act, internal control over financial reporting is a process designed by or und the supervision of a company’s principal executive and principal financial officers, a 7 effected by a company’s board of directors, management and other personnel, to provi
8 reasonable assurance regarding the reliability of financial reporting and the preparation financial statements for external purposes in accordance with accounting princip 9 generally accepted in the United States of America. It includes those policies a procedures that: 10
11 • pertain to the maintenance of records that in reasonable detail accurately fairly reflect the transactions and dispositions of the assets of a company;
12 • provide reasonable assurance that transactions are recorded as necessary 13 permit preparation of financial statements in accordance with generally accep
14 accounting principles, and that receipts and expenditures of a company are be made only in accordance with authorizations of management and board 15 directors of a company; and
16 • provide reasonable assurance regarding prevention or timely detection 17 unauthorized acquisition, use or disposition of a company’s assets that could h a material effect on its financial statements. 18
19 Management of the Company has assessed the effectiveness of the Company’s inter control over financial reporting as of December 31, 2007. In making its assessment 20 internal control, management used the criteria described in “Internal Control Integrated Framework” issued by the Committee of Sponsoring Organizations (“COSO 21 of the Treadway Commission.
22 As a result of its assessment, management has concluded that the 23 internal control over financial reporting was effective as of December 31, 2007. In conducting an assessment of the effectiveness of the Company’s internal control 24 financial reporting, the Company has excluded the acquisition of Business Developm
25 Bank Ltd. from management’s report on internal control over financial reporting. Business Development Bank Ltd. acquisition was completed on December 11, 2007, 26 constituted 2.9% and 0.2% of the total assets and revenues, respectively, of the Comp as of December 31, 2007. 27
28 32 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page33 of 81
Because of its inherent limitations, internal control over financial reporting may i 1 prevent or detect misstatements. Also, projections of any evaluation of effectiveness
2 future periods are subject to the risk that controls may become inadequate because changes in conditions, or that the degree of compliance with the policies or procedu 3 may deteriorate.
4 The effectiveness of the Company’s internal control over financial reporting as
5 December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independ registered public accounting firm, as stated in their report incorporated by reference i 6 Item 8 of this Annual Report on Form 10-K.
7 Changes in Internal Control Over Financial Reporting
8 The Company has made no change in its internal control over financial reporting that 9 materially affected, or is reasonably likely to materially affect, the Company’s inte control over financial reporting during the quarter ended December 31, 2007. 10 184. The signed certifications of defendants Wu and Dennis Wu filed with the 10- 11 pursuant to the Sarbanes-Oxley Act of 2002 (“SOX”) were materially false and misleading. 12 185. In addition to stating that the they were each “responsible for establishing 13 maintaining disclosure controls and procedures and internal control over financial reporting,” th 14 certifications falsely stated, in part, that the 10-K (a) “does not contain any untrue statement of 15 material fact or omit to state a material fact necessary to make the statements made, in light o 16 the circumstances under which such statements were made, not misleading with respect to th 17 period covered by this report,” (b) “the financial statements, and other financial informatio 18 included in this report, fairly present in all material respects the financial condition, results o 19 operations and cash follows of the registrant as of, and for, the periods presented in this report, 20 and (c) each of them disclosed “[a]ll significant deficiencies and material weaknesses in th 21 design or operation of internal control over financial reporting which are reasonably likely t 22 adversely affect the registrant’s ability to record, process, summarize and report financia 23 information,” and “[a]ny fraud, whether or not material, that involves management or othe 24 employees who have a significant role in the registrant’s internal control over financia 25 reporting.” 26
27
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1 186. Defendants’ statements about the effectiveness of UCBH’s internal controls
2 their SOX Certifications are materially false and misleading because UCBH lacked adequat
3 internal controls in nearly every aspect of the Bank from 2007 until its failure in 2009. UCB
4 management was given a copy of the Report of Examination for each of the FDIC inspection
5 and examinations that detailed ineffective internal controls at the Bank, pursuant to the FDIC’
6 Risk Management Manual of Examination Policies, Section 1.1. The Material Loss Review
7 stated in relevant part:
8 a. There were “UCB Board and management weaknesses reported during
9 through 2009”
10 b. “The primary reason for UCB’s failure was inadequate oversight by the Bo
11 of Directors and management. In particular, UCB’s Board and managem
12 failed to control the risks associated with the institutional rapid expansi
13 which began in 2002. Further, management controls were insufficient
14 prevent the occurrence of inaccuracies, omissions, and misrepresentations t
15 affected key UCB financial data”
16 c. “Beginning in 2007, however, examination reports began to note
17 significant weaknesses in oversight by UCB’s Board and management.
18 reports also indicated that the Board and management were dominated by one
19 individual who held the titles of President, Chief Executive Officer (CEO)
20 and Chairman of the Board and was responsible for certain practices
21 ultimately contributed to the bank’s failure. Examination reports and relat
22 documentation in these latter years noted that UCB: (1) had a weak Board
23 Directors and needed increased Board oversight; (2) management did n
24 provide UCB’s internal loan review unit, the Independent Asset Revi
25 Division (IARD), with the necessary support to fulfill its mandate; (3) need
26 to improve its risk management and infrastructure by using better technolo
27 and increasing staffing to accommodate UCB’s rapid growth; (4) was unab
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1 to effectively integrate its foreign operations with its domestic operations;
2 (5) had high CRE [Commercial Real Estate] loan concentrations and incre
3 in problem loans.”
4 d. “Examiners cited the following weaknesses with UCB’s Board
5 management: The March 2007 examination stated that examiners could
6 determine if the Board was apprised of UCB’s significant leverage strategy
7 grow its assets to $10 billion. UCB’s executive management stated that
8 Board was apprised of the strategy; however, UCB’s legal counsel dire
9 management to not document the discussions due to liability concerns.”
10 e. “The February 2008 examination noted that, after several years of existe
11 UCB’s Enterprise Risk Management function was unable to quantify or rep
12 risks to UCB’s Board and the bank’s management had not developed
13 overarching assessment of its enterprise-wide risks.” The February 200
14 examination was on the bank “as of December 31, 2007.” (The “Februar
15 2008 Examination”)
16 f. “The 2007, 2008, and 2009 examination reports and reviews noted UCB’
17 high levels of senior management staff turnover, inexperienced staff,
18 insufficient staffing levels, indeterminate job roles, and
19 responsibilities and authority. Similarly, the June 2009 UCB targeted
20 noted that UCB experienced elevated staff departures.”
21 g. “The March 2007 examination noted that UCB had not adequately int
22 the Hong Kong branch into its risk management framework due
23 weaknesses in its credit underwriting and administration and BSA [B
24 Secrecy Act] and IT [Information Technology] operations.”
25 h. The Material Loss Review concluded based on examination reports from
26 FDIC from 2007 forward, that UCB’s Board and management did not
27 certain of the following criteria, (1) “level and quality of oversight
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1 support of all institution activities by Board and management”; (2) “ability
2 the Board and management, in their respective roles, to plan for, and respo
3 to, risks that may arise from changing business conditions or the initiation
4 new activities or products”; (3) “adequacies of, and conformance w
5 appropriate internal policies and controls addressing the operations and ri
6 of significant activities”; (4) “accuracy, timeliness, and effectiveness
7 management information and risk monitoring systems appropriate for
8 institution’s size, complexity, and risk profile”; (5) “adequacy of audits
9 internal controls to promote effective operations and reliable financial
10 regulatory reporting; safeguard assets; and ensure compliance with
11 regulations, and internal policies”; (6) “Responsiveness to recommend
12 from auditors and supervisory authorities”; (7) “extent that the Board
13 management are affected by, or susceptible to, dominant influence
14 concentration of authority.”
15 i. The February 2008 Examination directed the “UCB’s Board
16 management” to, among other things, “improve liquidity monitoring”; “ass
17 its staffing, infrastructure needs, and management structure”; and “verify
18 unresolved high-and moderate impact IT and general audit issues.”
19 j. The February 2008 Examination “noted that UCB had not adequat
20 monitored participation loans purchased from other lenders and
21 classified as ‘special mention.’” “Special mention loans denote assets
22 potential weaknesses warranting management’s close attention.”
23 187. Defendants’ statements about the effectiveness of UCBH’s internal controls
24 their SOX Certifications are materially false and misleading as evidenced by the crim
25 indictment of defendants Shabudin and Yu for securities fraud referenced above (Ex. C) and
26 findings therein; Tran’s guilty plea to conspiracy to commit securities fraud and the
27
28 36 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page37 of 81
1 I therein; the findings of fact of made by the FDIC (Ex. F); and the allegations contained in
2 SEC complaint (Ex. E).
3 B. First Quarter Ended March 31, 2008
4 188. On May 9, 2008 the Company filed a 10-Q with the SEC for first quarter
5 March 31, 2008. The 10-Q, which was signed by defendant Wu and John Downing,
6 stated that the Company’s internal controls were effective and that there were no m
7 changes to that would likely to impact the Company’s internal control over financial rep
8 The 10-Q states in relevant part:
9 Item 4. Controls and Procedures 10 At the end of the period covered by this report, UCBH Holdings, Inc. (“UCBH”; UCB 11 United Commercial Bank and United Commercial Bank’s wholly owned subsidiaries
12 collectively referred to as the “Company”) carried out an evaluation, under supervision and with the participation of the Company’s management, includ 13 UCBH’s Chief Executive Officer and the Chief Financial Officer , of the effectiven
14 of the design and operation of the Company’s disclosure controls and procedures defined in rule 13a-15(e) under the Securities and Exchange Act of 1934, as amend
15 Officer concluded that the Company’s disclosure controls and 16
17 period covered by this report that have materially affected, or are reasonably lik 18 to materially affect, the Company’s internal control over financial reporting.
19 189. Filed with the 10-Q were signed SOX certifications of defendants Wu and J
20 Downing which, in sum and substance, are substantially the same as the SOX certifications f
21 with the Company’s February 29, 2008 10-K.
22 190. The Company’s statements about the effectiveness of its internal controls and
23 SOX certifications were materially false and misleading for the same reasons such statem
24 and SOX certifications filed with the February 29, 2008 10-K were materially false
25 misleading set forth in ¶186-87, above.
26 191. Defendants were aware that UCB had ineffective internal controls because
27 FDIC provided a copy of its Report of Examination to UCB management.
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1 C. Second Quarter Ended June 30, 2008
2 192. On August 11, 2008 the Company filed a 10-Q with the SEC for the s
3 quarter ended June 30, 2008. The 10-Q, which was signed by defendants Wu and On, f
4 stated that the Company’s internal controls were effective. The 10-Q states in relevant part:
5 Item 4. Controls and Procedures
6 At the end of the period covered by this report, UCBH Holdings, Inc. (“UCBH”; UC 7 United Commercial Bank and United Commercial Bank’s wholly owned subsidiaries collectively referred to as the “Company”) carried out an evaluation, under 8
9 UCBH’s Chief Executive Officer and the Acting Chief Financial Officer , of effectiveness of the design and operation of the Company’s disclosure controls 10 procedures as defined in rule 13a-15(e) under the Securities and Exchange Act of 19 as amended. Based on this evaluation, UCBH’s Chief Executive Officer and Act 11
12 procedures were effective as of the end of the period covered by this report.
13 193. The 10-Q also reiterated the soundness of the Company’s internal control
14 financial reporting because while the Company’s had implemented a new general ledger system
15 in the second quarter, the Company falsely told investors that the implementation of the new
16 system “was not in response to any internal control deficiency.” The 10-Q states in relevant part:
17
18
19 and enhancing our financial systems [and was not in to any internal control deficiency]. The Company reviewed the internal c 20 affected by the new general ledger system, modified internal controls that were im
21 by the new system, and has [successfully] tested those internal control changes.
22 the period covered by this report that have
23 financial reporting
24
25 194. Filed with the 10-Q were signed SOX certifications of defendants Wu and O 26 which, in sum and substance, are the same as the SOX certifications filed with the Company’ 27 February 29, 2008 10-K. 28 38 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW
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1 195. The Company’s statements about the effectiveness of its internal controls a
2 SOX certifications were materially false and misleading for the same reasons such stateme
3 and SOX certifications filed in connection with the February 29, 2008 10-K were materially fa
4 and misleading set forth in ¶186-87, above.
5 D. Third Quarter Ended September 30, 2008
6 (i) Third Quarter Earnings Conference Call
7 196. On October 24, 2008 the Company held an earnings conference call w
8 investors to discuss its third quarter financial results ended September 30, 2008. On the call
9 the Company were defendants Wu, On, and Mitchell. During the call defendant Mitchell fals
10 reassured investors about the Company’s the ongoing efforts to monitor its loan portfolios
11 follows:
12 “In addition to our portfolio management efforts, we are also employing
13 independent loan reviews of our Construction portfolio to ensure risk
14 reflective of current market conditions. ”
15 197. Defendant Wu also falsely touted the Company’s methods in formulating reserv
16 for loan losses to ensure accuracy and falsely stated that when the underlying value of the as
17 falls on a loan, the Company accounts for it in its provision “right away.” Wu misrepresented
18 relevant part:
19 : Hi, my question is a follow-up to the reserve question as well
20 So I just wanted to get some clarifications on that. Basically you're taking everything asset-by-asset, and if you feel the asset is in good shape you're not going to take a reserve 21 on it?
22 : Well, actually no. There's a general reserve applied to any lo
23 outstanding. So we have a very - I would say, sophisticated loan risk rating syste Okay? Every single loan has been rated and graded. So on each types of loan on ea 24 grade we have a loan loss factor to be applicable to the outstanding. So this I in 25 -- risk rating system and tha 26 the level allowance from da month-to-month and quarter-to- .
27 reserve.
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1 : So, if the value of the asset falls then obviously something has
2 be taken care of then, right?
7 : Well, how do you decide how to mark things down 12 8 people are 90 days delinquent, per say? How do you decide like how much r you should account for that?
11 evaluate our credits and grade them on a scale as we monitor them, and track thing like in the credit metrics like the delinquencies. That would definitely be a factor tha 12 comes into this. Depending on the different loan types, the assessment will be different whether there is different hard collateral like in a real estate loan o 13 depending on if we're talking about a commercial loan. So as we monitor
14 delinquencies and get concerned about credit pressures, then we would go
15 loans and then that - that as we go down through a from better to worse, it 16 gets to a point where it's
17 reserve to a loan specific ysis where we do all this very analysis. 18
19 199. When pressed further in this exchange, defendant On falsely stated that that
20 Company complied with and continues to comply with GAAP in connection with its loan
21 reserves and would take those reserves in a “very timely” manner. In the same exchange, w
22 asked why the Company should not be more conservative in setting its loan loss reserves,
23 reiterated that the Company was conservative:
24
25
12 26 A delinquent loan is any loan that is delinquent on payment of interest or principal for 30 days or more. All nonaccrual loans are delinquent because nonaccrual loans are 90 days or more past 27 due. 28 40 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page41 of 81
2 of just the process that we have where we funnel everything down, based on risk ratings and then to the extent that we get information that might indicate that we have 3 a specific impaired loan, we will put those into the FAS 114 category which we do very timely. That is a basic underpinning of our methodology. From just a critica 4 component standpoint, and you want to in terms of analyzing that and maybe, Lana, i
5 you are still on the phone? This is a component you may want to look at. But our FAS 114, the total loans that we had as of 9/30/08 was about $325.6 million. Total specific 6 valuation allowances on these loans amounted to 27.1 million, or if you wanted to put that in a percentage basis, 8.3%. Which I think gets to Tommy's comment that a lot o 7 our loans are very adequately secured, so to - that really protects against loss content
8 So, from an accounting standard and you'll see it when we file our 10-Q, you might be able to get a better, kind of, handle on how that all works. Hopefully that's helpful
9 : Yeah, I mean it is. I mean, it's just - I think that a lot 10 people are concerned that, why not be conserve - more conservative? Why not reser
11 more?
14 same time, you have to acknowledge the fact that where we were in terms of allowance percentage to where we are today. We make - we have - do a lot 15 research in the past three or four quarters.
16 : Okay
17
18 200. The Defendants’ statements about their diligent and extensive efforts
19 determining and reporting UCB’s loan losses reserves and provisions, the accuracy of
20 reserves and provisions and their adherence with GAAP based on “real time” monitoring
21 extensive processes, and the purported “conservative” approach were materially false
22 misleading for the following reasons:
23 a. The Company suffered extensive internal control weaknesses that
24 prior to, during and after the third quarter, as set forth in ¶186-87,
25 prevented the Company’s Board and management from effectively
26 accurately monitoring and reporting on the Company’s loan portfolio.
27
28 41 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page42 of 81
1 b. Defendants’ deliberate misconduct reported in the Company’s September
2 2009 news release which revealed the results of the Internal Investigat
3 finding that Defendants intentionally concealed impairment losses
4 nonperforming loans and other real estate assets, as noted in the Compa
5 September 8, 2009, Press Release. The press release revealed that
6 Company’s bank officers engaged in deliberate acts in an effort to conceal
7 Company’s deteriorating financial condition, abate credit rating downgra
8 and to minimize the Company’s overall loan loss allowance. Notably,
9 Company failed to disclose when the deliberate misconduct began,
10 according to the Material Loss Review, the Company’s auditor, KPMG sta
11 that UCBH senior management’s deliberate misconduct began in Octo
12 2008. The 9/8/2010 press release states in relevant part:
13 Conclusion of Independent Investigation
14 The Investigation Subcommittee of the Board Audit Committee
15 (“Subcommittee”) has completed its previously disclosed independent investigation regarding the recognition of impairment losses on nonperforming 16 loans and other real estate owned (OREO) assets. This represents an important
17 step forward for UCBH and enables the Company to complete its financial restatement as soon as practicable.
18 The Subcommittee’s report identified problems resulting both from weaknesses 19 in the Bank’s internal controls, consistent with the material weakness
20 previously reported, and from deliberate and improper actions and omissions of certain Bank Officers. The report concluded that those 21 problems were driven by an apparent desire to downplay deteriorating financial conditions by delaying or abating risk rating downgrades and 22 minimizing the Bank’s overall loan loss allowance.
23
24 c. According to the September 8th press release the deliberate misconduct
25 Bank officers and management included, among other things:
26 modification of loan terms to delay negative consequences,
27 extending terms, lowering interest rates and improper use of
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1 reserve accounts”; (ii) “Delay in recognition of risk rating downgrade
2 and specific reserves”; (iii) “Misrepresentation or omission of relevan
3 information in communications with the Bank’s Finance Department and
4 with UCBH’s independent auditors, KPMG LLP”; and (iv
5 “Modification of documents in support of the above.”
6 d. In connection with the findings of the Internal Investigation, the Company
7 stated in the September 8 th press release that it would address these findings
8 “through appropriate actions, which include additional training, reprimands
9 re-assignments and, in some instances, termination of employment.”
10 e. The Material Loss Review indicated that the Internal Investigation
11 prompted because “KPMG became suspicious that UCB officials
12 employees had engaged in illegal acts to conceal the bank’s true f
13 condition.” The Review also states that KPMG believed that the mis
14 identified by the internal investigation started in October 2008.
15 f. The Review also provided additional detail—that the Company omitted from
16 the September 8th press release—which further contradicts the defendants
17 statements during the October 24 conference call about the Company’
18 diligent and extensive efforts to monitor its loans and the purported a
19 timely and conservative nature of the Company’s loan reserves. The
20 states in relevant part:
21 Modification of loan terms to delay negative consequences . The investigation fo
22 instances where bank employees modified loan terms in an effort to delay negative consequences of a weakened borrower. The modifications were nume 23 and included extending terms, lowering interest rates, and improperly using interest reserve account. 24
25 Intentional delays in recognizing risk rating downgrades or specific reserves. T investigation found instances where bank employees acted to delay the recognition 26 a risk rating downgrade, or to minimize the loan loss allowance or write-down REO loans. 27
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Misrepresentation or omission of relevant information. The investigation 1 numerous instances where relevant information was intentionally withheld
2 KPMG, misrepresented to KPMG, or both. It also found instances where inform was withheld from or misrepresented to the bank’s Finance Department.
3 Inappropriate alteration of documents. The investigation found instances where 4 bank employees altered documents in an effort to improve the perception of credi
5 quality. In some cases, the alterations either removed or ameliorated negative fact that were material to the evaluation of a credit. Other cases included backdating 6 documents to make them appear more reliable.
7
8 g. The Review confirms that Company management at the highest levels
9 involved in the misconduct and that defendants Wu and Shabudin were
10 out of the Company because of their involvement in the misconduct.
11 Review states in relevant part:
12 The investigative report concluded that these activities were driven by an apparent desire
13 of UCB senior executives to mask deteriorating financial conditions by deliberately delaying risk rating downgrades and minimizing the bank’s overall loan los 14 allowance. The investigative report raised serious concerns regarding the actions o a number of UCB management officials. As a result, UCB’s CEO and Chie 15 Operating Officer resigned, while others were terminated. The report also contained
16 recommendations, which were adopted by UCBH’s Board. For example, UCBH’s Board and management agreed to provide bank employees with additional job training, and to 17 reprimand, reassign, and in some instances, terminate or demote certain UCB employees.
18 * * *
19 One individual, who held the titles of UCB’s President, CEO, and Chairman of th Board, exercised a considerable amount of influence over UCB’s operations. In an effor 20 to increase UCB’s assets, this individual was ultimately responsible for (1) fostering culture that led to the bank’s approval of a large number of exceptions to the bank’s loan 21 policy so UCB could make more loans, (2) fostering a combative culture wher
22 management failed to downgrade non-performing loans in a timely manner, and (3 overpaying to acquire financial institutions. 23 The August 2009 targeted review draft report noted that the President’s desire over ti 24 to grow the bank ultimately imperiled it by fostering a culture that deterred
25 identification and correction of problems by staff.
26 (ii) Third Quarter Form 10-Q
27
28 44 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page45 of 81
1 201. On November 10, 2008 the Company filed with the SEC a 10-Q for the thi
2 quarter ended September 30, 2008. The 10-Q, which was signed by defendants Wu and O
3 falsely stated that the Company’s internal controls were effective and that there were no materi
4 changes that would likely impact the Company’s internal control over financial reporting. T
5 10-Q states in relevant part:
6 Item 4. Controls and Procedures
7 At the end of the period covered by this report, UCBH Holdings, Inc. (“UCBH”; UC
8 United Commercial Bank and United Commercial Bank’s wholly owned subsidiaries collectively referred to as the “Company”) carried out an evaluation, under 9 supervision and with the participation of the Company’s management, includ
10
11 defined in Rule 13a-15(e) promulgated by the SEC under the Securities and Exch Act of 1934, as amended. Based on this evaluation, UCBH’s Chief Executive Of 12 and Chief Financial Officer concluded that the Company’s disclosure controls
13 procedures were effective as of the end of the period covered by this report.
14 202. The 10-Q also repeated the disclosure from its second quarter 10-Q about th 15 soundness of the Company’s its internal control over financial reporting and that the Company’ 16 implementation of a new general ledger system in the second quarter “was not in response to 17 internal control deficiency.” Nor did the 10-Q identify any material deficiencies in 18 Company’s internal control over financial reporting. 19 203. Filed with the 10-Q were signed SOX certifications of defendants Wu and 20 which, in sum and substance, are substantially the same as the SOX certifications filed with 21 Company’s February 29, 2008 10-K. 22 204. The Company’s statements about the effectiveness of its internal controls 23 SOX certifications were materially false and misleading for the same reasons such statem 24 and SOX certifications filed with the February 29, 2008 10-K were materially false 25 misleading for the reasons set forth above in ¶¶186-87, 200, which demonstrate that Com 26
27
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1 management and board engaged in deliberate or severely reckless conduct to conceal
2 Company’s true financial condition.
3 E. Fourth Quarter and Fiscal Year Ended December 31, 2008
4 (i) Fourth Quarter and Fiscal Year Press Release
5 205. On January 22, 2009 the Company issued a materially false and misleading
6 release announcing its fourth quarter and fiscal year ended December 31, 2008 financial results
7 In the announcement were financial statements of the Company, including a balance sheet and
8 income statement. The press release falsely reported the Company’s net loss before income
9 taxes for the fiscal year as $94,250,000. The Company also stated the provision for loan losses
10 for the fourth quarter was $112.1 million, and for the fiscal year was $222.9 million; that the net-
11 loan charge-offs were $43.6 million and $113.2 million for the fourth quarter and fiscal year
12 respectively; and that the allowance for loan losses at the fiscal year ended 2008 was $190.4
13 million.
14 206. The above financial statements and information contained in the press
15 were materially false and misleading because:
16 a. Starting from at least October 2008 senior executives and officials of
17 Company were deliberately concealing the Company’s true financ
18 condition by, among other things, altering documents and lying to t
19 Company’s auditors to abate credit rating downgrades and to minimize t
20 Company’s loan loss allowance, as more fully set forth in ¶200, above.
21 b. The Company had undisclosed management and control weaknesses from
22 least 2007 through 2009 (see ¶¶186-87, 200) which caused the Company
23 issue false financial statements.
24 c. In its annual report for the fiscal year ended December 31, 2008 filed on F
25 10-K with the SEC on March 16, 2009 and in a press release issued that
26 entitled “UCBH Holdings, Inc. Strengthens its Allowance for Loan Loss,”
27 Company admitted that it “misstated” its allowance for loan losses in
28 46 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW
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1 January 22, 2009 press release. According to the March 16,
2 announcements, the allowance for loan losses at end of fiscal year 200
3 should have been at least $230.4 million not the $190.4 million origi
4 reported—a $40 million or a 21% understatement. Likewise the provision
5 loan losses for fiscal 2008 was not $222.9, but as stated in the 10-K was
6 least $262.9 million, an understatement of $40 million or 17.9%. Likew
7 the net loss before income taxes was not $94,250,000 as reported in the
8 release, but at least $134,250,000 as reported in the 2008 10-K, a $40 m
9 or 43% understatement of net loss.
10 d. Notably, the corrected amounts reported in the 2008 10-K were, yet again
11 materially false and misleading as set forth in the Company’s 8-K filed with
12 the SEC on May 20, 2009. In the 8-K, UCBH stated that its financia
13 statements as of December 31, 2008 should not be relied upon and must be
14 restated. The 8-K stated that the Company’s net loss before income taxes was
15 actually $45 to $55 million higher or $179,250,000 to $189,250,000 rather
16 than the $134,250,000 million in net loss reported in the 10-K. Essentially
17 the actual net loss before income taxes was nearly double the
18 reported in the January 22, 2009 press release.
19 e. While UCBH never issued the restatement of the fiscal 2008
20 statements and the specific restated amounts were not released for the
21 line-items set forth in the Company’s press release and 2008 10-K because
22 Bank failed in November 2009, before the restatement could be complet
23 the Company admitted that the “restatement will result in material adjustme
24 to the loan loss provision and related allowances for loan losses, includi
25 charge-offs and the resulting change in non-performing loan levels, and
26 other real estate owned expense for the quarter and year ended December 31,
27 2009.” The May 20, 2009 8-K states in relevant part:
28 47 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page48 of 81
Item 4.02(a) Non-Reliance on Previously Issued Financial Statements or a Related Audit 1 Report or Completed Interim Review
2 On May 18, 2009, UCBH Holdings, Inc. (the “Company”) management recommended to 3 the Audit Committee of the Board of Directors, and the Audit Committee agreed, that the Company’s consolidated financial statements as of and for the year ended December 31 4 2008, should be restated, and the previously issued consolidated financial statements, and
5 any related reports from its independent registered public accounting firm for such period, as well as its previously issued earnings release for the first quarter of 2009 6 should no longer be relied on.
7 The restatement resulted from a re-examination of the Company’s non-performing asset
8 portfolio conducted by management as part of the ongoing remediation of certain ineffective controls as disclosed on March 16, 2009 in Item 9A, Disclosure Controls and 9 Procedures in the Company’s Form 10-K filing for the year ended December 31, 2008. Such re-examination resulted in the finding and conclusion that certain loan impairments, 10 and related reserves and charge-offs associated with specific collateral dependent loans
11 and other real estate owned properties which had been analyzed and recorded during the first quarter of 2009, should have been more appropriately recorded and reflected in the 12 fourth quarter of 2008; the Company has identified corrections to date that may result in an increase in its pre-tax loss of approximately $45 million to $55 million for the 13 year ended December 31, 2008, but this analysis remains preliminary and has not yet
14 been finalized. The restatement will result in material adjustments to the loan loss
15 resulting change in non-performing loan levels, and to other real estate owned expense for the quarter and year ended December 31, 2008 . Further, although the re- 16 examination has not resulted in an increase to the previously reported level of non-
17 performing assets, such re examination has resulted in the need to record additional general valuation allowances in the first quarter of 2009. 18
19 In addition, the Audit Committee is conducting an independent investigation regar the recognition of impairment losses on non-performing loans and other real es 20 owned. Accordingly, the Company will not file its 2008 Form 10-K/A or its Form 1 for the quarter ended March 31, 2009 until after the completion of such investigation. 21
22 There is no assurance that the outcome of the investigation will not result in additio impairment charges or that the Company’s Form 10-Q for subsequent periods will 23 timely filed.
24 (ii) Fourth Quarter and Fiscal Year 10-K 25 207. On March 16, 2009 the Company filed with the SEC its annual report for 26 fiscal year ended December 31, 2008 on Form 10-K. The 10-K was signed by defendants 27
28 48 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW
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1 On, Jou, Ko, Ng, Riley, Wan, Wang, Wong and Dennis Wu. As set forth above, the Company’s
2 10-K was materially false and misleading because the $134,250,000 of net income before
3 income taxes reported in the 10-K for the fiscal year ended was overstated by $45 to $55 million
4 (33-40%).
5 208 As to the Company’s internal controls, the 10-K identified a single
6 deficiency in the Company’s internal control over financial reporting, concerning the Company’
7 policies and procedures that “did not provide for timely evaluation of and revision t
8 management’s approach for assessing credit risk inherent in the Company’s loan portfolio t
9 reflect changes in the economic environment.” Consequently, the 10-K states that “[t]hi
10 material weakness resulted in a material misstatement of the Company’s loan loss allowance an
11 provision for loan losses as of and for the year ended December 31, 2008 that has been correcte
12 prior to issuance of the Company’s 2008 consolidated financial statements.” (i.e. th
13 misstatement has been corrected).
14 209. The Company falsely reassured investors that it was “actively working” t
15 remediate this internal control deficiency by taking corrective actions.
16 210. The Company’s statements about the existence of only a single material interna
17 control deficiency, that it corrected the misstatement resulting from the deficiency and it
18 ongoing and “active” remediation efforts were materially false and misleading because:
19 a. In the May 20, 2009 8-K, the Company admitted that its financial statement
20 for fiscal year ended December 31, 2008 could no longer be relied upon an
21 had to be restated, and that the “restatement will result in material adjustment
22 to the loan loss provision and related allowance for loan losses” which
23 discovered during the Company’s re-examination of its internal controls.
24 b. Starting from at least October 2008 through 2009 senior executives an
25 officials of the Company were deliberately concealing the Company’
26 deteriorating financial condition by, among other things, altering document
27
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1 and lying to the Company’s auditors to abate credit rating downgrades and
2 minimize the Company’s loan loss allowance, as set forth in ¶ 200 above.
3 c. The Company had undisclosed management and control weaknesses from
4 least 2007 through 2009 (¶¶186-87, 200) which also caused the Company
5 issue misstatements and omissions to investors during the Class Period.
6 d. Contrary to the Company’s representations of ongoing and “activ
7 remediation efforts, the Material Loss Review reported that officials from t
8 FDIC San Francisco Regional Office, found that the FDIC's efforts to rate t
9 Bank’s Capital, Asset Quality, Management, Earnings, Liquidity and
10 Sensitivity to Market Risk (“CAMELS”) in late 2008 and into 2009 were
11 hindered by the Company’s deliberate misconduct, which included, (a
12 “presenting examiners with inaccurate financial information on certain
13 occasions regarding loans they reviewed” (b) not providing regulators
14 December 2008 IARD loan review report until three months after it w
15 prepared, which “would have shed light on UCB’s declining lo
16 performance”; and (c) not being “forthright with examiners when question
17 about loan loss provision expenses for the fourth quarter of 2008”. The
18 findings of misconduct are specifically noted in the MLR.
19 e. The Review also noted that Bank’s April 2009 targeted review rep
20 identified “new loan administration issues related to troubled de
21 restructuring and loss impairment analyses for problem loans that
22 once asset quality deteriorated.”
23 211. Filed with the 10-K were signed SOX certifications of defendants Wu and O
24 which are substantially the same as the SOX certifications filed with the Company’s 2007 10-K
25 filed February 29, 2008. The SOX certifications were materially false and misleading for th
26 same reasons as the February 29, 2008 SOX certifications, and the reasons set forth above i
27 ¶¶186-87, 200, 206, 210.
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1 212. The Company also made the following material misrepresentations in the 10-K
2 about its allowance for loan losses:
3 a. “allowance for loan losses is maintained at a level that is adequate to
4 probable losses inherent in our loan portfolio as of the respective
5 sheet date”; and
6 b. “allowance for loan losses represents our estimate of the losses that
7 inherent in the loans held in portfolio. UCB continuously monitors the
8 of its loans held in portfolio and maintains an allowance for loan
9 sufficient to absorb losses inherent in the loans held in portfolio.”
10 213. These statements were materially false and misleading because the allowance
11 loan losses reported in the 10-K was materially inaccurate as a result of senior management
12 Bank officials deliberately concealing the Company’s deteriorating financial condition and
13 the reasons set forth in ¶¶186-87, 200, 206, 210.
14 214. Just ten days after filing the 2008 10-K, CFO On and two UCBH directors
15 certified and filed an updated call report with the FFIEC for the year end December 31, 2008.
16 The March 26, 2009 updated call report showed non-performing assets of $589.4 million, nearly
17 $190 million greater than the $433.8 million reported in the January 22 press release and $59
18 million more than the 10-K filed just 10 days earlier. Thus, on January 22, defendants
19 understated non-performing assets by a whopping 37%.
20
21 F. First Quarter ended March 31, 2009
22 215. On April 20, 2009 FDIC letter notifying the bank of a downgrade to a compos
23 “3” rating and designating the bank as “troubled.” The letter also restricted UCB’s issuance
24 debt under the Temporary Liquidity Guarantee Program.
25 216. On April 23, 2009 the Company issued a materially false and misleading pre
26 release announcing its first quarter ended March 31, 2009 financial results. Contained in t
27 announcement were financial statements of the Company, including among other things
28 51 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW
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1 balance sheet and condensed statement of operations. The press release falsely reported
2 Company’s provision for loan losses of $178.5 million for the first quarter. The Company
3 noted that at the end of first quarter the allowance for loan losses was $276.5 million and
4 non-performing assets totaled $700.8 million.
5 217. The Company falsely stated in the April 23, 2009 press release that “
6 Company believes that that the allowance was adequate to absorb expected losses inherent in
7 loan portfolio at March 31, 2009.”
8 218. The above financial statements contained in the April 23, 2009 press release
9 materially false and misleading.
10 219. Defendant CFO On and two UCBH directors certified and filed a call report wi
11 the Federal Financial Institutions Examination Counsel dated May 22, 2009, which stated t
12 ALL was $323.8 million and the Provision for the quarter ended March 31, 2009 was $2
13 million—each nearly $47 million greater than what the Company reported in the April 23, 20
14 press release. And the call report showed $759.3 million of non-performing assets compared
15 only $700.8 million stated in the April 24, 2009 press release.
16 220. The Company’s financial statements and information contained in the pre
17 release were also materially false and misleading because (a) of the deliberate misconduct o
18 Defendants in concealing the true financial condition of the Company, altering loan document
19 to minimize downgrades and the Company’s loan losses allowance (¶¶186-87, 200, 206, 210
20 and the Company’s lack of internal controls (¶¶186-87, 200, 206, 210); (b) of the Company’
21 May 20, 2009 8-K, which stated that “earnings release for the first quarter of 2009, should n
22 longer be relied upon” and had to be restated; (c) KPMG stated that UCBH had likely committe
23 illegal acts in misrepresenting its financial performance.
24 221. On May 20, 2009, UCBH filed an 8-K with the SEC disclosing that th
25 Company’s financial statements for the year ended December 31, 2008, must be restated, and it
26 previously issued financial statements, as well as its previously issued earnings release for th
27 first quarter of 2009, should no longer be relied on.
28 52 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page53 of 81
20th 1 222. The May announcement was misleading because it omitted to disclose
2 the restatement and investigation had been prompted by UCBH’s auditor, KPMG, when i
3 notified the UCBH board that it had uncovered potential illegal acts committed by
4 officials in altering loan documents and withholding information from KPMG in an effort
5 I conceal the Bank’s deteriorating financial condition.
6 223. On May 28, 2009, and early notification (dear CEO) letter was delivered to
7 Board, which further restricted brokered deposits. At this point, UCBH’s senior officers
8 directors knew that UCBH was doomed as without the ability to accept brokered deposits,
9 would soon run out of cash.
10 224. On June 3, 2009 the Company filed with the SEC an 8-K/A, signed by
11 On, amending the May 20 8-K. In that announcement, the Company falsely stated that it
12 merely adding the following statement to the May 20, 2009 8-K:
13 The Company will not be able to determine the impact of the restatement on th consolidated balance sheet, statement of operations, statement of changes in 14 stockholders’ equity and comprehensive income, and statement of cash flows as o
15 and for the year ended December 31, 2008, and the quarterly period ended March 31 2009, until the restatement has been completed. The Company intends to disclose any 16 such impact in the periodic reports that contain the restated financial statements.
17 225. The June 3, 2009 8-K/A was materially false and misleading because th
18 Company had determined the impact of the restatement for at least certain of the
19 adjustments as evidenced by the updated May 22, 2009 call report filed with the F
20 I Financial Institutions Examination Counsel above.
21 226. On June 30, 2009, the FDIC and the CDFI sent a joint letter to UCB summarizi
22 the FDIC’s April 2009 targeted review results and announcing that a Cease and Desist
23 would be issued to UCB. The cease and desist order was the death knell for UCB.
24 227. Defendants failed to disclose to investors that a cease and desist order would
25 be issued that would make UCB's collapse, only two months later, inevitable.
26 G. Second Quarter ended June 30, 2009
27
28 53 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page54 of 81
1 228. On August 6, 2009 the Company issued a press release announcing
2 preliminary second quarter results ended June 30, 2009. UCBH estimated that Provision
3 $300-333 million and non-performing assets were $835-$875 million.
4 229. Yet that VERY SAME DAY, August 6, 2009, defendant CFO On and two UCBH
5 directors certified and field a call report with the FFIEC stating that Provision was $451.9
6 million and non-performing assets were over $1.0 billion.
7 V. THE TRUTH SLOWLY EMERGES/ LOSS CAUSATION
8 230. On April 23, 2009, UCBH issued a press release announcing its results for
9 first quarter ended March 31, 2009. While the announcement itself was misleading for failing t
10 disclose the true extent of UCBH’s deteriorating financial condition as explained elsewhere i
11 the Complaint, the press release revealed continuing deterioration in the Company’s loa
12 portfolio and consequently, increases in the Company’s allowance and provision for loan losse
13 that should have been accounted for on UCBH’s financial statements earlier in 2008. The pres
14 release states in relevant part:
15 SAN FRANCISCO -- April 23, 2009
16 UCBH Holdings, Inc. (NASDAQ: UCBH), the holding company of United
17 Commercial Bank (UCBTM or the “Bank”), today reported a net loss of $0.78 pe share. The loss in the quarter reflects a loan loss provision of $178.5 million, $12.6 18 million in nonperforming asset disposition expenses, and a $5.2 million write-down
19 primarily related to a commercial mortgage-backed security (“CMBS”) and U.S Government-Sponsored Enterprise (“GSE”) preferred stock investments, offset by 20 $9.5 million in gains from sales of available-for-sale securities and a tax benefit o $83.9 million. 21 * * *
22 Provision for loan losses for the quarter was $178.5 million, adding $46.1 million 23 the allowance for loan losses. Allowance for loan losses was at a strong 3.30% loans held in portfolio. The Company believes that the allowance was adequate 24 absorb expected losses inherent in the loan portfolio at March 31, 2009. * * * 25 Chairman, President and Chief Executive Officer Thomas S. Wu said, “Ongoi 26 housing market weakness has continued to impact our residential construction lo portfolio, which was the primary driver of first quarter results. Our observations 27 residential construction markets are mixed as some of the most distressed mark 28 54 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page55 of 81
that impacted the Bank during 2008 appear to be showing early signs of stabilizatio 1 while contiguous markets demonstrated notable deterioration in the first quarter. As
2 result of our sharp focus on the management of the problem assets on our books, w have disposed $93.7 million of these assets during the first quarter and will continu 3 this momentum throughout the year. * * *
4 Nonperforming assets were $700.8 million, or 5.22% of total assets, at March 31
5 2009, compared with $530.8 million, or 3.93% of total assets, at December 31, 2008 The increase in nonperforming assets continued to reflect further deterioration in the 6 appraised values of certain residential construction loans. The increase in nonperforming assets during the first quarter of 2009 was primarily in residentia 7 construction and commercial real estate loans.
8 Sales of nonperforming loans and OREO totaled $93.7 million, primarily c 9 of residential construction properties located in distressed areas in California.
10 The ratio of allowance for loan losses to loans held in portfolio was 3.30% at Mar
11 31, 2009, compared with 2.66% at December 31, 2008. The ratio of the allowance loan losses and the reserve for unfunded commitments to loans held in portfol 12 excluding cash secured loans, was 3.47% at March 31, 2009, compared to 2.79% December 31, 2008. 13 231. This announcement, issued after market-close on April 23, 2009, caused 14 Company’s stock price to fall from $2.09 per share to $1.62 per share, or 22.5% on April 15 2009. 16 232. On April 24, 2009, Fitch Ratings issued an announcement after market 17 downgrading UCBH’s long-term Issuer Default Ratings (IDRs) of UCBH and the Bank to “BB 18 and “BB+”, respectively, due to continued deterioration revealed in the April 23, 2009 pres 19 release. Had UCBH fully come clean about the true extent of the deterioration of its loa 20 portfolio and allowance and provision for loan losses, the ratings downgrades would have bee 21 more severe. The announcement states in relevant part: 22 FITCH DOWNGRADES UCBH HOLDINGS' IDR TO 'BB'; PLACED ON RA
23 WATCH NEGATIVE
24 Fitch Ratings-New York-24 April 2009: Persistent and severe deterioration in credi quality, which continues to affect results and weigh on capital, has led Fitch Ratings to 25 downgrade the long-term Issuer Default Ratings (IDRs) of UCBH Holdings, Inc
26 (UCBH) and its bank subsidiary United Commercial Bank to 'BB' and 'BB+' respectively. The ratings have also been placed on Rating Watch Negative. A full list o 27 ratings appears at the end of this release.
28 55 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page56 of 81
The downgrade reflects the magnitude of credit deterioration in UCBH's loan bo While Fitch expected asset quality to weaken given the company's exposure commercial real estate, particularly its construction portfolio in the distressed real es markets of California and Nevada, the level of deterioration has escalated quickly exceeded expectations. The rating action also considers UCBH's weak tangible comm equity position relative to its significant exposure to commercial real estate. Regulat capital ratios remain above well- capitalized standards, although this is largely due to the significant amount of preferred securities in the capital structure.
The Negative Rating Watch considers the likelihood of further credit deterioration giv the composition and concentrations in UCBH's loan book. If the in-flow of non-proble credits fails to show signs of slowing and losses continue to escalate, a further downgra of the company's ratings is likely, possibly multiple notches. In addition to t stabilization of credit quality, Fitch would anticipate UCBH to augment its tangib capital base in light of anticipated credit challenges. To that end, China Minsheng Ba 10 has been in discussions with UCBH for some time regarding a third-stage investment
11 the company, which should aid capital levels. Upon the completion of this investme China Minsheng Bank would hold a 20% stake in UCBH. Currently, China Minshe 12 Bank is a 9.9% owner.
13 233. This announcement caused the Company’s stock price to fall from $1.62 per
14 to $1.45 per share or 10.5% on April 27, 2009 (the next trading day). On April 28, 2009
15 Company stock fell an additional $.20 per share or 13.8% to $1.25 per share.
16 234. On May 12, 2009, UCBH filed a Form 12b-25 announcing that the
17 would not timely file its 10-Q for the first quarter ended March 31, 2009 because the
18 has not completed its assessment of the adequacy of the allowance for loan losses.
19 UCBH Holdings, Inc. (the “Company”) is filing this Notification of Late Filing on
20 Form 12b-25 with respect to the Company’s Quarterly Report on Form 10-Q for th period ended March 31, 2009 (the “Form 10-Q”). The Company is unable, withou 21 unreasonable effort and expense, to timely file the Form 10-Q because the Company has not completed its financial statements for the quarterly period ended March 31 22 2009. Specifically, the Company’s assessment of the adequacy of the allowance fo
23 loan losses and the evaluation of potential goodwill impairment have not been completed. The Company currently expects to file the Form 10-Q no later than th 24 fifth calendar day following the prescribed due date. * * * 25
26 As announced in the Company’s April 23, 2009 Press Release, which was furnish as an exhibit to the Company’s Current Report on Form 8-K furnished on April 27 2009, the Company initially reported at the time of the Press Release a net loss
28 56 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page57 of 81
$93.7 million, or $0.78 per diluted share, compared to net income of $2.2 million, 1 $0.02 per diluted share, for the three months ended March 31, 2008. The net loss
2 the three months ended March 31, 2009 was primarily attributable to a $178.5 milli loan loss provision. While the Company does not anticipate changes to its repor 3 nonperforming asset levels, it is possible that the Company will make additio general reserve provisions to its allowance for loan losses at March 31, 2009. A 4 additional provisioning will further increase the Company’s net loss for the quar
5 ended March 31, 2009. A reasonable estimate of any such additional general reser provisioning cannot be made until the ongoing assessment described above 6 finalized.
7
8 235. This announcement caused UCBH’s stock price to drop 19.54% from a
9 price of $2.10 per share on May 12, 2009 to $1.66 per share the next trading day.
10 236. On May 20, 2009, the Company filed an 8-K with the SEC announcing,
11 other things, (a) that the Company’s financial statements as of and for the year ended Decembe
12 31, 2008 and the first quarter earnings announcement should no longer be relied upon and had to
13 be restated; (b) that restatement resulted from a re-examination of the Company’s non
14 performing asset portfolio as part of the Company’s remediation of its internal controls; (c
15 estimated corrections to the company’s pre-tax net loss for the year ended 2008; and (d) that the
16 Audit Committee was conducting an investigation regarding the recognition of impairmen
17 losses on non-performing loans and other real estate owned. The 8-K states in relevant part:
18 Item 4.02(a) Non-Reliance on Previously Issued Financial Statements or a Related Audi
19 Report or Completed Interim Review
20 On May 18, 2009, UCBH Holdings, Inc. (the “Company”) management recommended to the Audit Committee of the Board of Directors, and the Audit Committee agreed, that the 21 Company’s consolidated financial statements as of and for the year ended December 31
22 2008, should be restated, and the previously issued consolidated financial statements, and any related reports from its independent registered public accounting firm for such 23 period, as well as its previously issued earnings release for the first quarter of 2009 should no longer be relied on. 24
25 The restatement resulted from a re-examination of the Company’s non-performing asse portfolio conducted by management as part of the ongoing remediation of certain 26 ineffective controls as disclosed on March 16, 2009 in Item 9A, Disclosure Controls and Procedures in the Company’s Form 10-K filing for the year ended December 31, 2008 27 Such re-examination resulted in the finding and conclusion that certain loan impairments 28 57 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page58 of 81
and related reserves and charge-offs associated with specific collateral dependent loan 1 and other real estate owned properties which had been analyzed and recorded during the
2 first quarter of 2009, should have been more appropriately recorded and reflected in the fourth quarter of 2008; the Company has identified corrections to date that may result in 3 an increase in its pre-tax loss of approximately $45 million to $55 million for the yea ended December 31, 2008, but this analysis remains preliminary and has not yet been 4 finalized. The restatement will result in material adjustments to the loan loss provision
5 and related allowance for loan losses, including charge-offs and the resulting change in non-performing loan levels, and to other real estate owned expense for the quarter and 6 year ended December 31, 2008. Further, although the re-examination has not resulted in
an increase to the previously reported level of non-performing assets, such re 7 examination has resulted in the need to record additional general valuation allowances in
8 the first quarter of 2009.
9 In addition, the Audit Committee is conducting an independent investigation regard the recognition of impairment losses on non-performing loans and other real est 10 owned. Accordingly, the Company will not file its 2008 Form 10-K/A or its Form 10
11 for the quarter ended March 31, 2009 until after the completion of such investigation. There is no assurance that the outcome of the investigation will not result in additio 12 impairment charges or that the Company’s Form 10-Q for subsequent periods will timely filed... . 13 237. On July 14, 2009, after market close, Moody’s Investor service downgraded 14 ratings of the Bank’s financial strength and deposition rating due to the Moody’s concerns of 15 Bank’s internal controls. The announcement states in relevant part: 16 Moody's downgrades United Commercial Bank (deposits to B1) 17
18 New York, July 14, 2009 -- Moody's Investors Service downgraded the ratings of United Commercial Bank (UCB, bank financial strength rating to E+ from D-; deposits to B1 19 from Ba3). The short term ratings of the bank remain at Not Prime. The long-term ratings of the bank were also placed on review for possible further downgrade. United 20 Commercial Bank is a subsidiary of UCBH Holdings, Inc., which is unrated.
21 The downgrade reflects Moody's concerns about UCB's internal controls, and thes 22 concerns are heightened because UCB faces major asset quality challenges. UCB previously disclosed weakness is in internal controls related to credit risk managemen 23 The continued lack of timeliness and completeness of UCB's financial statements als
24 raise substantial concerns. UCB is in process of restating its financial statements for th period ended December 31, 2008 and has not yet filed its 10Q for the quarter ende 25 March 31, 2009. The company has indicated that these filings should be complete
26 during the third quarter of 2009. * * *
27
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Today, UCB announced an action plan to strengthen its capital and improve its financia 1 performance, particularly its asset quality. This plan includes stopping the preferred and
2 common dividend payments of the holding company, including trust preferred securities which will aid capital preservation. However, Moody's believes that the success of UCB's 3 plan to improve asset quality is uncertain and that its capital position, particularly its TCE, will become increasingly stressed from ongoing operating losses. During its review 4 Moody's will focus on UCB's ability to enhance its TCE through external sources, which
5 may be limited in the current market environment. The effects of ongoing losses on UCB's domestic and Greater China banking franchise will also be considered.
6
7 238. This announcement caused the Company’s stock price to fall from the July 1
8 2009 closing price of $1.24 per share to $1.09 per share, or 12.10% on July 15, 2009; and
9 additional $.23 per share, or 21% on July 16, 2009.
10 239. On August 14, 2009 the Company issued a press release announcing that i
11 received “a letter from The NASDAQ Stock Market (“NASDAQ”), notifying the Company tha
12 it is currently not in compliance with NASDAQ Listing Rule 5250(c)(1) Obligation to Fil
13 Periodic Financial Reports” (the “Listing Rule”), because it did not file its Form 10-Q for th
14 quarter ended June 30, 2009 in a timely manner.” The non-compliance resulted from UCBH’
15 need to restate its financial statements. The announcement caused the Company’s stock price t
16 fall from $1.60 per share to $1.33 per share.
17 240. On September 8, 2009 the Company issued a press release announcing,
18 other things, (a) the results of the Internal Investigation; (b) management and board changes; (c
19 corrections to the previously releases results for the second quarter ended June 30, 2009 results
20 and (d) entry of a consent agreement in connection with an Order to Cease and Desist with th
21 FDIC and CDFI. The press release states in relevant part:
22 SAN FRANCISCO -- September 08, 2009 The Board of Directors of UCBH Holdings 23 Inc., (NASDAQ: UCBH) the holding company of United Commercial Bank (UCBTM o
24 the “Bank”), today announced that it has named Doreen Woo Ho as acting President and Chief Executive Officer of the Company, succeeding Thomas S. Wu, who has resigned 25 from the Company and from its Board. Chief Operating Officer and former Chief Credi Officer Ebrahim Shabudin is also resigning from the Company. 26 * * * 27 Agreement with FDIC and DFI 28 59 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page60 of 81
The Bank also announced that it has entered into a consent agreement (the “Agreemen with the FDIC and the DFI on September 3, relating to the issuance of an Order to Ce and Desist. This order formally outlines specific steps the Bank must undertake strengthen its policies and procedures and enhance the soundness of the Bank.
The Agreement requires that the Bank perform an assessment of management and address weaknesses in management policies and practices, Board supervision, adequacy of capital, loan valuation reserves, loan quality, lending and collections practices operational issues, liquidity and compliance. The Agreement will be further described in a Current Report on Form 8-K to be filed by the Company with the Securities and Exchange Commission.
Under the Agreement, the Bank will also submit a written three-year strategic plan profitability plan to the FDIC and the DFI, notify both agencies in advance of director and management changes, and obtain prior written consent of both agen 10 before opening new branches. The Agreement also requires the Company to obtain p
11 approval from its regulators before paying dividends to shareholders.
12 Working in close consultation with its regulators, the Company and the Bank ha already taken a number of specific actions to address many of the issues identified in t 13 Agreement, as the Company works to complete its financial restatement. These include:
14 * Establishing the Risk Oversight Committee of the Company’s Board of Directors;
15 * Implementing the Company’s comprehensive capital plan, including the engagement a financial advisor; 16
17 * Suspending and/or deferring the cash dividends on the Company’s common preferred stocks, and deferred interest payments on its trust preferred securities; 18
19 * Completing a reassessment of the Bank’s credit risk profile and building an loan loss allowance in the second quarter of 2009;
20 * Executing on strategies to improve credit quality and to develop core bu 21 performance, including executing nonperforming asset disposition Initiating
22 associated with its strategic plan, including strengthening the Bank’s Com Banking and Commercial Banking businesses in the U.S to improve profitability.
23 The Company expects to finalize a similar agreement with the Federal Reserve Bank 24 San Francisco (FRB) by the end of the third quarter of 2009. * * * 25 Conclusion of Independent Investigation
26 The Investigation Subcommittee of the Board Audit Committee (“Subcommittee”) h 27 completed its previously disclosed independent investigation regarding the recognition 28 60 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page61 of 81
impairment losses on nonperforming loans and other real estate owned (OREO) assets. This represents an important step forward for UCBH and enables the Company to complete its financial restatement as soon as practicable.
The Subcommittee’s report identified problems resulting both from weaknesses in Bank’s internal controls, consistent with the material weakness previously reported, from deliberate and improper actions and omissions of certain Bank Officers. The re concluded that those problems were driven by an apparent desire to down deteriorating financial conditions by delaying or abating risk rating downgrades minimizing the Bank’s overall loan loss allowance. Key findings include instances of:
* Inappropriate modification of loan terms to delay negative consequences, includ extending terms, lowering interest rates and improper use of interest reserve accounts;
* Delay in recognition of risk rating downgrades and specific reserves;
10 * Misrepresentation or omission of relevant information in communications with
11 Bank’s Finance Department and with UCBH’s independent auditors, KPMG LLP; and
12 * Modification of documents in support of the above.
13 In connection with the above, the report raised serious concerns regarding the actions of
14 number of current and former Officers at various levels of the Bank’s management. Th Board and management are addressing the concerns expressed by the Subcommitte 15 through appropriate actions, which include additional training, reprimands, re assignments and, in some instances, termination of employment. 16
17 On September 4, 2009, the UCBH Board of Directors adopted the findings recommendations of the Subcommittee. In addition, the Subcommittee has advised 18 later this week, it will provide additional recommendations relating to controls
19 procedures to address the matters described above.
20 Business and Capital Update
21 The Company also provided an update to certain operating and financial performance
22 information for the second quarter of 2009 previously disclosed on August 6. The financial information provided in this release is subject to the implementation of the 23 recommendations in the Subcommittee’s report and the Company’s financial restatement.
24 * Reflecting credit loss assumptions associated with management’s ongoing review of
25 loan portfolio, the Company expects that its provision for loan losses for the seco quarter will be in a range of $360 million to $390 million.
26 * Net loan charge-offs for the second quarter of 2009 remain estimated in a range of $27 27 million to $300 million. 28 61 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page62 of 81
1 * The allowance for loan losses is estimated to be in a range of $395 million to $415
2 million, or approximately 5.0% of total loans at June 30, 2009. * * *
3 * Nonperforming assets are estimated to be in a range of $985 million to $995 million at June 30, 2009. 4
5 The Company will be establishing a deferred tax asset valuation allowance and is anticipating a goodwill impairment. Such deferred tax asset valuation allowance and 6 goodwill impairment will be reflected in the Company’s financial position as of June 30 2009. The deferred tax asset valuation allowance is estimated to be in the range of $315 7 million to $340 million. The goodwill impairment is currently under analysis and has no
8 been finalized, but the amount is expected to be material.
9 These updates reflect changes to some of the information included as part of Company’s FRY-9C regulatory “Call Report” for the period ended June 30, 2009. 10 Company will file amended Call Reports for all periods impacted by the finan
11 restatement once it has concluded its financial restatement efforts.
12 241. The adverse news in the September 8, 2009 press release caused the Company’
13 stock price to fall from $1.20 per share to $1.02 per share—a 14.2% decline—on September 9
14 2009, and an additional $.06 per share to $.96 per share on September 10, 2009.
15 242. On September 10, 2009 the Company filed with the SEC a copy of
16 agreements referenced in the referenced in the September 8, 2009 press release (the
17 and Consent to the Issuance Of an Order to Cease and Desist and the Order to Cease and
18 Order), along with a Written Agreement between the FDIC and the Company.
19 243. The Order to Cease and Desist, required the Company to cease and desist
20 the following unsafe and unsound banking practices set found in the FDIC and CDFI’s April 6
21 2009 examination: “(a) operating with management whose policies and practices are detrimenta to the Bank and jeopardize the safety of its deposits; (b) operating with a board of directors 22 which has failed to provide adequate supervision over and direction to the active management o 23 the Bank; (c) operating with inadequate capital in relation to the kind and quality of assets held 24 by the Bank; (d) operating with an inadequate loan valuation reserve; (e) operating with a large 25 volume of poor quality loans; (f) engaging in unsatisfactory lending and collection practices; (g) 26 operating in such a manner as to produce operating losses; (h) operating with inadequate 27
28 62 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page63 of 81
1 provisions for liquidity; and (i) operating in violation of the following laws and regulations: (i
2 Section 7(a)(1) of the Federal Deposit Insurance Act, 12 U.S,C, § 1817(a)(1); and (ii) Section
3 103.121(b)(2)(i)(B) of the United States Department of the Treasury’s Financial Recordkeeping
4 regulations, 31 C.F.R. § 103.121(b)(2)(i)(B); (j) operating in contravention of the following: (i
5 Appendix A to Part 364 of the FDIC’s Rules and Regulations, 12 C.F.R. Part 364, Appendix A
6 (ii) Appendix A to Part 365 of the FDIC Rules and Regulations, 12 C.F.R. Part 365 Appendix A
7 an (iii) the Statement of Policy entitled “Interagency Appraisal and Evaluation Guidelines.” A
8 copy of the Order to Cease and Desist is attached hereto as Exhibit B and incorporated by
9 reference herein.
10 244. Ultimately, the internal control weaknesses and the deliberate concealment of
11 Bank’s true financial condition and the resulting misstatements were too severe to overcome,
12 on November 6, 2009, the CDFI closed the Bank, and appointed the FDIC as receiver.
13 connection with the Bank’s closing, East West Bancorp assumed the Bank’s deposits and assets
14 These events caused the Company’s stock price to fall from $.84 per share on November 6, 2009
15 to less than $.09 per share. Shortly thereafter the stock became worthless.
16 245. On November 24, 2009 the Company filed a Chapter 7 Bankruptcy petition with
17 the Northern District of California Bankruptcy Court, listing $9.7 million in assets.
18 246. In July of 2010, the FDIC Office of Inspector General issued the Review.
19 247. The FDIC found that “[t]he investigation and UCBH’s inaccurate financia
20 statements made it harder for UCB to raise the capital the bank needed in 2009 to abs
21 substantial provisions and losses associated with its loan portfolio” ultimately resulting in
22 Bank’s failure and the complete loss of Class members’ investments.
23 VI. DEFENDANTS VIOLATED GAAP AND THE COMPANY’S PUBLICLY
24 STATED ACCOUNTING POLICIES
25 248. The Company’s materially false and misleading statements during the C
26 Period concerning its allowance for loan losses and related provision for loan losses
27
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1 statement of earnings were made in violation of GAAP and the Company’s own
2 accounting policies purporting to comply to GAAP.
3 249. GAAP consists of those principles recognized by the accounting profession as th
4 conventions, rules, and procedures necessary to define accepted accounting practice at th
5 particular time. Regulation S-X, § 17 C.F.R. §210.401 (a)(1), provides that financial statement
6 not prepared in compliance with GAAP are presumed to be misleading and inaccurate.
7 250. Restatements are required for material accounting errors that existed at the tim
8 financial statements were prepared. See Statement of Financial Accounting (“SFAS”) 154, ¶ j.
9 251. An accounting “error” is a term of art and results from, among other things, a
10 error in recognition, measurement, or mistakes in the application of GAAP. SFAS 154, ¶ h.
11 252. Under FAS 154, errors result from (i) mathematical mistakes, (ii) mistakes i
12 application of GAAP, or (iii) oversight or misuse of facts that existed at the time the financia
13 statements were prepared.
14 253. GAAP “recognize[s] the importance of reporting transactions and events
15 accordance with their substance.” AU § 411.06. GAAP should be applied consistently. AU
16 420.01 (“The report shall identify those circumstances in which such principles have not
17 consistently observed in the current period in relation to the preceding period.”).
18 254. SEC Rule 13a-13 requires issuers to file quarterly reports containing sp
19 information. SEC Rule 12b-20 also requires that periodic reports contain such fu
20 information as is necessary to make the required statements, in light of the circumstances
21 which they are made, not misleading.
22 255. The SEC has stated, in Securities Act Release No. 6349 (September 8, 1981
23 that: ... it is the responsibility of management to identify and address those key variab 24 and other qualitative and quantitative factors which are peculiar to and necessary
25 an understanding and evaluation of the individual company.
26
27
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1 256. In addition, as noted by the SEC in Accounting Series Release 173: “... it
2 important that the overall impression created by the financial statements be consistent with
3 business realities of the company's financial position and operations.”
4 257. The Company’s materially false and misleading statements concerning i
5 allowance and provision for loan losses and related statement of earnings were made in
6 of SFAS No. 5 and SFAS No. 114—which govern the recognition of loan losses. 13 7 258. Under SFAS No. 5, a loss contingency, such as the collectability of a loan,
8 be accrued a charge to income if both of the following conditions are met: • Information available prior to the issuance of the financial statements ind 9 that it is probable 14 that an asset had been impaired or a liability had
10 incurred at the date of the financial statement ... ; and
11 . The amount of loss can reasonably be estimated.
12 259. SFAS No. 114 provides that a loan is considered impaired when it is probable
13 all of the principal and interest due under the terms of the original loan agreement would not
14 collected.
15 260. The Company violated SFAS No. 5 because there was a probability of loss
16 the loss was reasonably estimated as to the Company’s loan losses.
17 261. Likewise, the Company violated SFAS No. 114 because it was probable that all
18 the principal and interest due under the terms of certain original loan agreements would not
19 been collected.
20 262. According to the Company’s September 8, 2009 press release (and
21 confirmed by the Review), Defendants deliberately concealed UCB’s true financial
22 through “[i]nappropriate modification of loan terms to delay negative consequences,
23 13 “[A] contingency is defined as an existing condition, situation, or set of circumstance 24 involving uncertainty as to possible gain (hereinafter “gain contingency”) or loss (herein aft “loss contingency”) to an enterprise that will ultimately be resolved when one or more futur 25 events occur or fail to occur. Resolution of the uncertainty may confirm the acquisition of a
26 asset or the reduction of a liability or the loss or impairment of an asset or the incurrence of liability.” SFAS No. 5. 27 14 FAS No.5, defines “probable” as “[t]he future event or events are likely to occur.”
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1 extending terms, lowering interest rates and improper use of interest reserve accounts; Delay i
2 recognition of risk rating downgrades and specific reserves; Misrepresentation or omission o
3 relevant information in communications with the Bank’s Finance Department and with UCBH’
4 independent auditors, KPMG LLP; and Modification of documents in support of the above”—i
5 an “apparent desire to downplay deteriorating financial conditions by delaying or abating ris
6 rating downgrades and minimizing the Bank’s overall loan loss allowance.”
7 263. For the same reasons, the Company violated SEC Staff Accounting Bulletin No
8 102, which states that a company should, among other things:
9
. Consider all known relevant and external factors that may affect loan collectibility; 10
11 . The Loan loss methodology be applied consistently;
12 • Require that analyses, estimates, reviews and other loan loss allowance 13 functions be performed by competent and well-trained personnel;
14 • Be based on current and reliable data; and
15 • Include a systematic and logical method to consolidate the loss estimate and 16 the loan loss allowance balance is recorded in accordance with GAAP.
17 A. Defendants’ Additional Fundamental GAAP Violations
18 264. The Company’s financial statements issued during the Class Period also
19 the following fundamental GAAP:
20 a. The principal that interim financial reporting should be based upon the
21 accounting principles and practices used to prepare annual fin
22 statements (APB No. 28);
23 b. The principle that financial reporting should provide information that is
24 to present and potential investors and creditors and other users in m
25 rational investment, credit and similar decisions (Financial Accou
26 Standards Board ("FASB") Statement of Concepts No. 1, ¶34);
27
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1 c. The principle that financial reporting should provide information about
2 economic resources of an enterprise, the claims to these resources, and
3 effects of transactions, events and circumstances that change resources
4 claims to these resources (FASB Statement of Concepts No.1, ¶40);
5 d. The principle that financial reporting should provide information about ho
6 management of an enterprise has discharged its stewardship responsibility
7 owners (stockholders) for the use of enterprise resources entrusted to it; to the
8 extent that management offers securities of the enterprise to the public, i
9 voluntarily accepts wider responsibilities for accountability to prospectiv
10 investors and to the public in general (FASB Statement of Concepts No. 1
11 ¶50);
12 e. The principle that financial reporting should be reliable in that it
13 what it purports to represent; that information should be reliable as well
14 relevant is a notion that is central to accounting (FASB Statement of Conce
15 No. 2, ¶¶58-59);
16 f. The principle that contingencies and other uncertainties that affect the
17 of presentation of financial data at an interim date shall be disclosed in
18 reports in the same manner required for annual reports (APB Opinion No. 28
19 ¶ 22);
20 g. The principle that disclosures of contingencies shall be repeated in interim and
21 annual reports until the contingencies have been removed, resolved, or have
22 become immaterial (APB Opinion No. 28, ¶ 22);
23 h. The principle of completeness, which means that nothing is left out of
24 information that may be necessary to insure that it validly repr
25 underlying events and conditions (FASB Statement of Concepts No. 2
26 and
27
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1 i. The principle that conservatism be used as a prudent reaction to uncertainty
2 try to ensure that uncertainties and risks inherent in business situations a
3 adequately considered; the best way to avoid injury to investors is to try
4 ensure that what is reported represents what it purports to represent (FASB
5 Statement of Concepts No. 2, ¶¶95, 97).
6 I VII. ADDITIONAL ALLEGATIONS DEMONSTRATING FALSITY AND SCIENTER
7 265. The following additional facts, when considered holistically with the
8 allegations in the Complaint, demonstrate a cogent and compelling strong inference of s
9 and further demonstrate the falsity of defendants’ statements.
10 266. The FDIC’s findings of fact (Ex. F), for example:
11 a. “Respondents, in particular, Tommy Wu and Shabudin, orchestrated
12 scheme to manipulate information related to certain loans at the Bank in ord
13 to mask the deterioration in the Bank’s loan portfolio and to delay reservin
14 for and/or recognizing losses in that portfolio.”
15 b "Shabudin ... repeatedly failed to provide information requested by KPMG i
16 a timely manner, including Risk Analysis and Action Plans (“RAAPs”) o
17 problem loans and internally classified and criticized asset lists.”
18 c. “One method Respondents used to withhold pertinent information from
19 KPMG was to conceal the existence of the most recent appraisals obtained
20 the Bank. Respondents Shabudin, Tran, Ta-Lun Wu, Yu, and others conceale
21 the existence of these new appraisals when the appraisals showed a decline i
22 the value of the underlying property held as collateral for Bank loans
23 showed a decline in the value ...”
24 d. “As a result of the failure of Tran, Yu, and Shabudin to ensure that the B
25 considered updated appraisals for certain loans and OREO properties and
26 KPMG knew of such appraisals, the impact to the Bank’s financial statem
27 was at least $12,565,000.”
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1 e. “Respondents Tommy Wu, Shabudin, Kerr, Montelaro, On, Yu, and other
2 concealed the existence of pending note sales from KPMG, including, but no
3 limited to, sales of the **********, *************, *********, an
4 ********** credits. In fact, the Bank had plans to sell a large number of note
5 in the first quarter of 2009. These plans were not disclosed by Respondents t
6 KPMG during the 2008 audit.” (redactions denoted by “*****...” in original)
7 f. “Respondents Tommy Wu, Shabudin, Kerr, Montelaro, On, Sun, Yu, an
8 others concealed negative information concerning repossessed assets
9 collateral from the Bank’s auditors and regulators, ...”
10 g. “Respondents Tommy Wu, Shabudin, Kerr, Montelaro, On, Sun, Tran, Y
11 and others made several misrepresentations and omissions in order to concea
12 the Bank’s understatement of its reserves from KPMG during the 2008 audit
13 including misrepresentations contained in the Bank’s FAS 114 reserve
14 calculations concerning the ***********, ****** ****, *************
15 *******, ***********, and ********* loans.” (redactions in original).
16 h. “The memo prepared in response to KPMG’s questions concerning the
17 ****** **** loan omitted the fact that CEO Wu, Shabudin, Swartz, Yu, and
18 Zhang had decided to sell the note for a $6.8 million loss, and that the Bank
19 had received an appraisal that reflected a significant decline in the value of th
20 underlying property.” (redaction in original).
21 i. “Respondents Tommy Wu, Shabudin, Kerr, Lee, Montelaro, On, and Y
22 engaged in unsafe or unsound practices and breaches of fiduciary by makin
23 misrepresentations and omissions to the Bank’s regulators...”
24 j. “Respondents Filed a False 2008 Form 10-K, False 2008 Call Reports,
25 False Management Representation Letters to KPMG.”
26
27
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1 267. That the Company’s senior management falsely reassured investors about,
2 I falsely touted their extensive and diligent efforts in monitoring the Company’s loan
3 For example:
4 a. During the May 7, 2008 D.A. Davidson & Co. Financial Services Investo
5 Conference, defendant Mitchell stated that in connection with Company’
6 problem loans during the first quarter of 2008, that “our executives are
7 involved personally in a lot of these loans, they’re making visits
8 working with our borrowers to help work through issues on workouts and
9 to get out of the particular loans while minimizing any sort of reali
10 losses....”
11 b. During the January 23, 2009 earnings conference for the fiscal year end
12 December 31, 2008, defendant Wu explained that the Company conducts
13 “continuous evaluation” of its loan portfolio and that the Company “monito
14 the delinquency trend” on loans “every week” and that the Comp
15 “monitors credit trends, very, very carefully.” Defendant Mitchell noted
16 the Company conducts “weekly monitoring” of the distressed real
17 markets of Nevada and California, and he stated that “senior mana
18 teams meet weekly on all or our portfolios.”
19 c. During the March 5, 2009 Sandler O’Neill & Partners West Coast
20 Services Conference, defendant Wu proclaimed that with respect to
21 Company’s loan portfolios:
22 “what we are doing, every week, actually we have senior management reviews
23 including myself, my chief credit officer, my chief [inaudible] all the business units [inaudible] get together every week for a couple of hours, we actually look at 24 ALL LOANS [with emphasis], for construction, CRE 15 and C&I, 16 we review 100% of our portfolio in terms of their delinquency trends, we look at the NPA 17 25
15 26 Construction and real estate. 16 Commercial and industrial.
27 17 Nonperforming assets.
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trends, we look at the classification trends, we look at EVERY SINGLE LOA 1 [with emphasis] to what we need to do proactively to make sure that we are on to
2 of every single problem if there is something actually surface so that will continu to help us really manage through this cycle and we anticipate all these kind 3 efforts will help us to really have a good handle on any potential problems th may surface because of the current economy.” 4 268. The Material Loss Review states that soon after the Company filed its 2008 10- 5 in March 2009, KPMG had “susipcio[ns] that UCB officials and/or employees had engaged i 6 illegal acts to conceal the bank’s true financial condition.” UCBH never publicly disclosed th 7 fact that the Internal Investigation was prompted by KPMG reporting the potential “illegal acts
8 to the Company’s Board. 9 269. The Review states that, “[i]n 2009, examiners also reviewed certain loans 10 were later believed to have been originated as a result of illegal activities. During their review 11 examiners prompted UCB to downgrade these loans due to performance issues. These loans and
12 approximately 150 others, as well as senior UCB management, are being investigated by other
13 units within and outside the FDIC.”
14 270. The Company’s allowance and provision for loan losses set forth in the
15 ended 2008 earnings press release was later restated in the corresponding 10-K. The Compa
16 made the false suggestion that the increase in the allowance and provision in the 10-K was ma
17 on its own accord. In reality, according to the Review, as a condition for KPMG’s sign-off
18 the 2008 10-K, KPMG required the Company to increase the allowance and provision for lo
19 losses by $40 million. Similarly, it can be inferred that similar reasons led to Company
20 increase its allowance and provision for loan losses in the 2007 10-K from what was reported
21 the 2007 earnings press release.
22 271. In addition to defendants Wu and Shabudin being forced to leave UCBH
23 of their fraudulent misconduct, the exodus of other Company officials contemporaneous with
24 alleged wrongdoing supports a strong inference of scienter.
25 a. After having been appointed a Company and Bank director and a member
26 the Company’s Credit Committee and Chairman of the Risk
27
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1 Committee effective August 11, 2009, the Company announced on September
2 8, 2009 that Joseph Vaez resigned from those positions.
3 b. James Kwok a Company and Bank Director since July 2005, tendered his
4 resignation from the Company and Bank effective May 21, 2009, a day after
5 the Company filed its 8-K announcing that the Company had to restate its
6 financial statements. According to the 8-K announcing Kwok’s resignation
7 he was a member of the Company and Bank’s Credit Committee and
8 Nominating Committee.
9 c. According to a Company 8-K, effective June 30, 2009, defendant Kerr,
10 as the Company and Bank’s Executive Vice President and Chief Le
11 Officer, resigned from the Company.
12 d. On March 3, 2008, Dennis Wu stepped down as the Company’s Bank’s CFO
13 three days after the Company filed its materially misleading 2007 10-K.
14 272. The Material Loss Review notes violations of TARP program rules becaus
15 “UCB’s Board had not established an excessive or luxury expenditures policy, filed the polic
16 with the Treasury, and posted the policy on its Internet Website”; and “UCB’s forme
17 President/CEO [Wu] claimed and was reimbursed for travel and other business expenses, i
18 contravention of Appendix A of Part 364 of the Interagency Guidelines Establishing Standard
19 for Safety and Soundness.... the draft targeted review reported that there was no evidence tha
20 UCB's Board had reviewed or approved the expenses for which the President/CEO had bee
21 reimbursed.”
22 VIII. PLAINTIFFS’ CLASS ACTION ALLEGATIONS
23 273. Plaintiffs bring this action as a class action pursuant to Federal Rules of Civi
24 Procedure 23(a) and (b)(3) on behalf of a Class consisting of all persons who purchased
25 common stock of UCBH during the Class Period and who were damaged thereby. Exclu
26 from the Class are Defendants, the present and former officers and directors of the UCBH
27
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1 any subsidiary thereof, members of their immediate families and their legal representatives
2 heirs, successors or assigns and any entity in which defendants have or had a controlling interest.
3 274. The members of the Class are so numerous that joinder of all members i
4 impracticable. Throughout the Class Period, UCBH’s stock was actively traded on
5 NASDAQ. While the exact number of Class members is unknown to Plaintiffs at this time a
6 can only be ascertained through appropriate discovery, Plaintiffs believe that there are at le
7 hundreds, if not thousands, of members in the proposed Class. Members of the Class may
8 identified from records maintained by UCBH or its transfer agent and may be notified of
9 pendency of this action by mail, using a form of notice customarily used in securities cl
10 actions.
11 275. Plaintiffs’ claims are typical of the claims of the members of the Class, as
12 members of the Class are similarly affected by Defendants’ wrongful conduct in violation
13 federal law that is complained of herein.
14 276. Plaintiffs will fairly and adequately protect the interests of the members of
15 Class and has retained counsel competent and experienced in class and securities litigation.
16 277. Common questions of law and fact exist as to all members of the Class
17 predominate over any questions solely affecting individual members of the Class. Among
18 questions of law and fact common to the Class are:
19 a. whether the federal securities laws were violated by Defendants’ acts
20 alleged herein;
21 b. whether statements made by Defendants to the investing public during
22 Class Period misrepresented material facts about the business, operations
23 management of UCBH; and
24 c. to what extent the members of the Class have sustained damages and
25 proper measure of damages.
26 278. A class action is superior to all other available methods for the fair and effici
27 adjudication of this controversy since joinder of all members is impracticable. Furthermore,
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1 the damages suffered by individual Class members may be relatively small, the expense
2 burden of individual litigation make it impossible for members of the Class to red
3 individually the wrongs done to them. There will be no difficulty in the management of
4 I action as a class action.
5 IX. RELIANCE PRESUMPTION
6 279. At all relevant times, the market for UCBH’s common stock was an
7 market for the following reasons, among others:
8 a. UCBH stock met the requirements for listing, and was listed and acti
9 traded on the NASDAQ, a highly efficient and automated market;
10 b. During the class period, on average, 14.9 million shares of UCBH com
11 stock were traded on a weekly basis. Approximately 13.3% of all outstan
12 shares were bought and sold on a weekly basis, 18 demonstrating a very str
13 presumption of an efficient market;
14 c. As a regulated issuer UCBH filed with the SEC periodic public reports a
15 was eligible (and did file) S-3 registration statements with the SEC duri
16 Class Period;
17 d. UCBH regularly communicated with public investors via established i
18 communication mechanisms, including regular disseminations of
19 releases on the national circuits of major newswire services and other
20 ranging public disclosures, such as communications with the financial
21 and other similar reporting services;
22 e. UCBH was followed by over a dozen securities analysts employed by maj
23 brokerage firms who wrote reports that were distributed to the sales force an
24 certain customers of their respective brokerage firms during the Class Period;
25
18 26 According to the Company’s 2008 and 2007 10-Ks, the Company had 120,436,096 104,439,018 share outstanding, respectively. For this calculation, Plaintiffs have used 27 average of the two numbers, 112,437,557.
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1 f. At least 75 NASD member firms were active market-makers in UCBH
2 at all times during the Class Period; and
3 g. Unexpected material news about UCBH was rapidly reflected in
4 incorporated into the Company’s stock price during the Class Period.
5 X. FIRST CAUSE OF ACTION
6 Violation of Section 10(b) of
7 The Exchange Act Against and Rule 10b-5
8 Promulgated Thereunder Against Defendants UCBH,
9 Wu, Yu, Shabudin, On, Dennis Wu, Nagel, Kerr, Gautsch, Mitchell, Thompson and
10 Cinderey
11 280. Plaintiffs repeat and reallege each and every allegation contained above as if f
12 I set forth herein.
13 281. This cause of action is asserted only against defendants UCBH, Wu,
14 On, Dennis Wu, Nagel, Kerr, Gautsch, Mitchell, Thompson and Cinderey.
15 282. During the Class Period, defendants carried out a plan, scheme and course o
16 conduct which was intended to, and throughout the Class Period, did: (1) deceive the investin
17 public, including Plaintiffs and other Class members, as alleged herein; and (2) cause Plaintif
18 and other members of the Class to purchase and/or sell UCBH’s securities at artificially inflate
19 and distorted prices. In furtherance of this unlawful scheme, plan and course of conduc
20 defendants, individually and as a group, took the actions set forth herein.
21 283. Defendants, individually and in concert, directly and indirectly, by the use, mean
22 or instrumentalities of interstate commerce and/or of the mails, engaged and participated in
23 continuous course of conduct to conceal adverse material information about the busines
24 operations and future prospects of UCBH as specified herein.
25 284. Defendants employed devices, schemes and artifices to defraud, while
26 possession of material adverse non-public information and engaged in acts, practices, and
27 course of conduct as alleged herein in an effort to assure investors of UCBH’s value an
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1 I performance and continued substantial growth, which included the making of, or 2 participation in the making of, untrue statements of material facts and omitting to state mate
3 facts necessary in order to make the statements made about UCBH and its business operati
4 and financial condition in light of the circumstances under which they were made,
5 misleading, as set forth more particularly herein, and engaged in transactions, practices and
6 course of business that operated as a fraud and deceit upon the purchasers UCBH’s securiti
7 I during the Class Period.
8 285. Each of the defendants’ primary liability, and controlling person liability, arise
9 from the following: (a) defendants were high-level executives, directors, and/or agents at the
10 Company during the Class Period and members of the Company’s management team or had
11 control thereof; (b) by virtue of their responsibilities and activities as senior officers and/o
12 directors of the Company, were privy to and participated in the creation, development and
13 reporting of the Company’s internal budgets, plans, projections and/or reports; (c) defendant
14 enjoyed significant personal contact and familiarity with the other members of the Company'
15 management team, internal reports and other data and information about the Company's finances
16 operations, and (d) defendants were aware of the Company's dissemination of information to the
17 investing public which they knew or recklessly disregarded was materially false and misleading.
18 286. Defendants had actual knowledge of the misrepresentations and omissions o
19 material facts set forth herein, or acted with reckless disregard for the truth in that they failed to
20 ascertain and to disclose such facts, even though such facts were available to them. Such
21 defendants’ material misrepresentations and/or omissions were done knowingly or recklessly and
22 for the purpose and effect of concealing UCBH’s financial condition from the investing public
23 and supporting the artificially inflated price of its securities. As demonstrated by defendants
24 false and misleading statements during the Class Period, defendants, if they did not have actua
25 knowledge of the misrepresentations and omissions alleged, were reckless in failing to obtai
26 such knowledge by failing to take steps necessary to discover whether those statements wer
27 false or misleading.
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1 287. As a result of the dissemination of the materially false and misleading informati
2 and failure to disclose material facts, as set forth above, the market price for UCBH’s securiti
3 was artificially inflated during the Class Period. In ignorance of the fact that market prices
4 UCBH’s publicly-traded securities were artificially inflated or distorted, and relying directly
5 indirectly on the false and misleading statements made by defendants, or upon the integrity of t
6 market in which the Company’s securities trade, and/or on the absence of material adver
7 information that was known to or recklessly disregarded by defendants but not disclosed in
8 public statements by defendants during the Class Period, Plaintiffs and the other members of th
9 Class acquired UCBH’s securities during the Class Period at artificially high prices and wer
10 damaged thereby.
11 288. At the time of said misrepresentations and omissions, Plaintiffs and othe
12 members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff
13 and the other members of the Class and the marketplace known the truth regarding UCBH’
14 financial results and condition, which were not disclosed by defendants, Plaintiffs and othe
15 members of the Class would not have purchased or otherwise acquired UCBH securities, or, i
16 they had acquired such securities during the Class Period, they would not have done so at t
17 artificially inflated prices or distorted prices at which they did.
18 289. By virtue of the foregoing, the defendants have violated Section 10(b) of t
19 Exchange Act, and Rule 10b-5 promulgated thereunder.
20 290. As a direct and proximate result of the Defendants’ wrongful conduct, Plainti
21 and the other members of the Class suffered damages in connection with their
22 purchases and sales of the Company’s securities during the Class Period.
23 291. This action was filed within two years of discovery of the fraud and within
24 years of Plaintiffs’ purchases of securities giving rise to the cause of action.
25 XI. SECOND CAUSE OF ACTION
26 Violation of Section 20(a) of The Exchange Act Against the Individual Defendants
27
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1 292. Plaintiffs repeat and reallege each and every allegation contained above as if
2 I set forth herein.
3 293. This Second Claim is asserted against each of the Individual Defendants.
4 294. The Individual Defendants acted as controlling persons of UCBH within
5 meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-l
6 positions, agency, and their ownership and contractual rights, participation in and/or awaren
7 of the Company’s operations and/or intimate knowledge of aspects of the Company’s reven
8 and earnings and dissemination of information to the investing public, the Individual Defend
9 had the power to influence and control, and did influence and control, directly or indirectly,
10 decision-making of the Company, including the content and dissemination of the v
11 statements that Plaintiffs contend are false and misleading. The Individual Defendants
12 provided with or had unlimited access to copies of the Company’s reports, press releases, pub
13 filings and other statements alleged by Plaintiffs to be misleading prior to and/or shortly af
14 these statements were issued, and had the ability to prevent the issuance of the statements or
15 cause the statements to be corrected.
16 295. In particular, each of these Defendants had direct and supervisory involvement i
17 the day-to-day operations of the Company and, therefore, is presumed to have had the power t
18 control or influence the particular transactions giving rise to the securities violations as allege
19 herein, and exercised the same.
20 296. As set forth above, UCBH and the Individual Defendants each violated
21 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint.
22 297. By virtue of their positions as controlling persons, the Individual Defendants
23 liable pursuant to Section 20(a) of the Exchange Act as they culpably participated in the fr
24 alleged herein. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiffs
25 other members of the Class suffered damages in connection with their purchases of
26 Company’s common stock during the Class Period.
27
28 78 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW
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1 298. This action was filed within two years of discovery of the fraud and within
2 years of Plaintiffs’ purchases of securities giving rise to the cause of action.
3
4 WHEREFORE, Plaintiffs pray for relief and judgment, as follows:
5 a. Determining that this action is a proper class action and certifying Plaintiffs a
6 class representatives under Rule 23 of the Federal Rules of Civil Procedure
7 and Plaintiffs’ counsel as Class Counsel;
8 b. Awarding compensatory damages in favor of Plaintiffs and the other Clas
9 members against all Defendants, jointly and severally, for all damage
10 sustained as a result of Defendants’ wrongdoing, in an amount to be proven a
11 trial, including interest thereon;
12 c. Awarding Plaintiffs and the Class their reasonable costs and expenses incurred
13 in this action, including counsel fees and expert fees; and
14 d. Such other and further relief as the Court may deem just and proper.
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28 79 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217 Filed01/09/12 Page80 of 81
1 JURY TRIAL DEMANDED
2 Plaintiffs hereby demand a trial by jury.
3
4 Dated: January 9, 2012 Respectfully submitted, 5 THE ROSEN LAW FIRM, P.A.
6 /s/ Laurence Rosen 7 Laurence M. Rosen (SBN # 219683) 355 South Grand Avenue, Suite 2450 8 Los Angeles, CA 90071
9 Telephone: (213) 785-2610 Facsimile: (213) 226-4684 10 Email: [email protected]
11 and
12 Phillip Kim, Esq. (pro hac vice) 13 THE ROSEN LAW FIRM, P.A. 275 Madison Avenue, 34thFloor 14 New York, New York 1001610016
15 Telephone: (212) 686-1060 Facsimile: (212) 202-3827 16 Email: [email protected]
17 Lead Counsel for Plaintiffs and Class
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28 80 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW
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CERTIFICATE OF SERVICE 1
2 I, Phillip Kim, pursuant to 28 U.S.C. §1746, hereby declare under penalty of perjury as
3 follows:
4 I am an attorney of the Rosen Law Firm, P.A. I am over the age of eighteen.
5 On January 9, 2012, I electronically filed the following CONSOLIDATED THIRD
6 AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES
7 LAWS with the Clerk of the Court using the CM/ECF system which sent notification of such
8 filing to counsel of record set forth in the attached master service list.
9 Executed on January 9, 2012.
10
11 /s/ Phillip Kim
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28 81 CONSOLIDATED THIRD AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS-- Case no. CV-09-4208-JSW Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page1 of 51
EXHIBIT A 8-JSW Document217-1 Filed01/09/12 Page2 of 51
Office of Inspector General
Office of Material Loss Reviews
Report No. MLR-10-043
Material Loss Review of United Commercial Bank, San Francisco, California
July 2010 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page3 of 51
çPJL Up Executive Summary Material Loss Review of United Commercial Office of Bank, San Francisco, California Inspector General Report No. MLR-10-043
July 2010
On November 6, 2009, the California Department of Financial Institutions (CDFI) closed United Commercial Bank (UCB), San Francisco, California, and named the FDIC as receiver. On January 20, 2010, the FDIC notified the Office of the Inspector General (OIG) that UCB’s total assets at closing were $10.9 billion and the estimated loss to the Deposit Insurance Fund (DIF) was $1.4 billion. As of June 25, 2010, the estimated loss to the DIF had increased to $1.5 billion.
As required by section 38(k) of the Federal Deposit Insurance (FDI) Act, the OIG conducted a material loss review of this failure. The primary objectives of this review were to (1) determine the causes of UCB’s failure and the resulting material loss to the DIF and (2) evaluate the FDIC’s supervision of UCB, including the FDIC’s implementation of the Prompt Corrective Action (PCA) provisions of section 38 of the FDI Act. In November 2008, UCB’s holding company, United Commercial Bank Holdings, Inc. (UCBH), received $298.7 million through the United States Department of the Treasury’s (Treasury) Troubled Asset Relief Program’s (TARP) Capital Purchase Program (CPP), which resulted in a loss to the Treasury when UCB failed. As a result, we added a third objective to this review, which was to determine whether the FDIC followed applicable procedures in recommending UCBH for CPP funding and in monitoring UCB’s compliance with the CPP securities purchase agreement with the Treasury.
UCB was a state, nonmember commercial bank, and the only significant subsidiary of UCBH, a one-bank holding company, which operated essentially as a shell company. UCB’s assets comprised 99.5 percent of UCBH’s assets.
UCB was founded as United Federal Savings and Loan Association in 1974 to serve the financial needs of San Francisco’s Chinese community. As the Chinese-American population grew and expanded throughout California, the institution became United Savings Bank, Federal Savings Bank, enabling it to provide statewide banking services. In 1998, to reflect its rapidly growing focus on commercial banking activities, the institution converted its charter from a savings and loan regulated by the Office of Thrift Supervision to a commercial bank regulated by the FDIC, and was renamed UCB.
The bank was headquartered in San Francisco and provided a full range of commercial and consumer banking products to small- and medium-sized businesses, professionals, and other individuals. Beginning in the late 1990s, UCB expanded beyond its core market of California through mergers and acquisitions, both domestically and abroad.
Causes of Failure and Material Loss
The primary reason for UCB’s failure was inadequate oversight by the Board of Directors (Board) and management. In particular, UCB’s Board and management failed to control the risks associated with the institution’s rapid expansion, which began in 2002. Further, management controls were insufficient to prevent the occurrence of inaccuracies, omissions, and misrepresentations that affected key UCB financial
To view the full report, go to www.fdicig.gov Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page4 of 51
Material Loss Review of United Commercial Executive Summary Bank, San Francisco, California
Report No. MLR-10-043
July 2010 data. In this regard, examiners informed UCB’s external auditor of asset quality issues identified in the FDIC’s April 2009 targeted review, which in part led to an investigation commissioned by UCBH’s audit committee in May 2009. The investigation found that various UCB officials misrepresented or omitted relevant loan performance data, altered documents to improve the perception of loan quality, and made other misrepresentations that impacted UCBH’s financial statements. UCBH reported that its 2008 financial statements were materially inaccurate and required revision. The investigation and UCBH’s inaccurate financial statements made it harder for UCB to raise the capital the bank needed in 2009 to absorb substantial provisions and losses associated with its loan portfolio.
Also contributing to the failure were UCB’s high concentrations in acquisition, development, and construction (ADC) and commercial real estate (CRE) loans and heavy reliance on non-core funding sources to support its expansion efforts, all of which increased the bank’s risk profile. UCB management was reluctant to downgrade troubled loans in a timely manner, in an effort to mask deteriorating financial conditions. As the real estate market declined, UCB experienced increasing levels of adversely classified assets and associated losses, which required significant increases to its allowance for loan and lease losses. Losses and provisions associated with ADC and CRE concentrations eroded the bank’s earnings and capital and led to deficient liquidity. Absent an adequate capital infusion and improvement to the bank’s liquidity position, the CDFI closed UCB on November 6, 2009 because it was no longer viable.
The FDIC’s Supervision of UCB The FDIC conducted timely and regular examinations of UCB and monitored its condition through offsite monitoring mechanisms. The examinations included onsite reviews of UCB’s Hong Kong branch and a bank that it owned in China in 2008 and 2009, respectively. San Francisco Regional Office officials told us that misrepresentations and financial reporting matters that were identified in the investigation masked the bank’s true financial condition and frustrated examination efforts in late 2008 and into 2009. Through its supervisory efforts, the FDIC identified key risks in UCB’s operations and brought these risks to the attention of the institution’s Board and management in examination reports and other correspondence. The FDIC also instituted a Bank Board Resolution in 2008 to address UCB’s non-compliance with the Bank Secrecy Act and a Cease and Desist Order in 2009 requiring UCB to develop an adequate capital restoration plan. Finally, the FDIC implemented applicable PCA provisions of section 38 of the FDI Act in a timely manner.
Notwithstanding these supervisory efforts:
• Given UCB Board and management weaknesses reported during 2007 through 2009, a lower Management component rating may have been justified earlier than April 2009;
• While the Division of Supervision and Consumer Protection (DSC) downgraded UCB’s Asset Quality component rating in consecutive examinations and targeted reviews during 2008 and 2009, given the bank’s rapidly deteriorating financial condition, an informal supervisory action based on the December 2008 visitation may have been warranted; and
• Although DSC noted that it closely monitored UCB in 2008, had DSC transitioned UCB to a targeted review schedule during that year, the FDIC may have had additional information upon which to base its October 2008 CPP funding recommendation.
To view the full report, go to www.fdicig.gov Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page5 of 51
Material Loss Review of United Commercial Executive Summary Bank, San Francisco, California
Report No. MLR-10-043
July 2010
We also determined that while the FDIC monitored UCB through the FDIC's Large Insured Depository Institution (LIDI) program, as required, the FDIC’s quarterly LIDI ratings were lower than UCB examination ratings during 2008, reflecting the more forward-looking orientation of the LIDI program.
Capital Purchase Program
On November 14, 2008, UCBH received $298.7 million in TARP CPP funds and subsequently down- streamed the money to UCB. Treasury lost this investment when UCB was closed on November 6, 2009. UCB was the first depository institution to lose CPP funds. Nevertheless, we determined that (1) the FDIC followed applicable procedures in recommending UCBH for CPP funding and (2) examiners evaluated UCB’s compliance with the CPP Securities Purchase Agreement in accordance with DSC guidance. The FDIC was not aware of UCB’s serious financial reporting matters when it assessed UCB’s TARP application in October 2008; these matters became apparent in 2009, after the investigation by UCBH’s audit committee.
After we issued our draft report, management provided additional information for our consideration, and we revised our report to reflect this information, as appropriate. On July 20, 2010, the Director, DSC, provided a written response to the draft report. That response is provided in its entirety as Appendix 5 of this report.
DSC reiterated the OIG’s conclusions regarding the causes of UCB’s failure. With regard to our assessment of the FDIC’s supervision of UCB, DSC stated that from 2005 through 2009, the FDIC and the CDFI jointly and separately completed several examinations, visitations, reviews, and other oversight activities of UCB. Through these activities, examiners identified key risks and brought them to the attention of UCB’s Board and management in examination reports and other correspondence. DSC pointed out that in December 2008, the FDIC and the CDFI downgraded UCB’s Asset Quality and Earnings component ratings to “3” and identified further deterioration during an April 2009 joint targeted review. DSC also stated that UCBH’s external auditor found that UCB’s management had begun to conceal serious financial reporting issues around October 2008.
Finally, DSC stated that it has issued guidance from 2006 through 2009 that re-emphasizes the importance of monitoring institutions that have concentrated ADC and CRE exposures and rely on volatile non-core funding sources.
To view the full report, go to www.fdicig.gov Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page6 of 51 Contents
Page Background 2 UCB History 2 Mergers and Acquisitions 3 TARP 4 Causes of Failure and Material Loss 5 Board and Management Oversight 5 Investigation of UCB 6 ADC and CRE Loan Concentrations 8 Insufficient Capital and Liquidity 13 The FDIC’s Supervision of UCB 14 Supervisory History 15 Supervisory Response to Board and Management Oversight 18 Supervisory Response to UCB’s Asset Quality 22 Use of Targeted Reviews 25 LIDI Program 26 Implementation of PCA 27
Capital Purchase Program 28 CPP Criteria 28 The FDIC’s Recommendation of UCBH for CPP Funding 29 Examiners’ Evaluation of UCB’s Compliance with the CPP Securities 31 Purchase Agreement Corporation Comments 33
Appendices 1. Objectives, Scope, and Methodology 34 2. Glossary of Terms 37 3. Acronyms 41 4. Organizational Chart 43 5. Corporation Comments 44
Tables 1. Selected Financial Information for UCB 3 2. UCB’s Merger and Acquisition History 4 3. UCB’s ADC and CRE Concentrations as a Percentage of Total 9 Risk-based Capital 4. UCB’s Non-Core Funding Sources 11 5. UCB’s Adverse Classifications and ALLL 13 6. Onsite Examinations of UCB 16 7. FDIC, FRBSF, and CDFI Supervisory Actions Concerning UCB 18 LIDI Rating Descriptions 26 8. 9. UCB’s Capital Levels 27 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page7 of 51 Contents
Page
Figures 1. Composition of UCB’s Loan Portfolio, 2002 to 2009 9 2. UCB’s ADC Loans as a Percentage of Average Gross Loans 10 Compared to Peers 3. UCB’s CRE Loans as a Percentage of Average Gross Loans 11 Compared to Peers 4. UCB’s Net Non-Core Funding Dependence Ratio 12 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page8 of 51 FDIC Federal Deposit Insurance Corporation Office of Material Loss Reviews 3501 Fairfax Drive, Arlington, VA 22226 Office of Inspector General
DATE: July 20, 2010
MEMORANDUM TO: Sandra L. Thompson, Director Division of Supervision and Consumer Protection
/Signed/ FROM: Stephen M. Beard Assistant Inspector General for Material Loss Reviews
SUBJECT: Material Loss Review of United Commercial Bank, San Francisco, California (Report No. MLR-10-043)
As required by section 38(k) of the Federal Deposit Insurance (FDI) Act, the Office of Inspector General (OIG) conducted a material loss review of the failure of United Commercial Bank (UCB), San Francisco, California. On November 6, 2009, the California Department of Financial Institutions (CDFI) closed UCB and appointed the FDIC as the receiver. On January 20, 2010, the FDIC notified the OIG that UCB’s total assets at closing were $10.9 billion and the estimated loss to the Deposit Insurance Fund (DIF) was $1.4 billion. As of June 25, 2010, the estimated loss to the DIF had increased to $1.5 billion.
When the DIF incurs a material loss with respect to an insured depository institution for which the FDIC is appointed receiver, the FDI Act states that the Inspector General of the appropriate federal banking agency shall make a written report to that agency. The report is to consist of a review of the agency’s supervision of the institution, including the agency’s implementation of FDI Act section 38, Prompt Corrective Action (PCA); a determination as to why the institution’s problems resulted in a material loss to the DIF; and recommendations to prevent future losses.
The primary objectives of this material loss review were to (1) determine the causes of UCB’s failure and the resulting material loss to the DIF and (2) evaluate the FDIC’s supervision of UCB, including the FDIC’s implementation of the PCA provisions of section 38 of the FDI Act. In November 2008, UCB’s holding company, United Commercial Bank Holdings, Inc. (UCBH), received $298.7 million through the United States Department of the Treasury’s (Treasury) Troubled Asset Relief Program’s (TARP) Capital Purchase Program (CPP), and down-streamed the funds to UCB. 1 The Treasury lost this investment when UCB failed. As a result, we added a third objective to this review, which was to determine whether the FDIC followed applicable procedures in recommending UCBH for CPP funding and in monitoring UCB’s compliance with the
1 UCB and UCBH were separate entities. For technical accuracy, certain parts of this report refer to UCB and other parts refer to UCBH. Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page9 of 51
CPP Securities Purchase Agreement with the Treasury. 2 We coordinated with the Special Inspector General for the Troubled Asset Relief Program in completing this objective.
The report does not contain formal recommendations. Instead, as major causes, trends, and common characteristics of institution failures are identified in our material loss reviews, we will communicate those to FDIC management for its consideration. As resources allow, we may also conduct more in-depth reviews of specific aspects of the FDIC’s supervision program and make recommendations as warranted .3
Appendix 1 contains details on our objectives, scope, and methodology. We also include several other appendices to this report. Appendix 2 contains a glossary of key terms; including material loss, the FDIC’s supervision program, and the Uniform Financial Institutions Rating System, otherwise known as the CAMELS ratings. Appendix 3 contains a list of acronyms; Appendix 4 contains an organizational chart; and Appendix 5 contains the Corporation’s comments on this report.
Background
UCB History
UCB was a state, nonmember commercial bank, and the only significant subsidiary of UCBH, a one-bank holding company, which operated essentially as a shell company. UCB’s assets comprised 99.5 percent of UCBH’s assets. (See the organizational chart in Appendix 4.)
UCB was founded as United Federal Savings and Loan Association in 1974 to serve the financial needs of San Francisco’s Chinese community. As the Chinese-American population grew and expanded throughout California, the institution became United Savings Bank, Federal Savings Bank, enabling it to provide statewide banking services. In 1998, to reflect its rapidly growing focus on commercial banking activities, the institution converted its charter from a savings and loan regulated by the Office of Thrift Supervision (OTS) to a commercial bank regulated by the FDIC, and was renamed UCB.
The bank was headquartered in San Francisco and provided a full range of commercial and consumer banking products to small- and medium-sized businesses, professionals, and other individuals. Beginning in the late 1990s, UCB expanded beyond its core market of California through mergers and acquisitions, both domestically and abroad. UCBH issued trust preferred securities 4 or its own common stock to fund a number of the bank’s acquisitions.
2 The CPP Securities Purchase Agreement describes the terms of a financial institution’s agreement to issue shares and fulfill other requirements in exchange for the Treasury’s investment. 3 A further discussion of OIG-related coverage of financial institution failures can be found in the
Objectives, Scope, and Methodology section of our report. 4 Trust preferred securities are securities issued by a wholly-owned trust subsidiary of a bank holding company to raise capital. Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page10 of 51
UCBH was incorporated in 1998 in Delaware and was regulated by the Federal Reserve Bank of San Francisco (FRBSF). UCBH and its subsidiaries operated 71 branches or offices in California, New York, Georgia, New England, the Pacific Northwest, and Texas; and had branches and representative offices in Hong Kong, China, and Taiwan. UCBH became a publicly-traded company on November 5, 1998, when it began trading on the NASDAQ stock exchange.
Table 1 summarizes UCB’s financial information from 2004 through September 2009.
Table 1: Selected Financial Information for UCB Financial Measure Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Sept-09 Total Assets ($000s) 6,311,706 7,953,849 10,324,737 11,780,002 13,476,095 10,895,336 Total Loans ($000s) 4,381,749 6,070,282 6,778,521 8,009,287 8,670,687 7,703,981 Total Deposits ($000s) 5,222,762 6,275,530 7,214,319 7,800,631 9,057,304 7,653,666
Net Income ($000s) 93,818 109,590 109,990 116,498 (54,253) (1,085,667) Brokered Deposits/Total
Deposits 0.00% 2.50% 2.91% 2.10% 13.39% 13.56% Federal Home Loan Bank (FHLB) Advances /
Total Liabilities 6.31% 10.90% 15.39% 15.04% 14.60% 16.65% Return on Average
Assets 1.58% 1.57% 1.34% 1.11% (0.42%) (11.12%)
Net Interest Margin 3.84% 3.78% 3.54% 3.54% 2.94% 2.44% Noncurrent
Loans/Gross Loans 0.41% 0.40% 0.26% 1.08% 6.11% 14.06% Source: Uniform Bank Performance Reports (UBPR).
Mergers and Acquisitions
UCB’s primary merger and acquisition activities occurred from 2002 through 2007, as shown in Table 2 on the following page. UCB’s strategic plan included growing its assets to more than $10 billion, in part, to meet foreign criteria to purchase a bank in the People’s Republic of China. UCB achieved this goal when its assets exceeded $10 billion in the fourth quarter of 2006. In December 2007, UCB became the first state nonmember bank in the United States to wholly own a bank in the People’s Republic of China when it purchased Business Development Bank Limited, since renamed United Commercial Bank (China) Limited (UCBC). UCBC operated as a wholly-owned subsidiary of UCB and, as of September 2009, had total assets of $565 million and total deposits of $132 million. Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page11 of 51
Source: SNL Financial and UCB’s Form 10-K filed with the Securities and Exchange Commission (SEC) for the fiscal year ended December 31, 2008. SNL Financial collects, standardizes, and disseminates merger and acquisition, corporate, financial, and market data for banks, financial services, and other agencies and industries.
TARP
In October 2008, Congress passed and the President signed the Emergency Economic Stabilization Act of 2008 (EESA), which authorized the TARP and provided authority for the federal government to purchase up to $700 billion of troubled assets to provide stability to the economy and the nation’s financial system. One TARP program, the CPP, allowed the Treasury to purchase up to $250 billion of preferred stock in qualifying financial institutions. Through the CPP, institutions submitted applications to the FDIC or other appropriate federal banking agency, 5 which made recommendations to the Treasury on whether to approve or deny CPP requests. In turn, the Treasury determined the final eligibility and allocations for interested parties. The deadline to fund institutions through the CPP ended on December 31, 2009.
On November 14, 2008, UCBH received $298.7 million in TARP CPP funds and subsequently down-streamed the money to UCB. Treasury lost this investment when UCB was closed on November 6, 2009. UCB was the first depository institution to lose TARP funds. We discuss the specific criteria for approving these funds, the FDIC’s role in recommending UCBH for CPP funding, and the FDIC’s monitoring of UCB’s compliance with CPP provisions later in this report.
5 The banking agencies are the FDIC, the Board of Governors of the Federal Reserve System (FRB), the Office of the Comptroller of the Currency (OCC), and the OTS. Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page12 of 51
Causes of Failure and Material Loss
The primary reason for UCB’s failure was inadequate oversight by the Board of Directors (Board) and management. In particular, UCB’s Board and management failed to control the risks associated with the institution’s rapid expansion, which began in 2002. Further, management controls were insufficient to prevent the occurrence of inaccuracies, omissions, and misrepresentations that affected key UCB financial data. In this regard, examiners informed UCB’s external auditor of asset quality issues identified in the FDIC’s April 2009 targeted review, which in part led to an investigation commissioned by UCBH’s audit committee. The investigation found that various UCB officials misrepresented or omitted relevant loan performance data, altered documents to improve the perception of loan quality, and made other misrepresentations that impacted UCBH’s financial statements. UCBH reported that its 2008 financial statements were materially inaccurate and required revision. The investigation and UCBH’s inaccurate financial statements made it harder for UCB to raise the capital the bank needed in 2009 to absorb substantial provisions and losses associated with its loan portfolio.
Also contributing to the failure were UCB’s high concentrations in acquisition, development, and construction (ADC) and commercial real estate (CRE) loans and heavy reliance on non-core funding sources to support its expansion efforts, all of which increased the bank’s risk profile. UCB management was reluctant to downgrade troubled loans in a timely manner, in an effort to mask deteriorating financial conditions. As the real estate market declined, UCB experienced increasing levels of adversely classified assets and associated losses, which required significant increases to its allowance for loan and lease losses (ALLL). Losses and provisions associated with ADC and CRE concentrations eroded the bank’s earnings and capital and led to deficient liquidity. Absent an adequate capital infusion and improvement to the bank’s liquidity position, the CDFI closed UCB on November 6, 2009 because it was no longer viable.
Board and Management Oversight
According to examination reports from 2002 through 2008, UCB’s Board and management performed satisfactorily and were generally responsive to examination findings and recommendations, as indicated by Management component ratings of “1” or “2” during that timeframe. Beginning in 2007, however, examination reports began to note more significant weaknesses in oversight by UCB’s Board and management. The reports also indicated that the Board and management were dominated by one individual who held the titles of President, Chief Executive Officer (CEO), and Chairman of the Board and was responsible for certain practices that ultimately contributed to the bank’s failure. Examination reports and related documentation in these latter years noted that UCB: (1) had a weak Board of Directors and needed increased Board oversight; (2) management did not provide UCB’s internal loan review unit, the Independent Asset Review Division (IARD), with the necessary support to fulfill its mandate; (3) needed to improve its risk management and infrastructure by using better technology and increasing staffing to accommodate UCB’s rapid growth; (4) was unable to effectively integrate its foreign operations with its domestic operations; and (5) had high CRE loan Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page13 of 51
concentrations and increases in problem loans. These issues are discussed more fully in The FDIC’s Supervision of UCB section of this report.
Investigation of UCB
UCBH changed its external auditor from PricewaterhouseCoopers LLC (PwC) to KPMG, to opine on its 2008 financial statements. 6 KPMG provided UCBH with an unqualified opinion on its 2008 financial statements, dated March 16, 2009. 7 However, shortly after issuing its opinion letter and during its 2009 first quarter review of UCBH’s financial information, KPMG became suspicious that UCB officials and/or employees had engaged in illegal acts to conceal the bank’s true financial condition. San Francisco Regional Office (SFRO) officials stated that FDIC and CDFI examiners met with KPMG representatives on May 8, 2009, and informed KPMG that the April 2009 targeted review identified deterioration in UCB’s asset quality and overall financial condition and prompted UCB to write-down a large number of loans reviewed by examiners. Five days later, on May 13, 2009, KPMG alerted UCBH’s audit committee that illegal acts may have occurred at UCB and issued a related letter to the committee on May 15, 2009, pursuant to section 10A of the Securities Exchange Act of 1934.8 KPMG indicated that UCB’s potential illegal acts were related to an over-valuation of impaired and real estate owned (REO) loans, which resulted in a potential understatement of UCB’s ALLL.
KPMG’s notification prompted UCBH’s audit committee to initiate an internal investigation that began in May 2009 and was completed in September 2009. According to SFRO officials, KPMG stated that the scope of the investigation needed to take into account the issues noted in the April 2009 targeted review, some of which were in fact identified in the investigative report resulting from the audit committee’s investigation. The investigation’s findings, which were provided to UCBH’s Board and publicly
disclosed, identified serious financial reporting matters, as follows:
- Modification of loan terms to delay negative consequences . The investigation found instances where bank employees modified loan terms in an effort to delay the negative consequences of a weakened borrower. The modifications were
6 PwC was UCBH’s external auditor from 1999 through 2007. UCBH received an unqualified opinion from PwC in each of these years. Upon terminating the engagement, PwC represented that it was not aware of any disagreement with UCBH concerning the scope of its audit or the conformity of UCBH’s reported financial statements to generally accepted accounting principles. 7 This report also noted that KPMG identified a material weakness in UCBH’s internal controls related to its financial reporting. The material weakness resulted in a material misstatement of UCB’s ALLL and its provision for loan loss reserves. 8 If during the course of an audit, an auditor becomes aware of potential illegal acts, Section 10A of the Securities Exchange Act of 1934 requires the auditor to determine the likelihood that an illegal act occurred and if so, unless the matter is inconsequential, the auditor is required to provide assurance that the institution’s audit committee is adequately informed about the matter. Pursuant to Section 10A, the auditor may require the bank’s audit committee to conduct an internal investigation to determine whether a violation of law occurred that will have a material effect on the institution’s financial statements, what remediation is required to correct the violation, and whether the institution’s Board and management took adequate steps to achieve remediation. Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page14 of 51
numerous and included extending terms, lowering interest rates, and improperly using the interest reserve account.
Intentional delays in recognizing risk rating downgrades or specific reserves. The investigation found instances where bank employees acted to delay the recognition of a risk rating downgrade, or to minimize the loan loss allowance or write-down of REO loans.
Misrepresentation or omission of relevant information. The investigation found numerous instances where relevant information was intentionally withheld from KPMG, misrepresented to KPMG, or both. It also found instances where information was withheld from or misrepresented to the bank’s Finance Department.
- Inappropriate alteration of documents. The investigation found instances where bank employees altered documents in an effort to improve the perception of credit quality. In some cases, the alterations either removed or ameliorated negative facts that were material to the evaluation of a credit. Other cases included backdating documents to make them appear more reliable.
SFRO officials informed us that KPMG estimated these activities started around October 2008. The investigative report concluded that these activities were driven by an apparent desire of UCB senior executives to mask deteriorating financial conditions by deliberately delaying risk rating downgrades and minimizing the bank’s overall loan loss allowance. The investigative report raised serious concerns regarding the actions of a number of UCB management officials. As a result, UCB’s CEO and Chief Operating Officer resigned, while others were terminated. The report also contained recommendations, which were adopted by UCBH’s Board. For example, UCBH’s Board and management agreed to provide bank employees with additional job training, and to reprimand, reassign, and in some instances, terminate or demote certain UCB employees.9
As a result of the investigation, UCBH’s stock price collapsed and several law firms initiated shareholder class action lawsuits accusing UCBH of falsifying its financial statements and violating federal securities laws.
Restatement of UCBH’s 2008 Financial Statements
On May 18, 2009, UCBH and its audit committee agreed that (1) UCBH’s consolidated financial statements, as of and for the year ended December 31, 2008, needed to be restated and (2) the bank’s earnings release for the first quarter of 2009 should not be relied upon.
UCBH identified corrections that may have increased its pre-tax losses by approximately $45 million to $55 million for the year ended December 31, 2008, but this analysis was
9 UCBH press release dated September 8, 2009. Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page15 of 51
preliminary and was never finalized as a result of the bank’s closure. The restatement, if completed, would have resulted in material adjustments to UCB’s loan loss provision and related ALLL, charge-offs, non-performing loan levels, and other REO expenses for the quarter and year ended December 31, 2008, which flowed through to UCBH’s financial statements. Additionally, the re-examination resulted in the need to increase UCB’s first
quarter 2009 ALLL.
UCBH’s failure to restate its 2008 financial statements also delayed and eventually precluded it from filing its first quarter 2009 filing with the SEC. As a result, UCBH violated the NASDAQ Marketplace Listing Criteria Rule 5250(c)(1) “Obligation to File Periodic Financial Reports” and its stock ceased trading on the NASDAQ stock exchange on November 18, 2009. The investigation’s findings and UCBH’s failure to restate its financial statements significantly hampered UCB’s ability to raise capital, which eventually led to the bank’s closing.
ADC and CRE Loan Concentrations
Guidance issued by the FDIC, the OCC, and the FRB entitled, Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices (Joint Guidance), 10 recognizes that there are substantial risks posed by institutions with high ADC and CRE concentrations. Such risks include unanticipated earnings and capital volatility during a downturn in the real estate market. The Joint Guidance defines institutions with significant ADC and CRE concentrations as those reporting:
. ADC loans representing 100 percent or more of total capital; or
• CRE loans representing 300 percent or more of total capital, where the outstanding CRE balance increased by 50 percent or more during the prior 36 months.
According to the Joint Guidance, institutions with such concentrations should employ heightened risk management practices. In April 2010, the FDIC issued additional guidance applicable to monitoring CRE concentrations. This guidance identifies areas examiners should consider when reviewing a bank’s overall risk exposure to CRE loans,
and notes the prudency of monitoring an institution’s exposure to CRE loans. 11
As shown in Table 3, UCB’s ADC concentrations exceeded the 100-percent threshold established in the Joint Guidance from 2006 through 2009. UCB’s CRE concentrations also significantly and consistently exceeded the 300-percent criteria since at least 2002. 12
10 This guidance, dated December 12, 2006, was developed to reinforce sound risk management practices for institutions with high and increasing levels of ADC and CRE loans. 11 Division of Supervision and Consumer Protection (DSC) memorandum, Transmittal No. 2010-007,
entitled: Clarification of Calculation in Guidance on Commercial Real Estate, April 1, 2010. 12 UCB’s CRE concentrations as a percentage of Total Risk-based Capital were 661.43 percent, 669.56 percent, and 586.05 percent as of December 31, 2002, 2003, and 2004, respectively. We did not review CRE concentrations prior to 2002.
Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page16 of 51
Table 3: UCB’s ADC and CRE Concentrations as a Percentage of Total Risk- based Capital
ADC 71.68% 126.22% 161.65% 138.51% 210.98% * CRE 636.92% 568.00% 519.99% 389.05% 678.38% *
Source: UBPRs for UCB. * The increases in the concentration levels in 2009 resulted from increasing losses and declining capital
levels, rather than asset growth.
UCB’s significant ADC and CRE concentrations made it more vulnerable to, and were significantly impacted by, the decline in the commercial real estate sector. Figure 1 presents the composition of UCB’s loan portfolio.
Figure 1: Composition of UCB’s Loan Portfolio, 2002 to 2009
8,671 $9,000
8,009 7,999
$8,000
6,779
3,158 $7,000 2,759 U) 6,070 2,910 0
E $6,000 2,020
1,658
$5,000 4,382 3,806 - V
991 $4,000 3,550 3,039 I 638 3,618 3,506 -1
3,701 2 $3,000 629 I- 0 3,916
$2,000 , 2,873
2,194 1,963 $1,000 1,632 1,583 1,057 497 216 294 282 $0
Dec Dec Dec Dec Dec Dec Dec June
2002 2003 2004 2005 2006 2007 2008 2009
Period Ended
Source: Consolidated Reports of Condition and Income (Call Reports) for UCB.
As of June 2009, UCB’s ADC and CRE concentrations represented 22 percent and 64 percent of its average gross loans, respectively, as shown in Figures 2 and 3. These percentages placed UCB in the 83 rd percentile of its peer group for ADC loans and the
9 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page17 of 51
85th percentile for all other CRE loans, as of June 2009. UCB’s peer group was comprised of 189 commercial banks, each with assets greater than $3 billion. 13
UCB was particularly competitive with certain banks in its peer group that served similar markets and had similar ADC and CRE concentrations. Former FDIC and UCB staff interviewed indicated that UCB overpaid for certain acquisitions as a result of this competition and approved numerous exceptions to its loan policies in order to originate more loans.
Figure 2: UCB’s ADC Loans as a Percentage of Average Gross Loans Compared to Peers
25.00%
(0
20.00%
2
15.00%
-4-- UCB
Peers .2 10.00% (0 C
5.00%
0.00%
Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Jun-09
Period Ended
Source: UBPRs for UCB.
13 This classification is based on the UBPR, which categorizes commercial banks into one of 15 peer groups based on asset size, number of branches, and whether the bank is located in a metropolitan or non- metropolitan area.
10 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page18 of 51
Figure 3: UCB’s CRE Loans as a Percentage of Average Gross Loans Compared to Peers
90.00%
80.00% 78.50% 80.91% 79.77%
70.00% 3 75.31% 71.41% 69.42%
2 60.00% 64.51% 63.75%
IM 50.00% -.-- UCB
Peers . 40.00% .2 -U 30.00% 35.20% 35.10% 35.71% . %28.78%.
3 20.00% 22.39% 23.21%
10.00%
0.00%
Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Jun-09
Period Ended
Source: UBPRs for UCB.
Reliance on Non-Core Funding Sources
UCB increasingly relied on non-core funding sources to support increased ADC and CRE lending, as shown in Table 4. The February 2008 examination noted that UCB was overly dependent on non-core funding sources, which could strain liquidity in the future.
Table 4: UCB’s Non-Core Funding Sources
Total Deposits 5,22 762 6,275,530 7,214,319 7 1 7 Time Deposits ($100,000 or more) 1,61 1,965,157 2,1 31 1,7 Federal Funds Purchases and Resale 0 0 401,600 728,000 700,000 773,434
FHLB Advances 36 52 788,031 1,434,718 1 566,183 1,716,757 1,741,565 Brokered Deposits 0 156,744 210,063 163,505 1,213,034 1,037,608 ource: UBPRs for UCB.
The net non-core funding dependence ratio shows the degree to which a bank relies on potentially volatile liabilities to fund long-term earning assets. Generally, the lower the
11 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page19 of 51
dependence ratio, the less risk exposure there is for the bank. As shown in Figure 4, UCB’s net non-core funding ratio was consistently above its peers since at least 2002 .14
Figure 4: UCB's Net Non-Core Funding Dependence Ratio
60 54.38% 54.47% 57.00% 49.91% 50 46.60%
40 37.78% 37.57% 36.
IM 38.23%
34.74% UCB 33.19% 33.81% 32.73% 30 32.96% 32.57% 30.58% -.- Peers
20
10
0
Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Sept-09
Period Ending
Source: UBPRs for UCB.
Allowance for Loan and Lease Losses and Adversely Classified Items
The Interagency Policy Statement on the Allowance for Loan and Lease Losses requires institutions to maintain an appropriate ALLL level, discusses items that need to be addressed in written policies and procedures, and describes methodologies that
institutions should use to determine an appropriate ALLL level.
From 2002 through 2007, UCB had low levels of adversely classified items, and examiners did not identify a need for the bank to increase its ALLL. The February 2008 examination noted increases in adverse classifications and deterioration in the bank’s asset quality. As a result, UCB downgraded a significant number of construction loans. The December 2008 visitation identified further deterioration in UCB’s asset quality, with increased problem assets centered around UCB’s ADC loan portfolio.
By the April 2009 targeted review, examiners identified sharp increases in adversely classified assets and due to deteriorating market conditions and inaccurate loan grades, UCB downgraded a significant number of loans in its construction, commercial, and commercial real estate portfolios. Although the August 2009 targeted review draft report15 noted some improvements in UCB’s loan grading system, examiners found the
14 We did not examine this ratio prior to 2002. 15 The SFRO did not finalize this report because UCB was closed before a final report could be issued.
12 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page20 of 51
system to be inadequate and asset quality to be critically deficient. UCB again downgraded additional loans as a result of examiners’ findings and the draft review noted that several deficient lending practices heavily contributed to UCB’s excessive level of adversely classified assets.
Sharp increases in adversely classified assets caused UCB’s ALLL to be significantly underfunded in 2008 and 2009. As a condition for UCB’s external auditor to issue an unqualified opinion on UCBH’s 2008 financial statements, UCB increased its ALLL by $40 million as of December 31, 2008. As shown in Table 5, examiners recommended increases to the ALLL in 2008 and 2009.
Table 5: UCB’s Adverse Classifications and ALLL
Source: FDIC examination reports. a This ratio is computed by dividing the dollar amount of adverse classifications by Tier 1 Capital plus ALLL and off-balance sheet reserves. b Visitation c Targeted Review d A final report was not issued due to UCB’s closure.
Insufficient Capital and Liquidity
UCB’s asset quality continued to decline in 2009, which depleted earnings and eroded capital. As the real estate market declined, UCB experienced increasing levels of adversely classified assets and associated losses and significant increases in its ALLL. The August 2009 targeted review draft report noted loss provisions totaling $499 million, which contributed to a $288 million net loss for the second quarter of 2009. UCB became Undercapitalized for PCA purposes in June 2009 and Significantly Undercapitalized in September 2009.
UCB’s efforts to raise sufficient capital in 2009 were significantly hampered due to the investigation’s findings and UCBH’s inability to file accurate financial statements, and were ultimately unsuccessful. The August 2009 targeted review draft report estimated that an $800 million to $1.1 billion capital injection, or more, was needed to return UCB to a Well Capitalized status. 16 The draft review found that UCBH was no longer able to provide support to UCB, as it had negligible cash, no access to equity markets, and was subject to significant shareholder lawsuits.
16 Examiners had a difficult time estimating UCB’s actual capital needs at the time of the August 2009 targeted review, due to the ongoing need to restate UCB’s 2008 financial statements.
13 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page21 of 51
On September 15, 2009, UCB submitted a written capital restoration plan to achieve a Well Capitalized status by December 31, 2009. The FDIC deemed the plan to be unacceptable and unrealistic and, in a PCA directive dated November 2, 2009, required UCB to submit a revised plan. UCB did not do so before it failed.
Liquidity
UCB’s strained liquidity threatened its ability to meet depositor demands. The February 2008 examination stated that UCB’s volatile liability dependence had steadily increased over the prior 3 years and that certain liquidity ratios exceeded UCB’s own policy limits. Between September 9, 2009 and September 23, 2009, UCB experienced massive domestic depositor withdrawals, averaging $44 million per day. The withdrawals were precipitated by the investigation, UCB’s deteriorating financial condition, the publicized resignations of UCB’s President and Chief Operating Officer on September 4, 2009, and associated regulatory actions. Additionally, as of September 2009, most of the bank’s $1.1 billion in brokered deposits were due to mature in a year and UCB’s ability to replace those deposits or obtain alternative funding was uncertain.
Further, in September 2009, UCB’s Hong Kong branch office was operating under standard liquidity restrictions imposed by the Hong Kong Monetary Authority. While the branch appeared to have an adequate long-term liquidity position, it lacked the short-term working capital necessary to process customer transactions. The lack of short-term working capital at the Hong Kong branch strained UCB’s domestic operations because
the branch relied on capital from UCB.
Absent an immediate improvement to the bank’s liquidity position and an adequate capital infusion, the CDFI closed UCB since it was no longer viable.
The FDIC’s Supervision of UCB
The FDIC conducted timely and regular examinations of UCB and monitored its condition through offsite monitoring mechanisms. The examinations included onsite reviews of UCB’s Hong Kong branch and UCBC in 2008 and 2009, respectively. Through its supervisory efforts, the FDIC identified key risks in UCB’s operations and brought these risks to the attention of the institution’s Board and management in examination reports and other correspondence. As noted earlier, examiners told us that they informed KPMG of asset quality issues identified in the FDIC’s April 2009 targeted review, which in part led to an investigation that uncovered serious financial reporting matters. The FDIC also instituted a Bank Board Resolution (BBR) in 2008 to address UCB’s non-compliance with the Bank Secrecy Act (BSA) and a Cease and Desist Order in 2009 requiring UCB to develop an adequate capital restoration plan. Finally, the FDIC implemented applicable PCA provisions of section 38 of the FDI Act in a timely manner.
14 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page22 of 51
Notwithstanding these supervisory efforts:
• Given UCB Board and management weaknesses reported during 2007 through 2009, a lower Management component rating may have been justified earlier than April 2009;
• While DSC downgraded UCB’s Asset Quality component rating in consecutive examinations and targeted reviews during 2008 and 2009, given the bank’s rapidly deteriorating financial condition, an informal supervisory action based on the December 2008 visitation may have been warranted; and
• Although DSC noted that it closely monitored UCB in 2008, had DSC transitioned UCB to a targeted review schedule during that year, the FDIC may have had additional information upon which to base its October 2008 CPP funding recommendation.
We also determined that while the FDIC monitored UCB through the FDIC's Large Insured Depository Institution (LIDI) program, as required, the FDIC’s quarterly LIDI ratings were lower than UCB examination ratings during 2008, reflecting the more forward-looking orientation of the LIDI program.
Supervisory History
The FDIC and the CDFI performed six examinations, three targeted reviews, and one visitation of UCB from 2002 until the bank was closed on November 6, 2009. Table 6 summarizes key information, including the implementation of formal and informal actions that resulted from this joint oversight.
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Table 6: Onsite Examinations of UCB
Examination Examination Supervisory Start Date as of Date Agency Ratings Informal or Formal Action 6/24/2002 3/31/2002 FDIC 212221/2 None 12/01/2003 9/30/2003 FDIC/CDFI 212221/2 None 1/10/2005 9/30/2004 FDIC/CDFI 212121/2 None 1/30/2006 9/30/2005 FDIC/CDFI 211121/1 None 3/05/2007 12/31/2006 FDIC/CDFI 212122/2 None 2/27/2008 12/31/2007 FDIC/CDFI 222222/2 BBR to address BSA non- compliance, effective July 24, 2008; terminated
June 30, 2009. 12/01/2008 a 9/30/2008 FDIC/CDFI 232322/2 None
4/06/2009 b 3/31/2009 FDIC/CDFI 344433/4 Interim downgrade to a composite “3,” effective April 20, 2009. Cease and Desist Order issued on _____ September 3, 2009. b 6/16/2009 5/31/2009 FDIC/CDFI 344433/4 None. 8/03/2009 b, c 6/30/2009 FDIC/CDFI 555555/5 PCA Notification letter:
August 11, 2009. Cease and Desist Order: September 3, 2009. PCA Directive: November 2, 2009. Source: OIG analysis of examination reports and information in the FDIC’s Virtual Supervisory Information on the Net system for UCB, Orders, and Directives. a Visitation b Targeted Review c A final report was not issued due to UCB’s closure.
As discussed in the Causes of Failure and Material Loss section of this report, an investigative report found that UCB officials made intentional misrepresentations in an effort to mask the bank’s true financial condition. SFRO officials told us that these activities hindered examiners’ efforts to identify risks and assign accurate CAMELS ratings in late 2008 and into 2009. For example, UCB officials:
• presented examiners with inaccurate information on certain occasions regarding the loans they reviewed;
did not provide examiners with a December 2008 IARD loan review report until approximately 3 months after it was prepared, and this report would have shed light on UCB’s declining loan performance; and
• were not forthright with examiners when questioned about loan loss provision expenses for the fourth quarter of 2008.
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Offsite Review Program
The Offsite Review Program is designed to identify emerging supervisory concerns and potential problems so that the FDIC’s oversight strategy can be adjusted appropriately. Included in this program is an Offsite Review List (ORL), which consists of “1”- and “2”-rated institutions that have been identified with potential problems or pose the risk of being downgraded to a “3” rating or worse at the next examination. Institutions that appear on the ORL warrant additional FDIC oversight.
UCB appeared on the ORL three times as follows:
June 2008: Prompted due to a potential downgrade resulting from an increase in UCB’s non-performing assets and historical high levels of CRE concentrations. In response, the FDIC recommended ongoing monitoring of UCB and noted that UCB would be switched to a targeted review schedule.
• September 2008: Prompted due to a recommended downgrade in UCB’s Asset Quality and Earnings component ratings, each from a “2” to a “3,” as a result of UCB’s increase in classified assets and decline in profitability. These component ratings were downgraded as a result of the December 2008 visitation.
• December 2008: Prompted due to the deterioration in UCB’s construction loan portfolio and decline in earnings, which led the FDIC to consider a composite interim CAMELS downgrade to a “3.” The FDIC subsequently downgraded UCB to a composite “3” rating and notified UCB in a letter dated April 20, 2009.
The FDIC also generally performed the following offsite monitoring activities on a quarterly basis throughout the period of our review:
• contacted management to discuss significant changes in the bank’s risk profile and business activities;
• met with bank management to discuss quarterly financial results, correction of prior examination findings, and new activities; and
• reviewed Call Reports, UBPRs, SEC filings, press releases, and selected internally-prepared management reports, such as ALLL adequacy analyses.
Examiners notified FDIC regional management of significant changes in the bank’s risk profile as a result of these activities.
Supervisory Actions
Table 7 further describes supervisory actions initiated by the FDIC, the FRBSF, and the CDFI in 2008 and 2009.
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Table 7: FDIC, FRBSF, and CDFI Supervisory Actions Concerning UCB IDate Action Taken July 24, 2008 BBR imposed by the FDIC and the CDFI to address BSA issues identified at the February 2008 examination; terminated on June 30, 2009, after UCB fully
complied with the BBR and improved its BSA compliance program. April 20, 2009 FDIC letter notifying the bank of a downgrade to a composite “3” rating and designating the bank as “troubled.” The letter also restricted UCB’s issuance of
debt under the Temporary Liquidity Guarantee Program. May 28, 2009 Early notification (dear CEO) letter was delivered to the Board, which further restricted brokered deposits and the issuance of debt under the Temporary
Liquidity Guarantee Program. June 30, 2009 Joint letter from the FDIC and the CDFI to UCB summarizing the April 2009 targeted review results and announcing that a Cease and Desist Order would be issued. A letter from UCB to the FDIC dated July 29, 2009 acknowledged UCB’s deterioration in its asset quality and concurred with examiners’ April
2009 targeted review findings. September 3, 2009 A joint FDIC/CDFI Cease and Desist Order was issued to address issues identified at the April 2009 targeted review. The Order required UCB to cease and desist from engaging in unsafe or unsound banking and required UCB, by December 31, 2009, to achieve and maintain adequate capital levels. The Order also required UCB to develop and adopt an adequate capital plan within 60 days
of the date of the Order. UCB never developed an adequate plan.
September 9, 2009 FDIC letter notifying UCB of an interim rating downgrade to a composite “5.” September 9, 2009 Written agreement between UCBH and the FRBSF that required UCBH to
develop a plan to raise capital within 60 days.
September 15, 2009 FRBSF letter to UCBH informing it of a composite rating downgrade. September 17, 2009 SFRO letter to the bank restricting any additional transfers of assets to foreign
operations without the FDIC’s prior written consent. Source: Correspondence between the FDIC and UCB and UCBH Form 8-K filings.
Supervisory Response to Board and Management Oversight
According to examination reports from 2002 through 2008, UCB’s Board and management performed satisfactorily and were generally responsive to examination findings and recommendations, as indicated by Management component ratings of “1” or “2” during that timeframe. The Management component rating was first downgraded from a “2” at the April 2009 targeted review, at which time a “4” component rating was assigned.
DSC’s Risk Management Manual of Examination Policies states that the quality of management is probably the single most important element in the successful operation of a bank. The capability and performance of the Board and management is rated based upon, but not limited to, an assessment of the following factors:
• The level and quality of oversight and support of all institution activities by the Board and management;
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• The ability of the Board and management, in their respective roles, to plan for, and respond to, risks that may arise from changing business conditions or the initiation of new activities or products;
• The adequacies of, and conformance with, appropriate internal policies and controls addressing the operations and risks of significant activities;
• The accuracy, timeliness, and effectiveness of management information and risk monitoring systems appropriate for the institution’s size, complexity, and risk profile;
• The adequacy of audits and internal controls to promote effective operations and reliable financial and regulatory reporting; safeguard assets; and ensure compliance with laws, regulations, and internal policies;
• Responsiveness to recommendations from auditors and supervisory authorities; and
• The extent that the Board and management are affected by, or susceptible to, dominant influence or concentration of authority.
A Management rating of “2” denotes satisfactory performance by management and the Board and satisfactory risk management practices. Based on our review of FDIC examination reports, particularly from 2007 forward, and discussions with FDIC and former UCB staff, we concluded that UCB’s Board and management did not meet several of the factors described above. In particular, the February 2008 examination report led to a Matter Requiring Board Attention, requiring UCB’s Board and management to:
• address apparent violations and program issues pertaining to its BSA and Anti- Money Laundering program;
~ improve its liquidity monitoring;
~ develop a Board-approved contingency funding plan;
• develop a comprehensive strategic plan to include the integration of UCB’s Greater China strategy;
• assess its staffing, infrastructure needs, and management structure; and
• verify all unresolved high- and moderate-impact IT and general audit issues.
Examiners contemplated a “3” Management component rating, but after consultation with the SFRO, the FDIC provided a “2” rating because it was confident that UCB would remediate these issues and the bank’s financial condition was satisfactory. A follow-up visitation in December 2008 found that UCB had made progress in addressing these
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issues. However, other FDIC examinations and documentation identified a number of management-related findings at UCB as discussed in the following sections. These issues are indicative of a less than satisfactory Board and management.
Dominant Management Official
One individual, who held the titles of UCB’s President, CEO, and Chairman of the Board, exercised a considerable amount of influence over UCB’s operations. In an effort to increase UCB’s assets, this individual was ultimately responsible for (1) fostering a culture that led to the bank’s approval of a large number of exceptions to the bank’s loan policy so UCB could make more loans, (2) fostering a combative culture where management failed to downgrade non-performing loans in a timely manner, and (3) over- paying to acquire financial institutions.
The August 2009 targeted review draft report noted that the President’s desire over time to grow the bank ultimately imperiled it by fostering a culture that deterred the
identification and correction of problems by staff.
Board and Management Weaknesses
Examiners cited the following weaknesses with UCB’s Board and management:
• The March 2007 examination stated that examiners could not determine if the Board was apprised of UCB’s significant leverage strategy to grow its assets to $10 billion. UCB’s executive management stated that the Board was apprised of the strategy; however, UCB’s legal counsel directed management to not document the discussions due to liability concerns.
• The February 2008 examination reported Matters Requiring Board Attention, including an organizational assessment that would address, among other things, the management structure of the bank. The examination also recommended increased oversight by UCB’s Board to ensure that reported weaknesses were addressed in a timely manner.
Internal Loan Review and Management Controls
The April 2009 targeted review noted that UCB’s Board and management had not supplied IARD with the necessary support to fulfill its mandate. IARD’s efforts were frustrated, in part, due to a lack of stature and influence, which impeded its ability to effectively downgrade credits. The review noted: “After roughly four years of existence, IARD cannot fully quantify credit risk to a degree that provides senior management and
the Board with sufficient and accurate information to manage the institution’s risks.”
UCB’s President also delayed the issuance of an IARD loan review report to UCB’s Board and examiners because it contained negative performance information about the loans that were reviewed, according to UCB and examination staff interviewed.
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Finally, as discussed previously, management controls were not sufficient to prevent apparent violations of federal securities laws by UCB officials and the issuance of inaccurate financial statements.
Risk Management and Infrastructure
FDIC examination reports documented UCB’s difficulty in managing the risks associated with its aggressive growth and implementing an adequate supportive infrastructure. For example:
• The February 2008 examination noted that, after several years of existence, UCB’s Enterprise Risk Management function was unable to quantify or report risks to UCB’s Board and the bank’s management had not developed an overarching assessment of its enterprise-wide risks.
• The December 2008 visitation noted that UCB’s management needed to revisit its risk appetite and decide if its continued business prospects were vibrant enough to accept the risks associated with management’s asset growth and market share expectations.
• The 2007, 2008, and 2009 examination reports and reviews noted UCB’s high levels of senior management staff turnover, inexperienced staff, insufficient staffing levels, indeterminate job roles, and unclear responsibilities and authority. Similarly, the June 2009 UCBC targeted review noted that UCBC experienced elevated staff departures.
The April 2009 targeted review noted that management’s failure to strengthen UCB’s risk management infrastructure was attributed, in part, to the bank’s strategy to reach $10 billion in assets, so it could meet an eligibility standard to purchase a bank in the People’s Republic of China. During UCB’s growth period, its assets nearly doubled in 4 years and the bank continued to rely on manual processes rather than employ adequate technology and appropriate staff to effectively manage the institution. While manual processes served the bank when it was smaller, these methods became unreliable as it grew. The review further stated that the lack of a fully developed risk management infrastructure hampered management’s efforts to control the bank’s deterioration and that its loan risk rating system was ineffective.
Integration of Foreign and Domestic Operations
Examiners noted the following with respect to UCB’s oversight of UCBC and the Hong Kong branch:
• The March 2007 examination report noted that UCB had not adequately integrated the Hong Kong branch into its risk management framework due to
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weaknesses in its credit underwriting and administration and BSA and IT operations.
While the February 2008 examination found that the bank was managed in a satisfactory manner, it noted that UCB’s Board and management needed to develop and approve a comprehensive strategic plan that provided a vision for the future of the bank, including the integration of the Greater China strategy.
As discussed earlier, examination reports rated UCB management a “1” or a “2” until the April 2009 targeted review. Given the examination findings detailed above, a “3” management rating may have been more appropriate for the February 2008 examination. A stronger and earlier supervisory response may have influenced UCB’s Board and management to take corrective actions sooner in response to examiners’ findings and enhance its risk management and infrastructure in support of the institution’s rapid growth.
Supervisory Response to UCB’s Asset Quality
Asset quality is one of the most critical areas in determining the overall condition of a bank. As discussed below, examiners sampled a reasonable number of loans and successively downgraded UCB’s Asset Quality component rating. However, examiners did not report significant concerns with UCB’s ADC and CRE loan concentrations and
the extent of UCB’s weak underwriting issues until the 2009 targeted reviews.
Examination Coverage of ADC and CRE Concentrations
Examination reports issued from 2005 through February 2008 generally noted UCB’s elevated ADC and CRE concentrations and that UCB management was adequately monitoring and mitigating the risks associated with these concentrations. The December 2008 visitation report noted deterioration in UCB’s construction and commercial loan portfolios but reported that UCB’s overall CRE concentrations had declined and bank management continued to monitor its CRE concentrations against capital and provided the Board with reports that sufficiently disclosed the bank’s risk exposures.
Examiners first criticized UCB’s CRE concentrations in the April 2009 targeted review. This review noted that the CRE concentrations were problematic because they accounted for a substantial increase in adversely classified assets, and UCB underestimated the risk associated with, and did not properly manage, its CRE portfolio. The August 2009 targeted review draft report noted several deficiencies with UCB’s lending practices, which adversely impacted its CRE portfolio, and criticized UCB for cancelling planned audits of its CRE portfolio, despite the fact that this portfolio had been identified as having a high level of inherent risk.
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Examination Coverage of Underwriting and Credit Administration Practices
A discussion of the FDIC’s examination coverage of UCB’s underwriting and credit administration follows, with an emphasis on examiners’ reviews of the bank’s loan files and relevant findings in examination reports.
Loan File Reviews. Between 2002 and 2009, FDIC examiners reviewed from 9 percent to 27 percent of UCB’s non-homogenous loans, 17 representing between $237 million and $2.2 billion of UCB’s loan portfolio. In comparison, UCB’s loan portfolio ranged from $3 billion to $8 billion during this period. The percentage of non-homogenous loans and total number of loans reviewed generally increased each year, with the largest loan sample review conducted during the April 2009 targeted review. In this review, the loans examined represented 26 percent of UCB’s total loan portfolio and 27 percent of its non- homogenous loans. Examiners reviewed a commensurate cross-section of loans that were representative of the concentrations in UCB’s major loan categories. The number of loans reviewed appeared reasonable, based on informal guidance contained in a DSC pre-examination planning memo, suggesting that examiners should generally review between 15 percent and 30 percent of an institution’s loan portfolio during a full-scope examination. 18
From 2002 through 2009, examiners selected their loan samples during the pre- examination planning process and derived their loan samples by reviewing UCB’s delinquent loan reports, list of non-accrual loans, debt reports, performing credits, and new loan originations since the last examination to see if there were changes in UCB’s underwriting standards. In selecting loans for review, examiners paid particular attention to loans that UCB management had concerns with, such as those on watch lists. Examiners also considered the impact the economy had on UCB’s loan portfolio and selected loans accordingly, using an FDIC database to help generate their loan samples, which generated summary information on the loans, known as line sheets.
Examiners reviewed loan files and recorded instances where the files lacked sufficient documentation to determine whether UCB used sound practices to originate and service the loans. Exceptions included instances when UCB did not (1) demonstrate that the loans had sufficient collateral; (2) perform adequate financial statement analyses; or (3) obtain current appraisals.
In 2009, examiners also reviewed certain loans that were later believed to have been originated as a result of illegal activities. During their review, examiners prompted UCB
17 Non-homogenous loans have distinctive characteristics and are usually of larger dollar amounts than homogenous loans. Construction, CRE, and commercial and industrial loans are non-homogenous loans, while single family 1-4 loans are homogenous loans. The vast majority of UCB’s loans were non-
homogenous. 18 The DSC Examination Documentation module provides guidance for examiners to follow when conducting loan file reviews, including assessing underwriting and file documentation sufficiency, but does
not specify suggested sample sizes.
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to downgrade these loans due to performance issues. 19 These loans and approximately 150 others, as well as senior UCB management, are being investigated by other units within and outside of the FDIC.
Examination Report Findings. The March 2007 examination noted underwriting and credit administration weaknesses in UCB’s construction lending portfolio and UCB’s Hong Kong branch and criticized approximately $15 million in credits. UCB initiated corrective action during the examination and received a “1” Asset Quality rating, in part because adverse classifications were low and had decreased by $10 million from the prior examination. Findings from this examination were as follows:
Guarantor financial statements were not consistently analyzed and were presented on an “as is” basis without adjustments. The statements reviewed were self- prepared by the guarantors, were not in accepted accounting format, and reflected substantial gains in real estate and other values that were not adequately supported.
For the majority of loans sampled by examiners, UCB’s analysis of financial data was overly simplistic, listing only major assets and liabilities, the current assets ratio,20 and working capital.
• There were significant deficiencies with the Hong Kong branch’s underwriting standards because (1) the branch staff did not verify borrowers’ financial conditions or obtain tax returns from borrowers and guarantors, (2) the debt service coverage ratio calculation was not standardized, and (3) the branch’s underwriting standards did not meet those prescribed by UCB.
The February 2008 examination noted that almost all of UCB’s adversely classified construction loans had collateral dependent exposures to borrowing entities and guarantors that did not provide additional support or an alternative source of repayment. The February 2008 examination also noted that UCB had not adequately monitored participation loans purchased from other lenders and loans classified as “special mention.”21 The December 2008 visitation noted that UCB needed to improve the stress testing of its loan portfolio in order to better quantify the potential impact that changing economic conditions could have had on its asset quality, earnings, and capital. Examiners downgraded UCB’s Asset Quality component rating to a “2” at the February 2008 examination and a “3” at the December 2008 visitation.
19 We did not evaluate whether the FDIC should have been cognizant of UCB’s alleged violations of securities laws at an earlier time and note that the alleged violations involved several of UCB’s senior officers. 20 The current assets ratio is a measure of an institution’s ability to pay debts that are due within one year and is calculated by dividing current assets by current liabilities. Current assets are assets that could be converted into cash or cash equivalents within one year; current liabilities are debts or obligations that are due within one year. 21 Special mention loans denote assets with potential weaknesses warranting management’s close attention.
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The April 2009 targeted review noted UCB’s failure to downgrade loans in a timely manner and maximize recoveries on its increased volume of distressed assets and identified certain concerns with asset quality, some of which were new and others that were similar to those noted in prior examinations. 22 Examiners again downgraded UCB’s Asset Quality component rating to a “4.” Further, this review noted that several deficient lending practices heavily contributed to UCB’s excessive level of adversely classified assets. According to examination staff, the deficient lending practices related primarily to construction and commercial loans that were originated in 2006 and 2007, when UCB approved numerous exceptions to its loan policy in an effort to increase lending and its assets to $10 billion so it could purchase UCBC. DSC officials stated that prior to 2009, examinations did not identify the extent of the underwriting deficiencies because, in part, UCB's loans were performing, the market was strong, and appraisals generally supported the loans.
To the FDIC’s credit, examiners downgraded UCB’s Asset Quality ratings at consecutive examinations. However, examiners did not pursue supervisory action related to risks in this area until 2009. In that regard, the Formal and Informal Action Procedures Manual states that the FDIC may consider BBRs for institutions that receive a composite CAMELS or compliance rating of “2;” however, these resolutions are rare in such instances. Nevertheless, BBRs could be used to address concerns noted in areas where component “3” ratings were assigned, or to address high-risk areas in a particular lending segment. Given the risks associated with UCB’s loan portfolio, a BBR may have been warranted based on the December 2008 visitation to establish a stronger supervisory tenor and elevated sense of concern.
Use of Targeted Reviews
In 2009, the FDIC switched from conducting point-in-time examinations to targeted reviews of UCB. Targeted reviews are usually performed at large institutions, typically focus on specific areas of risk, and are conducted approximately 3 to 4 times per year. Point-in-time examinations are done annually and include an evaluation of all of the CAMELS components. The FDIC has not issued formal guidance prescribing when an institution should switch to targeted reviews, but according to FDIC management, targeted reviews are triggered by certain changes, such as deterioration in a bank’s financial condition. The decision to switch a bank from a point-in-time examination schedule to targeted reviews is based on the judgment of FDIC regional office staff and examiners.
The FDIC’s SFRO considered placing UCB on a targeted review schedule in 2008, as recommended by examiners. However, the SFRO conducted point-in-time examinations of UCB through 2008 because regional management concluded that these examinations were sufficient, UCB’s risk profile was satisfactory, and this approach enabled the
22 An examination official noted that the targeted review identified new loan administration issues related to troubled debt restructuring and loss impairment analyses for problem loans that surfaced once asset quality deteriorated.
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FRBSF to meet statutory timeframes for examining UCBH in mid-2008 while avoiding overlapping regulatory oversight.
The SFRO thoroughly considered its decision to delay placing UCB on a targeted review schedule and documented its reasons for the delay. Even though UCB remained on the point-in-time examination schedule until 2009, SFRO officials indicated that they closely monitored the bank, obtained current information regarding UCB’s financial performance and interim developments, identified deterioration in UCB’s asset quality and earnings in the latter half of 2008 through the FDIC’s offsite monitoring efforts, and kept apprised of the FRBSF’s 2008 examination findings. Nevertheless, in our view, UCB’s size, rapid growth, and increased risk profile constituted triggering events for switching UCB to targeted reviews at an earlier date. Switching to targeted reviews earlier would have enabled examiners to be onsite more frequently and further focus their efforts on key risks at an earlier date. Conducting targeted reviews during 2008 also may have provided the FDIC with additional information upon which to base its October 2008 CPP funding
recommendation.
LIDI Program
The FDIC develops LIDI reports and associated rankings as an additional means to measure the financial health of large institutions and risks to the DIF. Based on their review, case managers assign an institution a rating from A (best) to E (worst) and an “outlook” rating of positive, stable, or negative, which reflects an institution’s forward- looking risks. According to DSC officials, given the forward-looking nature of the LIDI Program, the LIDI ratings do not always match the CAMELS ratings because of their timing and the point-in-time nature of the examinations. Table 8 presents the FDIC LIDI rating definitions.
Table 8: LIDI Rating Descriptions A Low risk of concern regarding ultimate risk to the insurance funds. B Ordinary level of concern regarding the ultimate risk for the insurance funds. C More than ordinary level of concern regarding the ultimate risk to the insurance funds. D High level of concern regarding the risk to the insurance funds. E Serious concerns regarding the ultimate risk to the insurance funds. Source: FDIC Case Managers’ Manual.
UCB became subject to the LIDI program in the fourth quarter of 2006, when its assets reached $10 billion. The FDIC conducted quarterly LIDI reviews and issued 10 related reports, as required, beginning in the first quarter of 2007 and through the second quarter of 2009. Each of the 10 reports identified UCB’s ability to manage its rapid growth and high ADC and CRE concentrations as key risks and regulatory concerns. The six reports issued in 2008 and 2009 identified risks related to rises in UCB’s problem loans. UCB’s
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LIDI outlook rating was “stable” through the second quarter of 2008; however, the rating dropped to “negative” in the third quarter of 2008.
UCB’s LIDI ratings for each quarter in 2008 were “C” compared to composite CAMELS “2” ratings for the two 2008 examinations of UCB. The “C” LIDI ratings resulted from increased loan classifications and declined earnings. DSC officials noted that the lower LIDI ratings were indicative of the 12-month forward-looking orientation of that program versus the more point-in-time focus of the CAMELS ratings, as discussed earlier.
Implementation of PCA
Section 38, Prompt Corrective Action , of the FDI Act establishes a framework of mandatory and discretionary supervisory actions pertaining to all insured depository institutions. The section requires that regulators take progressively more severe actions, known as “prompt corrective actions,” as an institution’s capital level deteriorates. The purpose of section 38 is to resolve problems of insured depository institutions at the least possible long-term cost to the DIF. Part 325, Capital Maintenance, of the FDIC Rules and Regulations, defines the capital measures used in determining the supervisory actions that will be taken pursuant to section 38 for FDIC-supervised institutions. Part 325 also establishes procedures for the submission and review of capital restoration plans and for the issuance of directives and orders pursuant to section 38. Table 9 provides UCB’s capital ratios from 2002 through September 2009.
Table 9: UCB’s Capital Levels Tier 1 Leverage Tier 1 Risk Total Risk PCA Capital Period Ended Capital Based Capital Based Capital Category PCA Threshold 5% or more 6% or more 10% or more Dec-02 7.57% 10.26% 11.52% Well Capitalized Dec-03 7.86% 10.92% 12.18% Well Capitalized Dec-04 8.49% 11.42% 12.67% Well Capitalized Dec-05 8.26% 9.91% 10.98% Well Capitalized Dec-06 9.30% 9.67% 10.53% Well Capitalized Dec-07 7.42% 8.55% 10.80% Well Capitalized Dec-08 9.06% 11.72% 14.24% Well Capitalized Undercapitalized PCA letter sent
June-09 4.02% 5.32% 7.92% August 11, 2009. Significantly Undercapitalized PCA letter sent
Sept-09 2.20% 3.16% 5.91% October 29, 2009.
Source: UBPRs for UCB.
Based on the supervisory actions taken with respect to UCB, the FDIC properly implemented applicable PCA provisions of section 38 of the FDI Act. The FDIC timely notified UCB of its Undercapitalized and Significantly Undercapitalized status, required UCB to file a capital restoration plan with the FDIC, and required UCB to comply with mandatory restrictions of section 38 of the FDI Act. These restrictions related to UCB’s
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asset growth, acquisitions, new activities, new branches, dividend payments, management fees, capital distributions, and senior executive compensation.
Specifically, the FDIC’s supervisory actions related to PCA were as follows:
On August 11, 2009, the FDIC sent a PCA notification letter to UCB informing it of its Undercapitalized status and required UCB to develop a capital restoration plan.
• On October 29, 2009, the FDIC sent a PCA notification letter to UCB informing it of its Significantly Undercapitalized status.
On November 2, 2009, a PCA Directive noted that UCB submitted to the FDIC an unacceptable capital restoration plan on September 15, 2009. The FDIC concluded the plan contained unrealistic and unobtainable goals. The Directive required UCB to submit an acceptable revised capital restoration plan, which UCB never did.
Capital Purchase Program
On November 14, 2008, UCBH received $298.7 million in TARP CPP funds and subsequently down-streamed the money to UCB. Treasury lost this investment when UCB was closed on November 6, 2009. UCB was the first depository institution to lose TARP funds. Nevertheless, we determined that (1) the FDIC followed applicable procedures in recommending UCBH for CPP funding and (2) examiners evaluated UCB’s compliance with the CPP Securities Purchase Agreement in accordance with DSC
guidance.
CPP Criteria
On October 20, 2008, the Treasury issued final viability criteria for the federal banking agencies to use in reviewing CPP applications. The DSC regional offices reviewed the CPP applications from state nonmember banks and relied upon the Treasury’s guidance in determining whether the institutions qualified for CPP funding. The criteria indicated that the CPP eligibility recommendation was to be based on an assessment of the overall strength and viability of the applicant without considering potential funds received under the CPP. The viability criteria included an institution’s examination ratings and selected performance and capital ratios. The Treasury also provided the federal banking agencies with a TARP Capital Purchase Program Case Decision Memo. The FDIC used this document to record its findings related to: UCB’s CAMELS and Community Reinvestment Act ratings and selected performance ratios; UCB’s viability; the FDIC’s supervisory strategy; and relevant actions. The FDIC also included narrative comments in the document in support of its recommendation.
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In general, if an institution met the Treasury’s viability criteria for CPP participation, the appropriate federal banking agency recommended that the Treasury approve it for CPP funding.23 In turn, the Treasury made the final CPP funding decision. In exchange for CPP funds, the Treasury received preferred shares and warrants or future rights to purchase shares. Banks were required to pay the Treasury a 5-percent dividend for 5 years and a 9-percent dividend thereafter. Banks had the right to suspend the dividend payments, which UCBH did, to preserve capital.
The FDIC’s Recommendation of UCBH for CPP Funding
On October 21, 2008, UCBH filed its CPP application with the FRBSF, its primary regulator, and the FDIC. The FDIC, UCB’s primary regulator, reviewed the application and recommended Treasury approval of UCBH for CPP funding. At the time of its application, UCB met all of the Treasury’s eligibility criteria and the FDIC considered UCB to be a “viable” institution. The FDIC was not aware of UCB’s serious financial reporting matters when it assessed UCB’s TARP application in October 2008; these matters became apparent in 2009, after the investigation by UCBH’s audit committee. UCB’s capital and leverage ratios qualified it as a Well Capitalized institution and the bank met the Treasury’s viability criteria associated with classified and nonperforming asset levels, and construction and development loan concentrations. UCB’s most recent CAMELS composite rating was a “2” (based on the February 2008 examination) and its most recent Community Reinvestment Act rating was “Outstanding.” Further, the FRBSF assigned a satisfactory rating to UCBH and UCB received acceptable external debt ratings.
UCBH’s CPP Application Timeline
Treasury had requested the FDIC and other banking regulators to quickly recommend viable community banks for CPP funding. In response, SFRO representatives contacted UCB and other banks to solicit their interest in the program and UCB was one of the first institutions that the FDIC recommended for CPP funding. UCB expressed an interest in CPP funding on October 17, 2008, and 4 days later, UCBH submitted its CPP application. UCBH requested $298.7 million, the maximum allowable funding amount. 24 The FDIC forwarded the application and its case decision memo to the Treasury on October 22, 2008. The Treasury reviewed the FDIC’s recommendation on October 23, 2008, and requested additional information about UCB concerning deficiencies with its BSA program and a potential purchase of UCB by a foreign bank. The FDIC provided this information, and on October 24, 2008, the Treasury unanimously recommended preliminary approval of UCBH’s CPP application. On November 14, 2008, the Treasury disbursed $298.7 million in CPP funds to UCBH. UCBH down-streamed the funds to UCB, which used the TARP proceeds to make consumer and commercial loans, according to examiners’ documentation.
23 Institutions that did not meet the Treasury’s criteria were reviewed by the CPP Interagency Council, which was comprised of senior representatives from the federal banking agencies. Because UCB met the Treasury’s eligibility criteria, it was not subject to CPP Interagency Council review. 24 The maximum amount of capital eligible for purchase by the Treasury under the CPP is the lesser of
(i) an amount equal to 3 percent of the Total Risk-Weighted Assets of the applicant or (ii) $25 billion.
29 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page37 of 51
On October 27, 2008, 5 days after the FDIC had recommended UCBH for CPP funding, a Treasury staff member forwarded an e-mail from an anonymous source to DSC headquarters and senior Treasury officials. The e-mail questioned the Treasury’s decision to provide CPP funding to UCB and the integrity of UCB’s CEO. The FDIC and the Treasury considered the e-mail but because the e-mail was from an anonymous source, its allegations were unsubstantiated, and UCBH met the Treasury’s eligibility criteria, DSC did not change its recommendation decision.
The FDIC’s Review of UCBH’s CPP Funding Request
We confirmed that the FDIC relied upon the Treasury’s viability criteria and case decision memo to assess UCBH’s request for CPP funding. We also found that the Total Risk-Weighted Assets figure provided by UCB in its CPP application substantially matched the figure in UCB’s Call Report. 25
We interviewed the FDIC’s Case Manager for UCB to understand what actions were taken in reviewing the CPP application and preparing the case decision memo. The Case Manager indicated that he relied on UCB’s most recent FDIC risk management examination, which commenced in February 2008; the most recent Call Report data, which was as of June 30, 2008; and pro forma Call Report data, as of September 30, 2008.26 The Case Manager stated that he also contacted the CDFI and the FRB regarding UCB’s application. Neither institution objected to UCB’s receipt of CPP funding. The Case Manager indicated that he was not aware of any accounting issues at UCB at the time of his review of the bank’s CPP application. As discussed earlier, had the FDIC transitioned UCB to targeted reviews during 2008, the FDIC may have had additional information upon which to make a CPP funding recommendation.
In recommending UCBH for CPP funding, DSC was aware of certain negative information about UCB, but these issues were not considered significant enough to recommend against CPP funding. At the time of UCB’s application, the most recent LIDI report identified concerns about UCB’s CRE concentrations and rapid growth, and contained a “negative” outlook rating and a “C” overall rating, due to a decline in UCB’s asset quality and earnings. The report also stated, however, that UCB’s capital appeared adequate and UCB was well managed. The Case Manager was aware that UCB was subject to a July 2008 BBR regarding deficiencies in its BSA program and found that UCB had made progress in addressing these issues.
We concluded that the FDIC followed applicable procedures in recommending UCBH for CPP funding. We also note that the financial ratios that the FDIC used to determine that UCBH met the eligibility criteria may have been erroneous because these ratios were computed according to UCB’s 2008 financial statements, which were later found to be in
25 The CPP application requested only one financial figure from UCB, its Total Risk-Weighted Assets. The figure that UCB reported on its application was $9,957,908,000, compared to $9,947,144,000 on UCB’s June 30, 2008 Call Report. We determined that this difference of 0.11 percent was not material. 26 UCB had not finalized its September 30, 2008 financial data at the time of its CPP application.
30 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page38 of 51
need of restatement. Since UCB is now closed and its 2008 financial statements are not likely to be restated, we cannot conclude on whether UCB would have failed any of the eligibility criteria had the ratios been based on accurate financial data. For the same reason, we cannot opine on whether UCBH’s Total Risk-Weighted Assets figure reported in its CPP application was accurate, despite the fact that it substantially matched the figure in UCB’s June 30, 2008 Call Report. Finally, we did not find any reason to believe that the FDIC should have been aware of the problems with UCB’s financial statements at the time of UCBH’s CPP application.
Examiners’ Evaluation of UCB’s Compliance with the CPP Securities Purchase Agreement
The CPP Securities Purchase Agreement (Agreement) describes the CPP recipient’s responsibility for issuing shares and fulfilling other requirements in exchange for the Treasury’s investment. FDIC examiners evaluated UCB’s compliance with the
Agreement in accordance with DSC guidance issued in February 2009.27 The August 2009 targeted review draft report identified one instance where UCB was in apparent violation of the CPP provisions and one instance where UCB apparently violated excessive compensation standards imposed by regulation.
To evaluate UCB’s compliance with the Agreement, FDIC examiners reviewed applicable statutes and regulations, FDIC guidance, UCB’s compensation committee minutes, compensation and employment agreements, and related amendments for UCB’s five highest paid executives and UCBH’s dividend payments. Examiners prepared memoranda detailing their assessment of UCB’s compliance with the Agreement. These memoranda identified areas of UCB compliance and apparent non-compliance with the Agreement and contained recommendations for improvement. The FDIC examiners reviewed and documented UCB’s compliance with the CPP rules and regulations in April 2009 and as a part of the fieldwork performed in support of the August 2009 targeted review.
The August 2009 targeted review draft report identified the following apparent violations:
UCB was in apparent violation of the CPP standards for compensation and corporate governance because UCB’s Board had not established an excessive or luxury expenditures policy, filed the policy with the Treasury, and posted the policy on its Internet Web site. 28
27 CPP compliance provisions were established through the EESA and the Treasury’s rules codified under section 31 of the Code of Federal Regulations (CFR), Part 30. DSC issued implementing guidance through regional director memorandum, classification number 6300: Examination Guidance for Financial Institutions Receiving Subscriptions from the U.S. Department of the Treasury’s TARP CPP Program , dated February 9, 2009. 28 This requirement is found at 31 CFR Part 30, Section 111(d), TARP Standards for Compensation and Corporate Governance; Interim Final Rule.
31 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page39 of 51
• UCB’s former President/CEO claimed and was reimbursed for travel and other business expenses, in contravention of Appendix A to Part 364 of the Interagency Guidelines Establishing Standards for Safety and Soundness. 29 These expenses included expensive dinners where UCB had not maintained branch offices and corporate gifts that were considered to be unreasonable and disproportionate to services performed by the CEO. Further, the draft targeted review reported that there was no evidence that UCB’s Board had reviewed or approved the expenses for which the President/CEO had been reimbursed.
The following summarizes areas where examiners found UCB to be in compliance with the CPP. According to their documentation, examiners:
Found that UCB management amended the compensation and employment agreements of its five highest paid executives to comply with executive compensation restrictions imposed by the CPP. However, examiner documentation noted that UCB’s CEO had not certified that the compensation and employment agreements complied with executive compensation standards imposed by the TARP CPP interim final rule. 30
• Determined, in conjunction with an FDIC legal counsel’s opinion, that a $150,000 signing bonus, paid in April 2009 to UCB’s incoming President, was allowed under the CPP and that UCB was compliant with Section 111(b) of the EESA, which placed restrictions on executive compensation.
Concluded that UCB was in general compliance with the CPP provisions covering “Golden Parachute” payments, based on their review of related documentation. Examiners found that two former UCB Presidents signed agreements that they would not receive golden parachute payments while the bank participated in the CPP, nor would they accept other bonuses or incentive compensation based on certain criteria.
• Recommended that the salary provisions of the employment contracts of two executives (the President/CEO and the Director of Community Banking) be amended to conform with CPP regulations; UCB subsequently amended these contracts.
Concluded that as of August 3, 2009, UCB’s maintenance of records related to the CPP was satisfactory.
Recalculated UCB’s capital ratios without including the $298.7 million in CPP funds and found that, as of April 2009, UCB would still have been considered Well Capitalized . Under this scenario, UCB’s leverage, Tier I Risk-based Capital and Total Risk-based Capital levels would have been 6.74 percent, 8.71 percent,
29 12 CFR, Part 364 appendix A III, Prohibition of Compensation that Constitutes an Unsafe and Unsound Practice, A. – Excessive Compensation. 30 31 CFR § 30.12(a)(3)(i).
32 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page40 of 51
and 11.23 percent, respectively. These capital figures, however, were likely based on erroneous financial data, based on the findings of the investigation initiated by UCBH, which concluded in September 2009.
Reviewed UCBH’s dividend payments to shareholders and found that UCBH appeared to be in compliance with restrictions on paying dividends. However, examiners criticized UCBH’s dividend payments during periods when UCB reported a loss, due to the bank’s negative earnings and low levels of capital. UCBH eventually stopped paying dividends to the Treasury for the CPP funds, as allowed under the Agreement.
Corporation Comments
After we issued our draft report, management provided additional information for our consideration, and we revised our report to reflect this information, as appropriate. On July 20, 2010, the Director, DSC, provided a written response to the draft report. That response is provided in its entirety as Appendix 5 of this report.
DSC reiterated the OIG’s conclusions regarding the causes of UCB’s failure. With regard to our assessment of the FDIC’s supervision of UCB, DSC stated that from 2005 through 2009, the FDIC and the CDFI jointly and separately completed several examinations, visitations, reviews and other oversight activities of UCB. Through these activities, examiners identified key risks and brought them to the attention of UCB’s Board and management in examination reports, and other correspondence. DSC pointed out that in December 2008, the FDIC and the CDFI downgraded UCB’s Asset Quality and Earnings component ratings to “3” and identified further deterioration during an April 2009 joint targeted review. DSC also stated that UCBH’s external auditor found that UCB’s management had begun to conceal serious financial reporting issues around October 2008.
Finally, DSC stated that it has issued guidance from 2006 through 2009 that re- emphasizes the importance of monitoring institutions that have concentrated ADC and CRE exposures and rely on volatile non-core funding sources.
33 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page41 of 51 Appendix 1 Objectives, Scope, and Methodology
Objectives
We performed this audit in accordance with section 38(k) of the FDI Act, which provides, in general, that if the DIF incurs a material loss with respect to an insured depository institution, the Inspector General of the appropriate federal banking agency shall prepare a report to that agency, reviewing the agency’s supervision of the institution. The FDI Act requires that the report be completed within 6 months after it becomes apparent that a material loss has been incurred.
Our primary audit objectives were to (1) determine the causes of the financial institution’s failure and resulting material loss to the DIF and (2) evaluate the FDIC’s supervision of UCB, including the FDIC’s implementation of the PCA provisions of section 38 of the FDI Act. In November 2008, UCB received $298.7 million through the Treasury’s TARP CPP. As a result, the third objective of this review was to determine whether the FDIC followed applicable procedures in recommending UCBH for CPP funding and in monitoring UCB’s compliance with the CPP Securities Purchase Agreement. We conducted this performance audit from January 2010 to July 2010 in accordance with generally accepted government auditing standards. These standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
Scope and Methodology
The scope of this audit focused on UCB’s business operations from 2002 until its failure on November 6, 2009. Our work also included an evaluation of the regulatory supervision of the institution during this same time period.
To accomplish our objectives, we performed the following procedures and techniques:
Analyzed examination reports prepared by the FDIC and the CDFI from 2002 through 2009 as well as FRBSF examination reports prepared between 2005 and 2008.
• Reviewed the following:
• Pertinent regulations, policies, procedures, and guidance.
• UBPR and Call Report data.
• Bank data and correspondence maintained in DSC’s SFRO.
34 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page42 of 51 Appendix 1 Objectives, Scope, and Methodology
• Reports prepared by the Division of Resolutions and Receiverships (DRR) and DSC’s Washington, D.C. office staff related to the institution’s failure.
• Documentation pertaining to offsite monitoring activities performed by the FDIC.
• Relevant records maintained by the institution’s external auditors, KPMG and PwC.
• Form 10-K and Form 8-K SEC filings.
• Treasury’s viability criteria for recommending institutions for CPP funding.
~ Interviewed the following officials:
• DSC officials and examination staff in Washington, D.C. and the SFRO.
• DRR officials and contractors in the Irvine, California field office.
• KPMG and PwC officials responsible for auditing UCB’s financial statements and their legal counsels.
• The CDFI examiner-in-charge who worked on the FDIC examinations of UCB.
• SEC and FRBSF officials.
Coordination with the Special Inspector General for the Troubled Asset Relief Program (SIGTARP)
We coordinated with SIGTARP in completing the TARP CPP objective.
Internal Control, Reliance on Computer-processed Information, Performance Measurement, and Compliance with Laws and Regulations
Consistent with the audit objectives, we did not assess DSC’s overall internal control or management control structure. We relied on information in DSC systems, examination reports, and interviews of examiners to understand UCB’s management controls pertaining to causes of failure and material loss as discussed in the body of this report.
We obtained data from various FDIC systems but determined that information system controls were not significant to the audit objectives and, therefore, did not evaluate the effectiveness of information system controls. We relied on our analysis of information from various sources, including reports of examination, correspondence files, and
35 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page43 of 51 Appendix 1 Objectives, Scope, and Methodology
testimonial evidence to corroborate data obtained from systems that were used to support our audit conclusions.
The Government Performance and Results Act of 1993 (GPRA) directs Executive Branch agencies to develop a customer-focused strategic plan, align agency programs and activities with concrete missions and goals, and prepare and report on annual performance plans. For this material loss review, we did not assess the strengths and weaknesses of DSC’s annual performance plan in meeting the requirements of the GPRA because such an assessment is not part of the audit objectives. DSC’s compliance with the GPRA is reviewed in program audits of DSC operations.
Regarding compliance with laws and regulations, we performed tests to determine whether the FDIC had complied with PCA provisions by timely issuing PCA letters to UCB, notifying it of its Undercapitalized and Significantly Undercapitalized status. We also analyzed the restrictions that were imposed through PCA letters and Directives and assessed the FDIC’s monitoring of UCB’s compliance with CPP provisions.
The results of our tests were discussed, where appropriate, in the report. Additionally, we assessed the risk of fraud and abuse related to our objectives in the course of evaluating
audit evidence.
Related Coverage of Financial Institution Failures
On May 1, 2009, the OIG issued an internal memorandum that outlined major causes, trends, and common characteristics of FDIC-supervised financial institution failures that had resulted in a material loss to the DIF. The memorandum also indicated that the OIG planned to provide more in-depth coverage of those issues and make related recommendations, when appropriate. Since May 1, 2009, the OIG has issued additional MLR reports related to failures of FDIC-supervised institutions and these reports can be found at http://www.fdicig.gov . In June 2010, the OIG initiated an audit, the objectives of which are to (1) determine the actions that the FDIC has taken to enhance its supervision program since May 2009, including those specifically in response to the May 2009 memorandum, and (2) identify trends and issues that have emerged from subsequent MLRs.
In addition, with respect to more in-depth coverage of specific issues, in May 2010, the OIG initiated an evaluation of the role and federal regulators’ use of the Prompt Regulatory Action provisions of the FDI Act (section 38, PCA and section 39, Standards for Safety and Soundness ) in the banking crisis.
36 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page44 of 51 Appendix 2 Glossary of Terms
Term Definition
Acquisition, ADC loans are a component of Commercial Real Estate that provide Development, and funding for acquiring and developing land for future construction, and Construction providing interim financing for residential or commercial structures. (ADC) Loans Adversely Assets subject to criticism and/or comment in an examination report. Classified Assets Adversely classified assets are allocated on the basis of risk (lowest to
highest) into three categories: Substandard, Doubtful, and Loss.
Allowance for The ALLL is an estimate of uncollectible amounts that is used to reduce Loan and Lease the book value of loans and leases to the amount that is expected to be Losses (ALLL) collected. It is established in recognition that some loans in the institution’s overall loan and lease portfolio will not be repaid. Boards of directors are responsible for ensuring that their institutions have controls in place to consistently determine the allowance in accordance with the institutions' stated policies and procedures, generally accepted accounting principles, and supervisory guidance.
Bank Secrecy Act Congress enacted the BSA of 1970 to prevent banks and other financial (BSA) service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, criminal activity. The BSA requires financial institutions to maintain appropriate records and to file certain reports, including cash transactions over $10,000 via the Currency Transactions Reports (CTR). These reports are used in criminal, tax, or regulatory investigations or proceedings.
Call Report Reports of Condition and Income, often referred to as Call Reports, include basic financial data for insured commercial banks in the form of a balance sheet, an income statement, and supporting schedules. According to the Federal Financial Institutions Examination Council’s (FFIEC) instructions for preparing Call Reports, national banks, state member banks, and insured nonmember banks are required to submit a Call Report to the FFIEC’s Central Data Repository (an Internet-based system used for data collection) as of the close of business on the last day of each calendar quarter.
Commercial Real CRE loans are land development and construction loans (including Estate (CRE) 1-to-4 family residential and commercial construction loans), and other Loans land loans. CRE loans also include loans secured by multifamily property and nonfarm nonresidential property, where the primary source of repayment is derived from rental income associated with the property, or the proceeds of the sale, refinancing, or permanent financing of the property.
37 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page45 of 51 Appendix 2 Glossary of Terms
Term Definition
I Concentration A concentration is a significantly large volume of economically related assets that an institution has advanced or committed to a certain industry, person, entity, or affiliated group. These assets may, in the aggregate, present a substantial risk to the safety and soundness of the institution. FDIC’s The FDIC’s supervision program promotes the safety and soundness of Supervision FDIC-supervised institutions, protects consumers’ rights, and promotes Program community investment initiatives by FDIC-supervised institutions. The FDIC’s Division of Supervision and Consumer Protection (DSC) (1) performs examinations of FDIC-supervised institutions to assess their overall financial condition, management policies and practices (including internal control systems), and compliance with applicable laws and regulations and (2) issues related guidance to institutions and examiners.
Federal Home FHLBs provide long- and short-term advances (loans) to their members. Loan Bank Advances are primarily collateralized by residential mortgage loans, and (FHLB) government and agency securities. Community financial institutions may pledge small business, small farm, and small agribusiness loans as collateral for advances. Advances are priced at a small spread over comparable U.S. Department of the Treasury obligations.
Form 8-K A form that the Securities and Exchange Commission (SEC) requires publicly-traded companies to file whenever a significant event happens. These events may affect the company's financial state and, therefore, the SEC believes that they should be known to the public. Examples of these events include an acquisition, merger, bankruptcy, or change in the composition of the board of directors. Publicly-traded companies must
file a Form 8-K within 4 days of the event. Form 10-K An annual report required by the SEC that provides a comprehensive summary of a public company's performance. The report includes information such as company history, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements, among other information.
Formal Actions Notices or orders issued by the FDIC against insured financial institutions and/or individual respondents. The purpose of formal actions is to correct noted safety and soundness deficiencies, ensure compliance with federal and state banking laws, assess civil money penalties, and/or pursue removal or prohibition proceedings. Formal actions are legally enforceable. Final orders are available to the public
after issuance.
38 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page46 of 51 Appendix 2 Glossary of Terms
Term Definition
Informal Actions Voluntary commitments made by an insured financial institution’s board of directors. Such actions are designed to correct noted safety and soundness deficiencies or ensure compliance with federal and state laws. Informal actions are not legally enforceable and are not available to the
public.
Large Insured The FDIC established the LIDI program to assess and report on emerging Depository risks at all institutions with total assets of $10 billion or more as well as Institution (LIDI) other selected institutions. Under this program, regional case managers Program perform ongoing analyses of emerging risks within each insured institution and assign a quarterly risk rating. Case managers also maintain contact with the primary federal regulator for each institution in the LIDI program. Data obtained through this program are analyzed and key issues are reported to corporate executives regularly for use in policy and operational discussions. In addition, senior financial institution analysts with the Complex Financial Institutions Branch complete offsite analyses in order to meet the Corporation’s risk information needs and
form appropriate supervisory strategies.
Material Loss As defined by section 38(k)(2)(B) of the FDI Act, a loss is material if it exceeds the greater of $25 million or 2 percent of an institution’s total assets at the time the FDIC was appointed as the receiver. Offsite Review The FDIC’s Offsite Review Program is designed to identify emerging Program supervisory concerns and potential problems so that supervisory strategies can be adjusted appropriately. Offsite reviews are performed quarterly for each bank that appears on the Offsite Review List. Regional management is responsible for implementing procedures to ensure that Offsite Review findings are factored into examination schedules and
other supervisory activities. Prompt The purpose of PCA is to resolve the problems of insured depository Corrective Action institutions at the least possible long-term cost to the Deposit Insurance (PCA) Fund. Part 325, subpart B, of the FDIC Rules and Regulations, 12 CFR, section 325.101, et. seq., implements section 38, Prompt Corrective Action , of the FDI Act, 12 United States Code section 1831(o), by establishing a framework for determining capital adequacy and taking supervisory actions against depository institutions that are in an unsafe or unsound condition. The following terms are used to describe capital adequacy: (1) Well Capitalized , (2) Adequately Capitalized, (3) Undercapitalized, (4) Significantly Undercapitalized , and (5) Critically Undercapitalized.
A PCA Directive is a formal action seeking corrective action or compliance with the PCA statute with respect to an institution that falls within any of the three categories of undercapitalized institutions.
39 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page47 of 51 Appendix 2 Glossary of Terms
Term Definition
Uniform Bank The UBPR is an individual analysis of financial institution financial data Performance and ratios that includes extensive comparisons to peer group Report (UBPR) performance. The report is produced by the Federal Financial Institutions Examination Council for the use of banking supervisors, bankers, and the general public and is produced quarterly from Call Report data submitted by banks. Uniform Financial institution regulators and examiners use the Uniform Financial Financial Institutions Rating System to evaluate a bank’s performance in six Institutions components represented by the CAMELS acronym: Capital adequacy, Rating System Asset quality, Management practices, Earnings performance, Liquidity (UFIRS) position, and Sensitivity to market risk. Each component, and an overall composite score, is assigned a rating of 1 through 5, with 1 having the least regulatory concern and 5 having the greatest concern.
40 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page48 of 51 Appendix 3 Acronyms
ADC Acquisition, Development, and Construction
ALLL Allowance for Loan and Lease Losses
BBR Bank Board Resolution
BSA Bank Secrecy Act
CAMELS Capital, asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk
CDFI California Department of Financial Institutions
CEO Chief Executive Officer
CFR Code of Federal Regulations
CPP Capital Purchase Program
CRE Commercial Real Estate
DIF Deposit Insurance Fund
DRR Division of Resolutions and Receiverships
DSC Division of Supervision and Consumer Protection
EESA Emergency Economic Stabilization Act of 2008
FDI Federal Deposit Insurance
FHLB Federal Home Loan Bank
FRB Board of Governors of the Federal Reserve System
FRBSF Federal Reserve Bank of San Francisco
GPRA Government Performance and Results Act of 1993
IARD Independent Asset Review Division
IT Information Technology
LIDI Large Insured Depository Institution
OCC Office of the Comptroller of the Currency
OIG Office of Inspector General
ORL Offsite Review List
OTS Office of Thrift Supervision
41 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page49 of 51 Appendix 3 Acronyms
PCA Prompt Corrective Action
PwC PricewaterhouseCoopers LLC
REO Real Estate Owned
SFRO San Francisco Regional Office
SIGTARP Special Inspector General for the Troubled Asset Relief Program
TARP Troubled Asset Relief Program
UBPR Uniform Bank Performance Report
UCB United Commercial Bank
UCBC United Commercial Bank (China) Limited
UCBH United Commercial Bank Holdings, Inc.
42 Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page50 of 51
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N C Case3:09-cv-04208-JSW Document217-1 Filed01/09/12 Page51 of 51 Appendix 5 Corporation Comments FDIC Federal Deposit Insurance Corporation 550 17th Street NW, Washington, D.C. 20429-9990 Division of Supervision and Consumer Protection
July 20, 2010 TO: Stephen Beard Assistant Inspector General for Material Loss Reviews
/Signed/ FROM: Sandra L. Thompson Director
SUBJECT: Draft Audit Report Entitled, Material Loss Review of United Commercial Bank, San Francisco, California (Assignment No. 2010-019)
Pursuant to Section 38(k) of the Federal Deposit Insurance Act, the Federal Deposit Insurance Corporation’s Office of Inspector General (OIG) conducted a material loss review of United Commercial Bank (UCB), San Francisco, California, which failed on November 6, 2009. This memorandum is the response of the Division of Supervision and Consumer Protection (DSC) to the OIG’s Draft Report (Report) received on June 25, 2010.
UCB failed due to inadequate oversight by the Board of Directors (Board) and management during the institution’s rapid expansion. Management controls were insufficient to prevent the occurrence of inaccuracies, omissions, and misrepresentations by UCB management and staff and ultimately masked the true condition of the institution. Further contributing to UCB’s failure were the high concentrations in acquisition, development, and construction (ADC) and commercial real estate (CRE) loans supported by heavy reliance on non-core funding sources. UCB was closed due to overall deterioration in its loan portfolio, poor earnings, and inadequate capital.
From 2005 through 2009, the FDIC and the California Department of Financial Institutions (CDFI) jointly and separately completed four examinations, one targeted review, two visitations, three offsite reviews, two relationship manager contacts, and quarterly Large Insured Depository Institution (LIDI) reviews. Examiners identified key risks and brought them to the attention of UCB’s Board and management in examination reports and other correspondence. In December 2008, FDIC and CDFI downgraded both asset quality and earnings to component ratings of “3,” and further deterioration was discovered during the April 2009 joint targeted review. Subsequently, the holding company’s external auditor revealed that UCB’s management had begun around October 2008, to conceal serious financial reporting issues. The deterioration noted in the April 2009 targeted review coupled with the reporting irregularities resulted in substantially higher than projected provision expenses, further rating downgrades, and the issuance of a formal enforcement action. UCB was unable to resolve the mounting problems and raise capital to remain viable.
DSC issued Interagency Guidance on CRE Monitoring in 2006 and a Financial Institution Letter to banks on Managing Commercial Real Estate Concentrations in a Challenging Environment in 2008 that re-emphasized the importance of robust credit risk-management practices for institutions with concentrated CRE exposures and set forth broad supervisory expectations. Additionally, DSC issued a Financial Institution Letter in 2009 on The Use of Volatile or Special Funding Sources by Financial Institutions That Are in a Weakened Condition to enhance our supervision of institutions, such as UCB, with concentrated CRE/ADC lending and reliance on volatile non-core funding.
Thank you for the opportunity to review and comment on the Report.
44 Case3:09-cv-04208-JSW Document217-2 Filed01/09/12 Page1 of 19
EXHIBIT B exv10w2 http://www.sec.gov/Archives/edgar/data/1061580/000095012309042457...
Case3:09-cv-04208-JSW Document217-2 Filed01/09/12 Page2 of 19
EX-10.2 3 f53517exv10w2.htm EX-10.2
EXhIBIT 10.2
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
CALIFORNIA DEPARTMENT OF FINANCIAL INSTITUTIONS
SAN FRANCISCO, CALIFORNIA
) In the Matter of ) ) ORDER TO CEASE AND DESIST UNITED COMMERCIAL BANK ) SAN FRANCISCO, CALIFORNIA ) FDIC-09-490b ) (INSURED STATE NONMEMBER BANK) )
United Commercial Bank, San Francisco, California (“Bank”), having been advised of its right to a NOTICE OF CHARGES
AND OF HEARING detailing the unsafe or unsound banking practices alleged to have been committed by the Bank and of its right to
a hearing on the alleged charges under section 8(b)(1) of the Federal Deposit Insurance Act (“Act”), 12 U.S.C. § 1818(b)(1), and
Section 1912 of the California Financial Code, and having waived those rights, entered into a STIPULATION AND CONSENT TO
THE ISSUANCE OF AN ORDER TO CEASE AND DESIST (“CONSENT AGREEMENT”) with counsel for the Federal Deposit
Insurance Corporation (“FDIC”), and with counsel for the California Department of Financial Institutions (“CDFI”), dated
September 3, 2009, whereby solely for the purpose of this proceeding and without admitting or denying the alleged charges of unsafe
or unsound banking practices and violations of law and/or regulations, the Bank consented to the issuance of an ORDER TO CEASE
AND DESIST (“ORDER”) in accordance with Section 8(b) of the Act and Financial Code Section 1913 by the FDIC and the CDFI,
respectively.
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The FDIC and the CDFI considered the matter and determined that they had reason to believe that the Bank had engaged in
unsafe or unsound banking practices. The FDIC and the CDFI, therefore, accepted the CONSENT AGREEMENT and issued the
following:
ORDER TO CEASE AND DESIST
IT IS HEREBY ORDERED, that the Bank, its institution-affiliated parties, as that term is defined in section 3(u) of the Act, 12
U.S.C. § 1813(u), and its successors and assigns, cease and desist from the following unsafe and unsound banking practices, as more
fully set forth in the Joint FDIC and CDFI Report of Examination dated April 6, 2009 (“ROE”):
(a) operating with management whose policies and practices are detrimental to the Bank and jeopardize the safety of its
deposits;
(b) operating with a board of directors which has failed to provide adequate supervision over and direction to the active
management of the Bank;
(c) operating with inadequate capital in relation to the kind and quality of assets held by the Bank;
(d) operating with an inadequate loan valuation reserve;
(e) operating with a large volume of poor quality loans;
(f) engaging in unsatisfactory lending and collection practices;
(g) operating in such a manner as to produce operating losses;
(h) operating with inadequate provisions for liquidity; and
(i) operating in violation of the following laws and regulations:
(i) Section 7(a)(1) of the Federal Deposit Insurance Act, 12 U.S,C, § 1817(a)(1); and
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(ii) Section 103.121(b)(2)(i)(B) of the United States Department of the Treasury’s Financial Recordkeeping
regulations, 31 C.F.R. § 103.121(b)(2)(i)(B).
(j) operating in contravention of the following:
(i) Appendix A to Part 364 of the FDIC’s Rules and Regulations, 12 C.F.R. Part 364, Appendix A;
(ii) Appendix A to Part 365 of the FDIC Rules and Regulations, 12 C.F.R. Part 365 Appendix A; and
(iii) the Statement of Policy entitled “Interagency Appraisal and Evaluation Guidelines.”
IT IS FURTHER ORDERED, that the Bank, its institution-affiliated parties, and its successors and assigns, take affirmative
action as follows:
MANAGEMENT
1. The Bank shall have and retain qualified management.
(a) Each member of management shall have qualifications and experience commensurate with his or her duties and
responsibilities at the Bank. Management shall include
(i) a chief executive officer with proven ability in managing a bank of comparable size and risk profile;
(ii) a chief financial officer with proven ability in all aspects of financial management; and
(iii) a chief credit officer with significant lending, collection, and loan supervisory experience and experience
in upgrading a low quality loan portfolio.
Each member of management shall be provided appropriate written authority from the Bank’s Board of Directors (“Board”) to implement the provisions of this ORDER.
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(b) The qualifications of management shall be assessed on its ability to:
(i) comply with the requirements of this ORDER;
(ii) operate the Bank in a safe and sound manner;
(iii) comply with applicable laws and regulations; and
(iv) restore all aspects of the Bank to a safe and sound condition, including asset quality, capital adequacy,
earnings, management effectiveness, liquidity, and sensitivity to market risk.
(c) During the life of this ORDER, the Bank shall notify the Regional Director of the FDIC’s San Francisco Regional
Office (“Regional Director”) and the Commissioner of the California Department of Financial Institutions (“Commissioner”) in
writing when it proposes to add or replace any individual on the Board or employ any individual as a senior executive officer, or
change the responsibilities of any existing senior executive officer to include the responsibilities of another senior executive officer
position. The term “senior executive officer” shall have the same meaning as described in Part 303 of the FDIC’s Rules and
Regulations, 12 C.F.R. § 303.102. The notification shall include a completed Interagency Notice of Change in Director or Senior
Executive Officer and Interagency Biographical and Financial Report and must be received at least 30 days before the addition,
employment or change of responsibilities is intended to become effective. The Regional Director and the Commissioner shall have
the power under the authority of this Order to disapprove the addition, employment or change of responsibilities of any proposed
officer or director.
(d) The requirement to submit information and the prior disapproval provisions of this paragraph are based upon the
authority of 12 U.S.C. § 1818(b) and do not require the Regional Director and the Commissioner to complete their review and act on
any
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such information or authority within 30 days, or any other timeframe. The Bank shall not add, employ or change the responsibilities of
any proposed director or senior executive officer until such time as the Regional Director and the Commissioner have completed their
review.
(e) Within 90 days after the effective date of this ORDER, the Board shall obtain an independent study of the
management and personnel structure of the Bank to determine whether additional personnel are needed for the safe and profitable
operation of the Bank. Such a study shall include, at a minimum, a review of the duties, responsibilities, qualifications, and
remuneration of the Bank’s officers. The Board shall formulate a plan to implement the recommendations of the study. The plan shall
be acceptable to the Regional Director and the Commissioner as determined at subsequent examinations.
BOARD PARTICIPATION
2. (a) Within 30 days from the effective date of this ORDER, the Board shall increase its participation in the affairs of the
Bank, assuming full responsibility for the approval of sound policies and objectives and for the supervision of all of the Bank’s
activities, consistent with the role and expertise commonly expected for directors of banks of comparable size. This participation
shall include meetings to be held no less frequently than monthly at which, at a minimum, the following areas shall be reviewed and
approved: reports of income and expenses; new, overdue, renewal, insider, charged-off, and recovered loans; investment activity;
operating policies; and individual committee actions. The Board’s minutes shall document these reviews and approvals, including the
names of any dissenting directors.
CAPITAL
3. (a) By December 31, 2009, the Bank shall have and thereafter maintain Tier 1 capital in such an amount as to equal or
exceed 10 percent of the Bank’s total assets (“Leverage Capital Ratio”) and a Tier 1 Risk-Based capital ratio of no less than
12 percent.
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(b) Within 60 days from the effective date of this ORDER, the Bank shall develop and adopt a written capital plan to
meet and thereafter maintain the minimum requirements in Paragraph 3(a) with due considerations to the ongoing condition of the
Bank. The plan shall be in a form and manner acceptable to the Regional Director and the Commissioner. The capital plan must
include a contingency plan in the event that the Bank has (i) failed to maintain the minimum capital ratios required by subparagraph
3(a); (ii) failed to submit an acceptable capital plan as required by this subparagraph; or (iii) failed to implement or adhere to a
capital plan to which the Regional Director and the Commissioner have taken no written objection pursuant to this subparagraph. The
contingency plan shall address other strategic alternatives, including but not limited to the sale of control or merger of the Bank. The
Bank shall implement the contingency plan upon written notice from the Regional Director and the Commissioner.
(c) The level of Tier 1 capital to be maintained during the life of this ORDER pursuant to Paragraph 3(a) shall be in
addition to a fully funded allowance for loan and lease losses, the adequacy of which shall be satisfactory to the Regional Director
and the Commissioner as determined at subsequent examinations and/or visitations.
(d) Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 3 of this ORDER may be
accomplished by the following:
(i) the sale of common stock; or
(ii) the sale of noncumulative perpetual preferred stock; or
(iii) the direct contribution of cash by the Board, shareholders, and/or parent holding company; or
(iv) any other means acceptable to the Regional Director and the Commissioner; or
(v) any combination of the above means.
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Any increase in Tier 1 capital necessary to meet the requirements of Paragraph 3 of this ORDER may not be accomplished through a
deduction from the Bank’s allowance for loan and lease losses.
(e) If all or part of the increase in Tier 1 capital required by Paragraph 3 of this ORDER is accomplished by the sale
of new securities, the Board shall forthwith take all necessary steps to adopt and implement a plan for the sale of such additional
securities, including the voting of any shares owned or proxies held or controlled by them in favor of the plan. Should the
implementation of the plan involve a public distribution of the Bank’s securities (including a distribution limited only to the Bank’s
existing shareholders), the Bank shall prepare offering materials fully describing the securities being offered, including an accurate
description of the financial condition of the Bank and the circumstances giving rise to the offering, and any other material disclosures
necessary to comply with the Federal securities laws. Prior to the implementation of the plan and, in any event, not less than 15 days
prior to the dissemination of such materials, the plan and any materials used in the sale of the securities shall be submitted to the
FDIC, Registration and Disclosure Unit, Washington, D.C. 20429, and to the CDFI, San Francisco Office for review. Any changes
requested to be made in the plan or materials by the FDIC or the CDFI shall be made prior to their dissemination. If the increase in
Tier 1 capital is provided by the sale of noncumulative perpetual preferred stock, then all terms and conditions of the issue, including
but not limited to those terms and conditions relative to interest rate and convertibility factor, shall be presented to the Regional
Director and the Commissioner for prior approval.
(f) In complying with the provisions of Paragraph 3 of this ORDER, the Bank shall provide to any subscriber and/or
purchaser of the Bank’s securities, a written notice of any
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planned or existing development or other changes which are materially different from the information reflected in any offering
materials used in connection with the sale of Bank securities. The written notice required by this paragraph shall be furnished within
10 days from the date such material development or change was planned or occurred, whichever is earlier, and shall be furnished to
every subscriber and/or purchaser of the Bank’s securities who received or was tendered the information contained in the Bank’s
original offering materials.
(g) For the purposes of this ORDER, the terms “Tier 1 capital”, “total assets” and “Tier 1 risk-based capital ratio”
shall have, the meanings ascribed to them in Part 325 of the FDIC’s Rules and Regulations, 12 C.F.R. §§ 325.2(v) and 325.2(x) and
325.2(w).
NOT PAY CASH DIVIDENDS WITHOUT PRIOR APPROVAL
4. The Bank shall not pay cash dividends without the prior written consent of the Regional Director and the Commissioner.
ALLOWANCE FOR LOAN AND LEASE LOSSES
5. (a) The Bank shall immediately replenish its allowance for loan and lease losses and thereafter maintain an adequate
allowance for loan and lease losses at all time.
(b) Additionally, within 60 days from the effective date of this ORDER, the Board shall develop or revise, adopt and
implement a comprehensive policy for determining the adequacy of the allowance for loan and lease losses. For the purpose of this
determination, the adequacy of the reserve shall be determined after the charge-off of all loans or other items classified “Loss.” The
policy shall provide for a review of the allowance at least once each calendar quarter. The review should focus on the results of the
Bank’s internal loan review, loan loss experience, trends of delinquent and non-accrual loans, an estimate of potential loss exposure
of significant credits, concentrations of credit, and present and prospective economic conditions. A deficiency in the allowance shall
be remedied in the calendar quarter it is
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discovered, prior to submitting the Report of Condition, by a charge to current operating earnings. The minutes of the Board meeting
at which such review is undertaken shall indicate the results of the review. Upon completion of the review, the Bank shall increase
and maintain its allowance for loan and lease losses consistent with the allowance for loan and lease loss policy established. Such
policy and its implementation shall be satisfactory to the Regional Director and the Commissioner as determined at subsequent
examinations and/or visitations.
CHARGE-OFF
6. (a) On the effective date of this ORDER, the Bank shall eliminate from its books, by charge-off or collection, all assets
classified “Loss” and one-half of the assets classified “Doubtful” in the ROE dated April 6, 2009 that have not been previously
collected or charged off. Elimination of these assets through proceeds of other loans made by the Bank is not considered collection
for the purpose of this paragraph.
(b) Within 30 days from the effective date of this ORDER, the Bank shall formulate a written plan to reduce the Bank’s
risk exposure in each asset adversely classified “Substandard” or “Doubtful” in the ROE dated April 6, 2009, including all
outstanding loan commitments, to a level of an acceptable asset quality. For purposes of this provision, “reduce” means to collect,
charge off, or improve the quality of an asset so as to warrant its removal from adverse classification by the Regional Director and
the Commissioner. In developing the plan mandated by this paragraph, the Bank shall, at a minimum, and with respect to each
adversely classified loan or lease, review, analyze, and document the financial position of the borrower, including source of
repayment, repayment ability, and alternative repayment sources, as well as the value and accessibility of any pledge or assigned
collateral, and any possible actions to improve the Bank’s collateral position.
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(c) In addition, the plan mandated by this provision shall also include, but not be limited to, the following:
(i) A schedule for reducing the outstanding dollar amount of each such adversely classified asset, including
timeframes for achieving the reduced dollar amounts (at a minimum, the schedule for each such adversely classified asset must show
its expected dollar balance on a quarterly basis);
(ii) Specific action plans intended to reduce the Bank’s risk exposure in each such classified asset;
(iii) A schedule showing, on a quarterly basis, the expected consolidated balance of all such adversely
classified assets, and the ratio of the consolidated balance to the Bank’s projected Tier 1 capital plus the allowance for loan and
lease losses;
(iv) A provision for the Bank’s submission of monthly written progress reports to its Board; and
(v) A provision mandating Board review of the progress reports, with a notation of the review recorded in the
minutes of the meeting of the Board.
(d) The requirements of this paragraph do not represent standards for future operations of the Bank. Following
compliance with the above reduction schedule, the Bank shall continue to reduce the total volume of adversely classified assets. The
plan may include a provision for increasing Tier 1 capital when necessary to achieve the prescribed ratio.
(e) The Bank shall, immediately upon completion, submit the plan to the Regional Director and the Commissioner for
approval. Thereafter, the Bank shall implement and fully comply with the plan.
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NO ADDITIONAL CREDIT WITHHOUT PRIOR APPROVAL BY THE BANK’S
BOARD
7. (a) Beginning with the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional
credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged off or
classified, in whole or in part, “Loss” and is uncollected. Paragraph 7(a) of this ORDER shall not prohibit the Bank from renewing or
extending the maturity of any credit in accordance with the Financial Accounting Standards Board Statement Number 15 (“FASB
15”).
(b) Beginning with the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional
credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been classified, in
whole or part, “Doubtful” without the prior approval of a majority of the Board or the loan committee of the Bank.
(c) Beginning with the effective date of this ORDER, the Bank shall not extend, directly or indirectly, any additional
credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank in excess of $1,000,000 that
has been classified, in whole or part, “Substandard” without the prior approval of a majority of the Board or the loan committee of
the Bank.
(d) The loan committee or Board shall not approve any extension of credit, or additional credit to a borrower in
Paragraphs (b) and (c) above without first collecting in cash all past due interest.
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LENDING AND COLLECTION POLICIES
8. (a) Within 60 days from the effective date of this ORDER, the Bank shall revise, adopt, and implement written lending
and collection policies to provide effective guidance and control over the Bank’s lending function, which policies shall include
specific guidelines for placing loans on a non-accrual basis. In addition, the Bank shall obtain adequate and current documentation for
all loans in the Bank’s loan portfolio. Such policies and their implementation shall be in a form and manner acceptable to the
Regional Director and the Commissioner as determined at subsequent examinations and/or visitations.
(b) The initial revisions to the Bank’s loan policy and practices, required by this paragraph, at a minimum, shall include
the following:
(i) provisions, consistent with FDIC’s instructions for the preparation of Reports of Condition and Income,
under which the accrual of interest income is discontinued and previously accrued interest is reversed on delinquent loans;
(ii) provisions which prohibit the capitalization of interest or loans related expense unless the Board supports
in writing and records in the minutes of the corresponding Board meeting why an exception thereto is in the best interests of the Bank;
(iii) provisions which require complete loan documentation, realistic repayment terms, and current credit
information adequate to support the outstanding indebtedness of the borrower. Such documentation shall include current financial
information, profit and loss statements or copies of tax returns and cash flow projections;
(iv) provisions which incorporate limitations on the amount that can be loaned in relation to established
collateral values;
(v) provisions which specify the circumstances and conditions under which real estate appraisals must be
conducted by an independent third party;
(vi) provisions which establish standards for unsecured credit;
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(vii) provisions that the Board first determine that the lending staff has the expertise necessary to properly
supervise construction loans and that adequate procedures are in place to monitor any construction involved before funds are
disbursed;
(viii) provisions which prohibit concentrations of credit in excess of 25 percent of the Bank’s total equity capital
and reserves to any borrower and that borrower’s related interests;
(ix) provisions which require the preparation of a loan “watch list” which shall include relevant information on
all loans which are classified “Substandard” and “Doubtful” in the ROE dated April 6, 2009, or by the FDIC or the CDFI in
subsequent Reports of Examination and all other loans which warrant individual review and consideration by the Board as
determined by the loan committee or active management. The loan “watch list” shall be presented to the Board for review at least
monthly with such review noted in the minutes;
(x) provisions which require an accurate internal grading system;
(xi) provisions which require independent loan review; and
(xii) the Board shall adopt procedures whereby officer compliance with the revised loan policy is monitored
and responsibility for exceptions thereto assigned. The procedures adopted shall be reflected in minutes of a Board meeting at which
all members are present and the vote of each is noted.
REDUCE CONCENTRATION OF CREDIT
9. Within 60 days from the effective date of this ORDER, the Bank shall develop a written plan, approved by its Board and
acceptable to the Regional Director and the Commissioner for systematically reducing the amount of loans or other extensions of
credit advanced, directly or indirectly, to or for the benefit of, any borrowers in the “Land Development and Concentration Loan”
Concentrations, as more fully set forth in the ROE dated April 6, 2009.
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Such plan shall address compliance with the provisions of the Financial Institution Letter entitled “Commercial Real Estate Lending:
Joint Guidance” FIL-104-2006.
THREE YEAR STRATEGIC PLAN
10. Within 90 days of the effective date of this ORDER, the Bank shall develop and submit to the Regional Director and the
Commissioner a written three-year strategic plan. Such plan shall include specific goals for the dollar volume of total loans, total
investment securities, and total deposits as of December 31, 2009, December 31, 2010, and December 31, 2011. For each time frame,
the plan will also specify the anticipated average maturity and average yield on loans and securities; the average maturity and average
cost of deposits; the level of earning assets as a percentage of total assets; and the ratio of net interest income to average earning
assets. The plan shall be in a form and manner acceptable to the Regional Director and the Commissioner as determined at subsequent
examinations and/or visitations.
PROFIT PLAN
11. Within 90 days from the effective date of this ORDER, the Bank shall formulate and implement a written profit plan. This
plan shall be forwarded to the Regional Director and the Commissioner for review and comment and shall address, at a minimum, the
following:
(a) goals and strategies for improving and sustaining the earnings of the Bank, including:
(i) an identification of the major areas in, and means by which, the Board will seek to improve the Bank’s
operating performance;
(ii) realistic and comprehensive budgets;
(iii) a budget review process to monitor the income and expenses of the Bank to compare actual figures with
budgetary projections; and
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(iv) a description of the operating assumptions that form the basis for, and adequately support, major projected
income and expense components.
(b) coordination of the Bank’s loan, investment, and operating policies, and budget and profit planning, with the funds
management policy.
ELIMINATE AND/OR CORRECT ALL VIOLATIONS OF LAW CITED IN THE ROE
12. Within 60 days from the effective date of this ORDER, the Bank shall eliminate and/or correct all violations of law, as
more fully set forth in the ROE dated April 6, 2009. In addition, the Bank shall take all necessary steps to ensure future compliance
with all applicable laws and regulations.
POLICY FOR LIQUIDITY & FUNDS MANAGEMENT
13. Within 30 days from the effective date of this ORDER, the Board shall develop policies and plans for maintaining an
adequate level of liquid assets and borrowing capacity and reducing reliance on non-core funding sources. Such policies and plans
shall provide for ongoing monitoring of liquidity and be in a form and manner acceptable to the Regional Director and the
Commissioner as determined at subsequent examinations and/or visitations.
CALL REPORT
14. Within 10 days after eliminating from its books any asset in compliance with Paragraph 6(a) of this ORDER and
replenishing the allowance for loan and lease losses to an adequate level, the Bank shall file with the FDIC’s amended Consolidated
Reports of Condition and Income, which shall accurately reflect the financial condition of the Bank in the ROE dated April 6, 2009.
Thereafter, during the life of this ORDER, the Bank shall file with the FDIC’s Consolidated Reports of Condition and Income which
accurately reflect the financial condition of the Bank as of the end of the period for which the Reports are filed, including any
adjustment
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in the Bank’s books made necessary or appropriate as a consequence of any CDFI or FDIC’s examination of the Bank during that
reporting period.
BROKERED DEPOSITS
15. (a) Within 10 days of the effective date of this ORDER, the bank shall submit to the Regional Director and the
Commissioner a written plan for eliminating its reliance on brokered deposits. The plan should contain details as to the current
composition of brokered deposits by maturity and explain the means by which such deposits will be paid or rolled over. The
Regional Director and the Commissioner shall have the right to reject the Bank’s plan. The Bank shall provide a written progress
report, quarterly as required under this Order, to the Regional Director and the Commissioner detailing the level, source, and use of
brokered deposits with specific reference to progress under the Bank’s plan. For purposes of this ORDER, brokered deposits are
defined as described in section 337.6(a)(2) of the FDIC’s Rules and Regulations
(b) Within 30 days of the effective date of this ORDER, the Bank shall certify in writing to the Regional Director and
the Commissioner that the pricing of all the Bank’s deposit products is in compliance with interest rate limitations in section 337.6 of
the FDIC’s Rules and Regulations. Such written certification should be accompanied by data and analysis adequate to support the
Bank’s conclusion. Thereafter, the Bank shall make such certification and data available for the review of the Regional Director and
the Commissioner as requested at subsequent examinations and/or visitations.
NO BRANCHING ACTIVITIES WITHOUT PRIOR APPROVAL
16. The Bank, its subsidiaries, and affiliates shall not engage in any expansionary activities, including opening any branches,
without the prior written consent of the Regional Director and the Commissioner.
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PUBLIC ANNOUNCEMENTS AND NOTIFICATIONS
17. The Bank shall notify the Regional Director and the Commissioner in advance of making any public announcement or
notification.
PROGRESS REPORTS
18. Within 30 days of the end of the first quarter, following the effective date of this ORDER, and within 30 days of the end
of each quarter thereafter, the Bank shall furnish written progress reports to the Regional Director and the Commissioner detailing the
form and manner of any actions taken to secure compliance with this ORDER and the results thereof. Such reports shall include a
copy of the Bank’s Report of Condition and the Bank’s Report of Income. Such reports may be discontinued when the corrections
required by this ORDER have been accomplished and the Regional Director and the Commissioner have released the Bank in writing
from making further reports.
DISCLOSURE
19. Following the effective date of this ORDER, the Bank shall send to its shareholder(s) or otherwise furnish a description
of this ORDER in conjunction with the Bank’s next shareholder communication and also in conjunction with its notice or proxy
statement preceding the Bank’s next shareholder meeting. The description shall fully describe the ORDER in all material respects.
The description and any accompanying communication, statement, or notice shall be sent to the FDIC, Accounting and Securities
Section, Washington, D.C. 20429, and to the San Francisco Office of the CDFI at least 15 days prior to dissemination to shareholders.
Any changes requested to be made by the FDIC and the CDFI shall be made prior to dissemination of the description, communication,
notice, or statement.
This ORDER will become effective upon its issuance by the FDIC and the CDFI. The provisions of this ORDER shall remain
effective and enforceable except to the extent that, and
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until such time as, any provisions of this ORDER shall have been modified, terminated, suspended, or set aside by the FDIC and the
CDFI.
Pursuant to delegated authority.
Dated at San Francisco, California, this 3rd day of September, 2009.
/s/ J. George Doerr /s/ William S. Haraf
J. George Doerr William S. Haraf
Deputy Regional Director Commissioner
Division of Supervision and Consumer Protection California Department of Financial
San Francisco Region Institutions Federal Deposit Insurance Corporation
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EXHIBIT C Case3:09-cv-04208-JSW Document217-3 Filed01/09/12 Page2 of 16 Case3:11-cr-0O-3SW Documenti FiIedO9/15/Uage1 of 15 NNW tantttb *tateo '=&trict Court...., FOR THE NORTHERN DISTRICT OF CALIFORNIA
VENUE: SAN FRANCISCO
UNITED STATES OF AMERICA, Cf. ii
EBRAHIM SHABUDIN and THOMAS YU, 4IC
DEFENDANT(S).
INDICTMENT
Violations: 18 U.S.C. § 1349— Conspiracy to Commit Securities Fraud; 18 U.S.C. § 1348—Securities Fraud; 15 U.S.C. §§ 78m(b)(2) (A), 78m(b)(5), 78ff and 17 C.F.R. § 240.13b2-1 - Falsifying Corporate Books and Records; 15 U.S.C. § 78ff and 17 C.F.R. §
240.13b2-2 - False Statements to Accountants of a Publicly Traded Company; 18 U.S.C. § 2— Aiding and Abetting; 18 U.S.C. § 981(a) (1)(C) and 28 U.S.C. § 2461 - Forfeiture of Fraud Proceeds
1~'®rwl" AZ- O*O Foreman
Filed in open court this day of
Ada MecAns Clerk
Bail, \' CorOY UntOd States MaQ1S rate Judge ( Case3:09-cv-04208-JSW Document217-3 Filed01/09/12 PaQe3 of 16 Case3:11-cr-00-JSW Documentl FiIedO9/15/11 Page2 01 15 AD 257 (Rei. 6/78) % %.111 Nod DEFENDANT INFORMATION RELATIVE TO A CRIMINAL ACTIONCTION --—-- IN U.S. DISTRICT COURT -9---- 5 B"( LI C0ft..AINT Li INFORMATION [i INDICTMENT Name of District Court, and eiMagfstrttb lion - ____ SUPERSEDING NORTHERN OFFENSE CHARGED Li [ SAN F 18 U.S.C. § 1349- Securities Fraud Conspiracy 18 U.S.C. § [J Petty 1348- Securities Fraud; 15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5), 78ff and 17 C.F.R. § 240.13b2-1 - Falsifying Corporate Books Li Minor DEFENDANT - U.S and Records; 15 U.S.C. S 78ff and 17 C.F.R. § 240,13b2-2 False Statements to Accountants; 18 U.S.C. § 2-Aiding and Misde- Abetting; 18 U.S.C. § 981 (a)(1)(C) and 28 U.S.C.S 2461 Li meanor THOMAS VU Forfeiture Felony PENALTY: See Attachment A NUMBER L 1 0 664 DEFENDANT r ru sf,, IS NOT IN CUSTODY Name of Complaintarit Agency, or Person (& Title, if any) Has not been arrested, pending outcome this proceeding, 1) If not detained give date any prior summons was served on above charges FBI / SIGTARP / FDIC-OIG I FRB-OIG
person is awaiting trial in another Federal or State Court, Is a Fugitive Li give name of court 2)Li 3)Li Is on Bail or Release from (show District)
this person/proceeding is transferred from another district NDCA Li per (circle one) FRCrp 20, 21, or 40. Show District IS IN CUSTODY 4) Li On this charge this is a reprosecution of charges previously dismissed On another conviction Li SHOW 5)Li which were dismissed on motion Federal State of: DOCKET NO. Li Li 6) Li Awaiting trial on other charges Li U.S. ATTORNEY Li DEFENSE If answer to (6) is "Yes", show name of institution
this prosecution relates to a pending case involving this same Has detainer Li Yes } It "Yes" Li give date defendant MAGISTRATE been filed? j N 0 filed CASE NO. prior proceedings or appearance(s) DATE OF Month/Day/Year Li before U.S. Magistrate regarding this ARREST defendant were recorded under Or... If Arresting Agency & Warrant were not Name and Office of Person DATE TRANSFERRED Month/Day/Year Furnishing Information on this form MELINDA HAAG TO U.S. CUSTODY J U.S. Attorney fl Other U.S. Agency
Name of Assistant U.S. This report amends AO 257 previously submitted Attorney (if assigned) Jeffrey Rabkfn / Adam Reeves Li ADDITIONAL INFORMATION OR COMMENTS PROCESS: Li SUMMONS Li NO PROCESS WARRANT Bail Amount: If Summons, complete following: * Li Arraignment Li Initial Appearance Where defendant previously apprehended on Complaint, no new summons or warrant needed, since Magistrate has scheduled arraignment Defendant Address: Date/Time: Before Judge:
Comments: Case3:09-cv-04208-JSW Document217-3 Filed01/09/12 Page4 of 16 Case3:11-cr-00664-JSW Documenti FiIed09/15/11 Page3 of 15 SwIf 'Nod
- ATTACHMENT A - PENALTY:
The maximum statutory penalty for conspiracy to commit Securities fraud, in violation of Title 18, United States Code, Section 1349, is 25 years, plus a fine of up to $250,000 or twice the gross gain or loss, whichever is higher.
The maximum statutory penalty for securities fraud, in violation of Title 18, United States Code, Section 1348, is 25 years, plus a fine of up to $250,000 or twice the gross gain or loss, whichever is higher.
The maximum statutory penalty for falsifying corporate books and records, in violation of Title 15, United States Code, Sections 78m(b)(2)(A), 78m(b)(5) and 78ff and 17 C.F.R. § 240.13b2-1 is 20 years, plus a fine of up to $5,000,000.
The maximum statutory penalty for making false statements to accountants of a publicly traded company in violation of Title 15, United States Code, Section 78ff and 17 Code of Federal Regulations § 13b2-2 is 20 years, plus a fine of up to $5,000,000. Case3:09-cv-04208-JSW Document217-3 Filed01/09/12 Page5 of 16 Case3:11-cr-00 664- JSW Documentl FiIed09/15/11 Page4 of 15 A9 257 (Rev. 6178) ,
DEFENDANT INFORMATION RELATIVE TO A CRIMINAL ACTION - IN U.S. DIRfCTOURT
BY, 0 .COMPLAINT Li INFORMATION 21 INDICTMENT Name of District Court. and /Magate,,Locatiifl /) _____ Li SUPERSEDING OFFENSE CHARGED f NORTHERN DISTRl L(Fol SAN FRANCISCO DIV 18 U.S.C. § 1349.- Securities Fraud Conspiracy; 18 U.S.C. § Petty QN-' . 1348- Securities Fraud; 15 U.S.C. 0 78n1(b)(2)(A), 78m(b)(5), 78ff and 17C.F.R. § 240.13b2-1 -Falsifying Corporate Books Ej Minor DEFENDANT - U.S and Records; 15 U.S.C. § 78ff and 17 C.F.R. 8 240,13b2-2 - False Statements to Accountants; 18 U.S.C. 52-Aiding and Misde- LI Abetting; 18 U.S.C. § 981 (a)(1)(C) and 28 U.S.C. § 2461 - meanor EBRAF-IIM SHABUDIN Forfeiture JJ Felony PENALTY: See Attachment A jlCT COURT NUMBER 0
DEFENDANT PROCEEDING IS NOT IN CUSTODY Name of ComplaintantAgertcy, or Person (& Title, if any) Has not been arrested, pending outcome this proceeding. 1) J If not detained give date any prior FBI / SIGTARP / FDIC-OIG / FRB-OIG summons was served on above charges
person is awaiting trial in another Federal or State Court, Is a Fugitive give name of court 2) Li
3) Is on Bail or Release from (show District)
NDCA this personlproceeding is transferred from another district per (circle one) FRCrp 20, 21, or 40. Show District IS IN CUSTODY 4) fl On this charge this is a reprosecutiort of charges previously dismissed On another conviction SHOW 5)fl which were dismissed on motion Federal State of: DOCKET NO. fl fl Awaiting trial on other charges U.S. ATTORNEY n DEFENSE 6) Li If answer to (6) is "Yes", show name of institution
this prosecution relates to a pending case involving this same Yes If "Yes" Has detainer Li ) give date defendant MAGISTRATE been filed? No J filed CASE NO. prior proceedings or appearance(s) DATE OF Month/Day/Year before U.S. Magistrate regarding this ARREST defendant were recorded under Or... if Arresting Agency & Warrant were not Name and Office of Person DATE TRANSFERRED Month/Day/Year Furnishing Information on this form MELINDA HAAG TO U.S. CUSTODY U.S. Attorney Other U.S. Agency Name of Assistant U.S. Li This report amends AO 257 previously submitted Attorney (if assigned) Jeffrey Rabkin / Adam Reeves ADDITIONAL INFOPKIIATWIN flP (fsMMPMT PROCESS: Li SUMMONS [III NO PROCESS* [J WARRANT Bail Amount: If Summons, complete following: E] Arraignment Initial Appearance * Where defendant previously apprehended on complaint, no new summons or Li warrant needed, since Magistrate has scheduled arraignment Defendant Address:
Date/Time: Before Judge:
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- ATTACHMENT A -
PENALTY:
The maximum statutory penalty for conspiracy to commit securities fraud, in violation of Title 18, United States Code, Section 1349, is 25 years, plus a fine of up to $250,000 or twice the gross gain or loss, whichever is higher.
The maximum statutory penalty for securities fraud, in violation of Title 18, United States Code, Section 1348, is 25 years, plus a fine of up to $250,000 or twice the gross gain or loss, whichever is higher.
The maximum statutory penalty for falsifying corporate books and records, in violation of Title 15, United States Code, Sections 78m(b)(2)(A), 78m(b)(5) and 78ff and 17 C.F.R. § 240.13b2-1 is 20 years, plus a fine of up to $5,000,000.
The maximum statutory penalty for making false statements to accountants of a publicly traded company in violation of Title 15, United States Code, Section 78ff and 17 Code of Federal Regulations § 13b2-2 is 20 years, plus a fine of up to $5,000,000. Case3:09-cv-04208-JSW Document217-3 Filed01/09/12 Page7 of 16 Case3:11-cr-00-JSW Documenti FiIed09/15/1:Jae6 of 15
1 MELINDA HAAG (CABN 132612) United States Attorney 2
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8 UNITED STATES DISTRICT COURT 9 NORTHERN DISTRICT OF CALIFORNIA 3.0 SAN FRANCISCO DIVISION 13. 12 UNITED STATES OF AMERICA, 0 664 13 Plaintiff, ) VIOLATIONS: 18 U.S.C. § 1349— Conspiracy to :1.4 Commit Securities Fraud; 18 U.S.C. § 1348 - V. Securities Fraud; 15 U.S.C. §§ 78m(b)(2)(A), 1.5 78m(b)(5), 78ff and 17 C.F.R. § 240.13b2-1 - Falsifying Corporate Books and Records; 15 16 EBRAHIM SHABUDIN and U.S.C. § 78ff and 17 C.F.R. § 240.13b2-2— THOMAS YU, False Statements to Accountants of a Publicly 17 Traded Company; 18 U.S.C. § 2 - Aiding and Defendants. Abetting; 18 U.S.C. § 981(a)(1)(C) and 28 18 U.S.C. § 2461 - Forfeiture of Fraud Proceeds 3.9 I
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1 INDICTMENT 2 The Grand Jury charges: 3 INTRODUCTORY ALLEGATIONS 4 At all times relevant to this Indictment, unless otherwise indicated: 5 I, Background 6 A. The Bank 7 1. United Commercial Bank (UCB) was a commercial bank headquartered in San 8 Francisco, California, with branch offices throughout the United States as well as in China and 9 Taiwan. UCB provided a full range of commercial and consumer banking products to businesses 10 and individuals. 11 2. UCBH Holdings, Inc. (UCBH), a Delaware corporation, was the holding company 12 for UCB. UCBH was a publicly traded company whose shares were registered with the United 13 States Securities and Exchange Commission (SEC) and were traded on the National Association 14 of Securities Dealers Automatic Quotation (NASDAQ) system under the symbol "UCBH," 15 Hereafter, UCBH and UCB are referred to collectively as "the Bank." 16 3. As a public company, the Bank was required to comply with the SEC's rules and 17 regulations, which were designed to protect the investing public. Under those rules and 18 regulations, the Bank was required to (a) make and keep books, records, and accounts, which, in 19 reasonable detail, accurately and fairly reflected the transactions and disposition of the assets of 20 the Bank; (b) devise and maintain a system of internal accounting controls sufficient to provide 21 reasonable assurances that the Bank's transactions were recorded as necessary to permit 22 preparation of financial statements in conformity with generally accepted accounting principles; 23 and (c) file annual reports with the SEC that contained audited financial statements that 24 accurately and fairly presented the financial condition of the Bank, as well as other reports that 25 contained information about the Bank's management, board of directors, business operations and 26 performances. 27 4. A public accounting firm acted as the independent auditor of the Bank's annual 28 financial statements and reviewed the financial statements it filed quarterly.
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1. 5. The Bank was regulated by, among other agencies, the Federal Deposit Insurance 2 Corporation (the FDIC). The FDIC required, among other things, that the Bank be adequately 3 capitalized and safely managed at all times. 4 B. The Defendants 5 6. Defendant EBRAHIM SHABUDIN was a resident of Moraga, California, and an 6 Executive Vice President of the Bank. From approximately September 2008 through April 2009, 7 SHABUDIN served as the Bank's Chief Credit Officer and the Chief Operating Officer. 8 7. Defendant THOMAS YU was a resident of San Ramon, California, and a Senior 9 Vice President of the Bank. From approximately June 2008 through June 2009, YU served as 10 the Bank's Manager of Credit Risk and Portfolio Management. 12. C. The Bank's Loan Loss Allowance 12 8. The Bank's business loans were booked as assets on the quarterly and annual 13 financial statements filed with the SEC. Interest accrued on business loans was booked as
2.4 revenue on those quarterly and annual financial statements. 15 9. The Bank assigned risk ratings to its loans. Each rating represented the current 16 likelihood, based on all available information, that the borrower would pay the amount due under
17 the borrower's loan agreement with the Bank. Changes in risk ratings were reflected in internal
18 records specifically prepared for that purpose. 19 10. The Bank deemed a loan to be "impaired" if, based on all current information, it 20 was probable that the Bank would be unable to collect all of the amounts due under the loan 21 agreement. On a quarterly basis, the Bank represented to its regulators, its auditor, and the
22 investing public that the Bank had estimated the total dollar amount of outstanding loans that the 23 Bank would probably not collect from borrowers. This estimate, identified on the Bank's 24 quarterly and annual financial statements as the "Allowance for Loan Losses" (hereafter, the 25 "Loan Loss Allowance"), was derived from, among other things, the Bank's risk ratings as well
26 as the value of the collateral securing the Bank's loans. 27 II. By decreasing the Loan Loss Allowance, the Bank increased net assets on the 28 balance sheet and increased net income on the income statement. For this reason, the size of the
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IM 1 Bank's Loan Loss Allowance was material to stock analysts and the investing public. The 2 Bank's Loan Loss Allowance was also material to bank regulators such as the FDIC, which 3 monitored the Bank's Loan Loss Allowance and total assets to ensure that the Bank was 4 I adequately capitalized. 5 D. The Bank's Expanding Loan Portfolio 6 12. Between 2004 and 2007, the Bank's loan portfolio increased from approximately 7 $4.4 billion to more than $8 billion. By September 2008, the Bank's loan portfolio faced 8 growing losses. 9 13. On or about October 3, 2008, Congress created the Troubled Asset Relief 10 Program (the TARP), as part of the Emergency Economic Stabilization Act of 2008. 11 14. On or about November 14, 2008, the United States provided approximately $298 12 million in TARP funds to the Bank.
13 IL The Scheme to Defraud 14 A. Objectives of the Scheme to Defraud 15 15. Beginning in or about September 2008, SHABUDIN and YU, together with 16 others, engaged in a fraudulent scheme to deceive the investing public, depositors, the SEC. the 17 Bank's auditor, and bank regulators including bank examiners with the FDIC, by manipulating 18 the Bank's books and records in a manner that, as they well knew, (a) misrepresented and 19 concealed the Bank's true financial condition and performance by falsifying the books and 20 records so they did not fairly and accurately reflect, in all material respects, the transactions and 21 dispositions of the assets of the Bank, and omitted facts necessary to make the books and records 22 complete and accurate; and (b) caused the Bank to issue false and misleading statements and 23 representations about its financial condition and performance, because such statements did not 24 fairly and accurately, in all material respects, reflect the Bank's actual financial condition and 25 performance, and omitted facts necessary to make those statements complete and accurate. 26 16. The objectives of the scheme to defraud were, among other things, to (a) conceal, 27 delay, and avoid publicly reporting the Bank's number of impaired loans; (b) conceal, delay, and 28 avoid publicly reporting the Bank's true loan losses; (c) mislead investors through false
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1 statements relating to information material to their decision to buy, sell, or hold the Bank's 2 securities; (d) mislead depositors about information relevant to their decision to keep their funds 3 at the Bank; and (e) mislead bank regulators, such as the FDIC, about whether the Bank was 4 adequately capitalized and effectively managed. 5 B. Manner and Means of the Scheme to Defraud 6 17. In furtherance of the scheme to defraud, SHABUDIN and YU, and others, utilized .7 a variety of fraudulent accounting maneuvers and techniques. Among other things, SHABUDIN 8 and YU, and others, caused the Bank to: 9 (a) fraudulently conceal information showing the Bank's loan collateral and 10 repossessed assets had declined in value; 1]. (b) fraudulently rate the risk of certain loans; and 12 (c) fraudulently delay the downgrading of the risk ratings of certain loans. 13 18. As a further part of the scheme to defraud, SHABUDIN and YU, and others, 14 falsified the Bank's books and records. Among other things, SHABUDIN and YU, and others, 15 prepared and caused to be prepared various records and memoranda that both falsely described, 16 and omitted material information necessary to accurately describe, the likelihood that loans 17 would be repaid pursuant to the Bank's loan agreements and the value of the Bank's loan 18 collateral and repossessed assets. As a consequence, the description of the Bank's loans and 19 repossessed assets presented in those records and memoranda was false, misleading, and
20 fraudulent, 21 19. As a further part of the scheme to defraud, SHABUDIN and VU, and others, 22 misled and lied to the Bank's auditor. SHABUDIN and YU, and others, also failed to disclose to 23 the Bank's auditor facts necessary to make their statements and representations complete and
24 accurate. For example, SHABUDIN and VU, and others: 25 (a) misrepresented, and caused to be misrepresented, to the Bank's auditor, records 26 and memoranda that provided a materially false, misleading, and fraudulent description of 27 various Bank loans and the collateral securing those loans;
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1 (b) concealed and omitted from the Bank's records material information relating to 2 the existence of recent appraisals of collateral that secured various Bank loans; 3 (c) concealed and omitted from the Bank's records material information relating to 4 the value of repossessed assets and collateral; and 5 (d) concealed and omitted from the Bank's records material information relating to 6 the Bank's intention to sell various loans, as well as pending loan sales. 7 20. As a further part of the fraudulent scheme, SHABUDIN and YU, and others, 8 caused the Bank to issue materially false and misleading public statements and reports regarding 9 its financial condition and performance in, among other things: 10 (a) a press release issued on or about January 22, 2009; 11 (b) an earnings call held on or about January 23, 2009; and 12 (c) an annual report on SEC Form 10-K filed with the SEC on or about March 16,
13 2009, that contained its financial statements for the year 2008. 14 21. On or about May 20, 2009, the Bank announced that the financial statements
15 contained in its March 16, 2009 SEC Form 10-K were unreliable, withdrew those financial
16 statements, and announced that it intended to restate them. 17 22. The Bank failed in November 2009, without filing restated financial statements
18 for the year 2008. As a result of the Bank's failure, the FDIC became the Bank's receiver and
19 has paid out approximately $397 million. The estimated losses to the FDIC are approximately
20 $2.5 billion. To date, none of the TARP funds have been repaid.
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I INDICTMENT Nt Case3:09-cv-04208-JSW Document217-3 Filed01/09/12 Page13 of 16 Case3:11-cr-00664-JSW Documenti FiIed09/15/11 Page12 of 15 'S
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1 COUNT ONE: (18 U.S.C. § 1349— Conspiracy to Commit Securities Fraud) 2 23. The allegations in Paragraphs 1 through 22 are realleged and incorporated as if 3 fully set forth here. 4 24. Beginning in or about September 2008, and continuing through in or about April 5 2009, both dates being approximate and inclusive, in the Northern District of California and 6 elsewhere, the defendants, 7 EBRAHIM SHABUDIN and THOMAS YU, 8 9 and others, did knowingly and intentionally attempt and conspire to execute a scheme and artifice
10 to (a) defraud persons in connection with securities of UCBH, an issuer with a class of securities
1:1. that was registered under Section 12 of the Securities Exchange Act of 1934, and (b) obtain, by
12 means of materially false and fraudulent pretenses, representations and promises, and by
13 statements containing material omissions, money and property in connection with the purchase
14 and sale of securities of UCBH, an issuer with a class of securities that was registered under
15 Section 12 of the Securities Exchange Act of 1934, in violation of Title 18, United States Code,
16 Section 1348. 17 All in violation of Title 18, United States Code, Section 1349.
18 COUNT TWO: (18 U.S.C. § § 1348, 2— Securities Fraud) 19 25. The allegations in Paragraphs I through 24 are realleged and incorporated as if
20 fully set forth here. 21 26. Beginning in or about September 2008, and continuing through in or about April
22 2009, both dates being approximate and inclusive, in the Northern District of California and
23 elsewhere, the defendants, 24 EBRAHJM SHABUDIN and THOMAS YU, 25
26 and others, did knowingly and intentionally execute, and attempted to execute, a scheme and
27 artifice to (a) defraud persons in connection with securities of UCBH, an issuer with a class of
28 securities that was registered under Section 12 of the Securities Exchange Act of 1934, and (b)
I INDICTMENT 7 Case3:09-cv-04208-JSW Document217-3 Filed01/09/12 Page14 of 16 Case3:11-cr-00664-JSW Documentl FiIed09/15/11 Page13 of 15
:1. obtain, by means of materially false and fraudulent pretenses, representations and promises, and 2 by statements containing material omissions, money and property in connection with the 3 purchase and sale of securities of UCBH, an issuer with a class of securities that was registered 4 under Section 12 of the Securities Exchange Act of 1934, and did aid and abet in the same. 5 All in violation of Title 18, United States Code, Sections 1348 and 2. 6 COUNT THREE: (15 U.S.C. §§ 78m(b)(2)(A), 78m(b)(5), 78ff and 17 C.F.R. 240.13b2-1; 18 7 U.S.C. § 2— Falsifying Corporate Books and Records) 8 27. The allegations in Paragraphs I through 26 are realleged and incorporated as if 9 fully set forth here. 10 28. Beginning in or about September 2008, and continuing through in or about April
1.1 2009, both dates being approximate and inclusive, in the Northern District of California and
12 elsewhere, the defendants, 13 EBRAHIM SHABUDIN and THOMAS YU, 14
15 and others, did knowingly and willfully, directly and indirectly, falsify and cause to be falsified
16 books, records, and accounts of UCBH, and did aid and abet in the same. 17 All in violation of Title. 15, United States Code, Sections 78m(b)(2)(A), 78m(b)(5) and
18 78ff; Title 17, Code of Federal Regulations, Section 240.13b2-1; and Title 18, United States
19 Code, Section 2.
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I INDICTMENT 8 Case3:09-cv-04208-JSW Document217-3 Filed01/09/12 Page15 of 16 Case3:11-cr-00664-JSW Documentl FiIed09/15/11 Page14 of 15 *W01 Ifto
:2. COUNT FOUR: (15 U.S.C. § 78ff and 17 C.F.R. § 13b2-2; 18 U.S.C. § 2 False Statements to 2 Accountants of a Publicly Traded Company) 3 29. The allegations in Paragraphs 1 through 28 are realleged and incorporated as if
4 ; fully set forth here. 5 30. Beginning in or about September 2008, and continuing through in or about April 6 2009, both dates being approximate and inclusive, in the Northern District of California and 7 i elsewhere, the defendants, 8 EBRAHIM SHABUDIN and THOMAS YU, 9
10 and others, did knowingly and willfully make and cause to be made materially false and
11 misleading statements to UCBH's auditors in connection with the audit, review, and examination of UCBH's financial statements, and in connection with the preparation of documents and
13 reports required to be filed with the SEC, and did knowingly and willfully omit to state material 14 facts necessary in order to make statements made, in light of the circumstances in which such
15 statements were made, not misleading, and did aid and abet in the same. 16 All in violation of Title 15, United States Code, Section 78ff; Title 17, Code of Federal 17 Regulations, Section 240.13b2-2; and Title 18, United States Code, Section 2.
18 FORFEITURE ALLEGATION: (18 U.S.C. § 981(a)(1)(C) and 28 U.S.C. § 2461) :1.9 31. Paragraphs 1 through 26 of this Indictment are re-alleged and incorporated as if 20 fully set forth here for the purpose of alleging forfeiture pursuant to the provisions of 18 U.S.C. §
2]. 98 1 (a)(1)(C). 22 32. Upon a conviction for any violations of Title 18, United States Code, Sections
23 1349 and 1348, as alleged in Counts One and Two, the defendants, 24 EBRAHIM SHABUDIN and THOMAS YU, 25 26 shall forfeit to the United States any property, real or personal, which constitutes or is derived 27 from proceeds traceable to said offense, including but not limited to a sum of money equal to the 28 total proceeds from the commission of said offense.
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1 33. If, as a result of any act or omission of the defendants, any of said property
2 a. cannot be located upon the exercise of due diligence;
3 b. has been transferred or sold to or deposited with, a third person;
4 C. has been placed beyond the jurisdiction of the Court;
5 d. has been substantially diminished in value; or
6 e, has been commingled with other property which cannot be divided without
7 difficulty;
B any and all interest defendants have in any other property up to the value of the property
9 described in Paragraph 32 above, shall be forfeited to the United States pursuant to Title 18,
10 United States Code, Section 981 (a)(1 )(C), as incorporated by Title 28, United States Code,
11 Section 2461.
12 All in violation of Title 18, United States Code, Sections 98 1 (a)(1)(C), 1348, 1349; Title
13 28, United States Code, Section 2461; and Rule 32.2 of the Federal Rules of Criminal Procedure.
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16 Dated: September 15, 2011
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18 '4'FORaE
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20 MELINDA HAAG United States Attorney 21 22 4 1114 23 JADOU LAS IL,ON Acting Chief, Criminal Division 24
25 26 (Approved as to form: 92__) AYETUXY RABKIN 27 I U 28
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EXHIBIT D Case3:09-cv-04208-JSW Document217-4 Filed01/09/12 Page2 of 8
A0 257 (Rev. 6/78) _PEFENDANT INFORMATION RELATIVE TO A CRIMINAL ACTION - IN U.S. DISTRICT COURT [ BY: LI COMPLAINT X INFORMATION LI INDICTMENT Name of District Court, and/or Judge/Magistrate Location El SUPERSEDING NORTHERN DISTRICT OF<,LIFO 1] OFFENSE CHARGED 1 SAN FRANCLtVlSIj. 18 U.S.C. 371 - conspiracy to commit securities fraud, false Petty statements to accountants of publicly traded company, and C Minor false corporate books and records LI DEFAfl. U.S Misde- E meanor LAUREN TRAN [] Felony CT COURT N PENALTY: 5 years imprisonment; $250,000 fine or twice loss/gain; 1 year supervised release; $100 special assessment
FCkIThA MT
I'lMf IS NOT IN CUSTODY Has not been arrested, pending outcome this proceTTI Name of Complaintant Agency, or Person (& Title, if any) 1) If not detained give date any prior summons was served on above charges FBI / SIGTARP person is awaiting trial in another Federal or State Court, 2) F1 Is a Fugitive give name of court 3) Is on Bail or Release from (show District) NDCA this person/proceeding is transferred from another district D per (circle one) FRCrp 20, 21, or 40. Show District IS IN CUSTODY 4) LI On this charge this is a reprosecution of charges previously dismissed On another conviction SI-low 5)LI Federal State LI which were dismissed on motion LI LI DOCKET NO. of: 6) LI Awaiting trial on other charges U.S. ATTORNEY DEFENSE If answer to (6) is "Yes", show name of institution
this prosecution relates to a i If "Yes" Has detainer El Yes LI pending case involving this same S give date defendant MAGISTRATE been filed? No filed CASE NO. DATE OF Month/Day/Year prior proceedings or appearance(s) ARREST before U.S. Magistrate regarding this defendant were recorded under Or... if Arresting Agency & Warrant were not DATE TRANSFERRED Month/Day/Year Name and Office of Person Furnishing Information on this form MELINDA HAAG TO U.S. CUSTODY U.S. Attorney 0 Other U.S. Agency This report amends AO 257 previously submitted Name of Assistant U.S. LI Attorney (if assigned) Jeffrey Rabkin ADDITIONAL INFORMATION OR COMMENTS PROCESS: LI SUMMONS [] NO PROCESS* LI WARRANT Bail Amount: If Summons, complete following: * Where defendant previously apprehended on complaint, no new summons or Initial Appearance LI Arraignment LI warrant needed, since Magistrate has scheduled arraignment Defendant Address: Date/Time: Before Judge:
Comments: Case3:09-cv-04208-JSW Document217-4 Filed01/09/12 Page3 of 8
1 MELINDA HAAG (CABN 132612) United States Attorney (4/ 1' 2 (p4, le'611
3 ' 0, 4
5 1
6
7
8 UNITED STATES DISTRICT COURT 9 NORTHERN DISTRICT OF CALIFORNIA 10 SAN FRANCISCO DIVISION 11 12 UNITED STATES OF AMERICA, Q tR: 1 j 03404a 13 Plaintiff, ) ) VIOLATION: 18 U.S.C. § 371 —Conspiracy 14 ) IT, ) 15 )
16 LAUREN IRAN, )
) 17 Defendant. )
18
19 INFORMATION
20 The United States Attorney charges:
21 INTRODUCTORY ALLEGATIONS
22 At all times relevant to this Information, unless otherwise indicated:
23 I. Background
24 A. The Bank
25 1. United Commercial Bank (UCB) was a commercial bank headquartered in San
26 Francisco, California, with branch offices throughout the United States as well as in China and
27 Taiwan. UCI3 provided a full range of commercial and consumer banking products to businesses
28 and individuals.
INFORMATION Case3:09-cv-04208-JSW Document217-4 Filed01/09/12 Page4 of 8
0
1 2. UCBH Holdings, Inc. (UCBH), a Delaware corporation, was the holding company 2 for UCB. UCBH was a publicly traded company whose shares were registered with the United 3 States Securities and Exchange Commission (SEC) and were traded on the National Association
4 of Securities Dealers Automatic Quotation (NASDAQ) system under the ticker symbol "UCBH." 5 3. As a public company, the Bank was required to comply with the SEC's rules and 6 regulations, which were designed to protect members of the investing public. Under those rules 7 and regulations, the Bank's directors and officers were required to (a) make and keep books and 8 records that, in reasonable detail, fairly and accurately reflected the Bank's business transactions, 9 including its earnings, revenue, and expenses; (b) devise and maintain a system of internal
10 accounting controls sufficient to provide reasonable assurances that the Bank's transactions were
11 recorded as necessary to permit preparation of reliable financial statements; and (c) file quarterly
12 and annual reports with the SEC that contained information about the Bank's management, board
13 of directors, and business operations, as well as audited financial statements that accurately and
14 fairly presented the financial condition of the Bank. 15 4. A public accounting firm acted as the independent auditor of the Bank's quarterly
16 and annual financial statements. 17 5. The Bank was regulated by, among other agencies, the Federal Deposit Insurance
18 Corporation (the FDIC). The FDIC required, among other things, that the Bank be adequately
19 capitalized and safely managed at all times. 20 B. The Defendant 21 6. Defendant LAUREN IRAN was a Vice President and the Manager of Credit
22 Policy at the Bank. 23 C The Bank's Loan Portfolio, Loan Loss Allowance, and Non-Performing Assets 24 7 The Bank's business loans were booked as assets on the quarterly and annual
25 financial statements that the Bank filed with the SEC. 26 8. According to the Bank's policies, its loans were assigned risk ratings. The Bank 27 represented that each rating reflected the current likelihood, based on all available information, 28 I that the borrower would pay the amount due under the borrower's loan agreement with the Bank. I INFORMATION 2 Case3:09-cv-04208-JSW Document217-4 Filed01/09/12 Page5 of 8
Nwf
1 Changes in risk ratings were reflected in internal records specifically prepared for that purpose. 2 9. The Bank deemed a loan to be "impaired" if, based on all current information and 3 events, it was probable that the Bank would be unable to collect all of the amounts due under the 4 loan agreement. On a quarterly basis, the Bank represented to its regulators, its independent 5 auditor, and the investing public that the Bank had estimated the total dollar amount of its 6 outstanding loans that it probably would not collect from borrowers. This estimate, identified on 7 the Bank's financial statements as the "Allowance for Loan Losses" (hereafter, the "Loan Loss 8 Allowance"), was derived from, among other things, the Bank's risk ratings as well as the value 9 of the collateral securing the Bank's loans. 10 10. When the Bank increased its Loan Loss Allowance, its net assets and net income
11 declined. For this reason, the size of the Bank's Loan Loss Allowance was material to stock
12 analysts and the investing public. In addition, bank regulators such as the FDIC monitored the
13 Bank's total assets to ensure that the Bank was adequately capitalized.
14 II. The Conspiracy and Fraudulent Scheme 15 11. Beginning no later than December 2008, TRAN, together with others, engaged in a
16 conspiracy and fraudulent scheme to deceive the investing public, depositors, the SEC, the
17 Bank's independent auditor, and bank regulators including the FDIC, by manipulating the Bank's
18 books and records in a manner that, as TRAN well knew, (a) misrepresented and concealed the
19 Bank's true financial condition and performance, in that the books and records did not fairly and
20 accurately in all material aspects represent the Bank's true financial condition and performance,
21 and omitted to disclose facts necessary to make those books and records truthful and accurate,
22 and (b) supported false and misleading public statements and representations about the Bank's
23 financial condition and performance. 24 12. The objectives of the conspiracy and fraudulent scheme were, among other things,
25 Ito (a) conceal, delay, and avoid publicly reporting the true magnitude of the Bank's growing
26 number of impaired loans; (b) conceal, delay, and avoid publicly reporting significant loan
27 losses; (c) persuade investors through false and misleading statements to purchase and hold the
28 Bank's stock; (d) persuade depositors not to withdraw their funds from the Bank; and (e)
I INFORMATION Case3:09-cv-04208-JSW Document217-4 Filed01/09/12 Page6 of 8
:1. persuade bank regulators such as the FDIC that the Bank was adequately capitalized and safely 2 managed. 3 III. Overt Acts in Furtherance of the Conspiracy 4 13. In furtherance of the conspiracy and fraudulent scheme, and to effect the illegal 5 objects thereof, TRAN, together with others, committed and caused others to commit the acts 6 described above, which are hereby realleged as if fully set forth here, and committed the 7 following overt acts, among others, in the Northern District of California and elsewhere: 8 (a) between no later than December 2008, and continuing through March 16, 9 2009, both dates being approximate and inclusive, TRAN, together with others, fraudulently
:1.0 over-valued the collateral securing impaired loans in an effort to avoid or delay a material
1]. increase in the Bank's Loan Loss Allowance; 12 (b) between no later than December 2008, and continuing through March 16,
13 2009, both dates being approximate and inclusive, TRAN, together with others, materially
14 falsified the Bank's books and records in an effort to conceal the extent to which collateral
15 securing impaired loans had been over-valued; and 16 (c) between no later than December 2008, and continuing through March 16,
17 2009, both dates being approximate and inclusive, IRAN, together with others, knowingly and
18 willfully, directly and indirectly, made and caused to be made materially false and misleading
19 statements to the Bank's independent auditor, and omitted and withheld material information
20 from the Bank's independent auditor. For example, in or about and between January 2009 and
21 February 2009, the Bank's independent auditor asked TRAN to provide all recent appraisals
22 relating to impaired Bank loans. At the time, TRAN knew that the Bank had a spreadsheet and
23 list containing detailed information pertaining to such appraisals that had been authored by B.!-!.,
24 another employee of the Bank. Rather than provide that spreadsheet and list to the independent
25 auditor in response to its request, TRAN knowingly misled the independent auditor by stating, in
26 sum and substance, that no such spreadsheet or list of recent appraisals existed. TRAN then
27 provided the independent auditor with some, but not all, of the recent appraisals within the
28 Bank's possession.
I INFORMATION 4 Case3:09-cv-04208-JSW Document217-4 Filed01/09/12 Page7 of 8 II
1 14. As a result of the conspiracy and fraudulent scheme, the Bank issued materially 2 false and misleading public statements and reports regarding its financial condition and 3 performance in, among other things: 4 (a) a press release issued on January 22, 2009; 5 (b) an earnings call held on January 23, 2009; and 6 (c) an annual report on Form 10-K filed with the SEC on March 16, 2009, 7 which contained its financial statements for the year 2008. 8 15. In May 2009, the Bank announced that the financial statements contained in its 9 March 16, 2009, Form 10-K were unreliable. The Bank withdrew those financial statements and
10 announced that it intended to restate them. On November 6, 2009, before the Bank filed restated
ii. financial statements for the year 2008, the California Department of Financial Institutions closed
12 the Bank, revoked its charter, and tendered receivership of the Bank to the FDIC.
13 COUNT ONE: (18 U.S.C. § 371 - Conspiracy to Commit Securities Fraud, False Statements to
14 Accountants of Publicly Traded Company, and False Corporate Books and Records.) 15 16. The allegations in Paragraphs 1 through 15 are realleged as if fully set forth here. 16 17. Beginning no later than December 2008, and continuing through April 2009, both
17 dates being approximate and inclusive, in the Northern District of California and elsewhere, the 18 I defendant, 19 LAUREN TRAN,
20 together with others, did knowingly and intentionally conspire to commit offenses against the
21 United States, namely: 22 (a) securities fraud, that is, to knowingly and intentionally execute a scheme
23 and artifice to defraud any person in connection with the securities of UCBH, an issuer with a
24 class of securities that was registered under Section 12 of the Securities Exchange Act of 1934
25 (Title 15, United State Code, Section 781), in violation of Title 18, United States Code, Section
26 1348; 27 (b) false statements to accountants of a publicly traded company, that is, to
28 knowingly and willfully make and cause to be made materially false statements to UCBH's
11 INFORMATION Case3:09-cv-04208-JSW Document217-4 Filed01/09/12 Page8 of 8
1 independent auditor in connection with the audit and examination of UCBH's financial
2 statements, and to knowingly and willfully omit to state material facts necessary in order to make
3 statements made to UCBH' s independent auditor, in light of the circumstances in which such
4 statements were made, not misleading, in violation of Title 15 United States Code, Sections
5 78m(a), 78j(b), 78ff, and Title 17, Code of Federal Regulations, Section 13b2-2; and false corporate books and records, that is, to unlawfully, willfully and 6 (c)
7 knowingly, directly and indirectly, falsify and cause to be falsified the books, records, and
8 accounts of UCBH as to a material matter, in violation of Title 15, United States Code, Sections
9 78m(b), 78ff, and Title 17, Code of Federal Regulations, Section 240.13b2-1.
10 18. In furtherance of the conspiracy, and to effect the objects thereof, in the Northern
11 District of California and elsewhere, the defendant and others committed the overt acts described
12 in Paragraphs 13 through 14 of this Information, which are hereby realleged as if fully set forth
13 here.
14 All in violation of Title 18, United States Code, Section 371.
15
16 17 I Dated: 18 MELINDA HAAG 19 United States Attorney
20
21 By: OUGLA ILSON 22 Acing Chief Criminal Division 23
24
25 (Approved as to form: F______ASEL1Y RABKTN 26
27
28 Case3:09-cv-04208-JSW Document217-5 Filed01/09/12 Page1 of 27
EXHIBIT E Case3:09-cv-04208-JSWCase3:11-cv-04988-JSW Document217-5 Document1 ld 1111e2of of26 27
1 MARC J. FAGEL (Cal. Bar No. 154425) MICHAEL S. DICKE (Cal. Bar No. 158187) tpl 2 ROBERT L MITCHELL (Cal Bar No 1613 54) [email protected] 3 LLOYD FARNHAM (Cal. Bar No. 20223 1) 1 4 [email protected] 5 Attorneys for Applicant SECURITIES AND EXCHANGE COMMISSION Ali, 7g 6 44 Montgomery Street, 26th Floor San Francisco, California 94104 7 Telephone: (415)705-2500 8 Facsimile: (415) 705-2501 9 10 UNITED STATES DISTRICT COURT 11 NORTHERN DISTRICT OF CALIFORNIA 12 13 8 14 SECURITIES AND EXCHANGE Case No. 15 COMMISSION, 16 Plaintiff, COMPLAINT V. 17 THOMAS S. WU, EBRAHIM SHABUDIN, 18 THOMAS T. YU, and CRAIG S. ON, 19 Defendants. 20 21
22 Plaintiff Securities and Exchange Commission (the "Commission") alleges: 23 SUMMARY OF THE ACTION 24 1. This case involves an illegal effort by senior executives at a public bank holding 25 company to obscure the true financial problems of the holding company and the bank it owned. 26 In late 2008, during the financial crisis and economic downturn, San Francisco-based United 27 Commercial Bank and its public parent UCBH Holdings, Inc. faced mounting losses on loans 28 and real estate assets. Instead of accurately recording and then reporting these losses, and
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I increasing its loan loss reserve as required by accounting rules, these executives took steps to 2 delay disclosure of the full extent of the losses the bank faced. When UCBH filed its 2008 Form 3 10-K annual report with the Commission on March 16, 2009, the reported loss of $134 million
4 was understated by at least $65 million. These materially misstated financial results failed to 5 apprise the investing public of the true severity of the loan losses faced by the bank, thereby 6 understating a critical measure of the health of the financial institution.
7 2. The mounting loan losses would later lead to the bank's failure. In November 8 2009, the bank's regulators closed the bank and appointed the Federal Deposit Insurance 9 Corporation ("FDIC") as receiver. United Commercial Bank was the ninth largest bank to fail
10 during the recent financial crisis, and its failure has cost the FDIC's insurance fund $2.5 billion. 11 3. Thomas Wu, the CEO of UCBH and its subsidiary bank, was a rising star in the 12 banking industry. He led United Commercial Bank for ten years, including during the initial 13 public offering of the holding company UCBH in 1998. During his tenure the bank more than 14 doubled its deposits and loans, and by the end of 2008 the bank reported total assets of more than 15 $13 billion, and loan assets of more than $8 billion.
16 4. But beginning in late 2008 and continuing through the first three months of 2009, 17 while the 2008 financial statements were being prepared by the bank and reviewed by UCBH's 18 independent auditors, Wu deliberately tried to stem the tide of bad news the bank was required to 19 disclose to auditors and the public. He directed subordinates to delay including newer and lower
20 appraisals in the valuations of collateral and bank assets. In some cases he was aware of specific 21 information that would show certain loans or collateral were nearly worthless, but refused to 22 record these losses in the financial records of the bank and misled auditors about the information. 23 Wu knew that for a number of large troubled loans, the bank had not considered known negative 24 information in valuing the collateral or calculating losses, but falsely certified the 2008 financial 25 statements were accurate and prepared in accordance with accounting standards. 26 5. Two other bank executives were instrumental in the efforts to hide the losses by 27 the bank and the public holding company from its shareholders. Ebrahim Shabudin, the Chief 28 Operating Officer of UCBH and Chief Credit Officer at the bank, reviewed and approved bank
COMPLAINT
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I records regarding the loss reserves that he knew inappropriately understated loss reserves, and
2 approved memoranda sent to UCBH's independent auditors that he knew contained false and 3 misleading information about the loans. Thomas Yu, a senior vice-president at the bank, hid 4 negative information from the auditors to prevent them from discovering that certain troubled 5 loans and assets faced large losses. Yu also had primary responsibility for preparing the bank's 6 loan loss reserve calculation, and in that role he prepared loan loss reserve calculations that
7 understated losses faced by the bank. Wu, Shabudin, and Yu knew their efforts to hide negative 8 information would materially affect the publicly-filed 2008 financial statements. 9 6. UCBH's Chief Financial Officer, Craig On, certified the accuracy of the 2008 10 Form 10-K and signed internal loan loss calculations and made representations to the 11 independent auditors. Given the concerted efforts of other senior executives to hide and delay 12 loan losses, and given what he knew about at least a portion of the mounting losses, On should 13 have known that the UCBH financial statements in the 2008 Form 10-K were not accurate. 14 JURISDICTION AND VENUE 15 7. The Commission brings this action pursuant to Sections 20(b) and 20(d) of the 16 Securities Act of 1933 ("Securities Act") [15 U.S.C. §§ 77t(b), 77t(d)} and Sections 21(d) and
17 21(e) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78u(d), 78u(e)J. 18 8. This Court has jurisdiction over this action pursuant to Section 22 of the
19 Securities Act [15 U.S.C. § 77v] and Section 27 of the Exchange Act [15 U.S.C. § 78aa]. 20 9. Defendants, directly or indirectly, made use of the means or instrumentalities of 21 interstate commerce, or of the mails, or of the facilities of a national securities exchange in 22 connection with the transactions, acts, practices and courses of business alleged herein. 23 10. Venue in this District is proper pursuant to Section 22 of the Securities Act [15 24 U.S.C. § 77v] and Section 27 of the Exchange Act [15 U.S.C. § 78aa] because a substantial part 25 of the acts and transactions constituting the violations alleged in this Complaint occurred within 26 the Northern District of California, because the relevant offer or sale of securities took place in 27 the district, and because one or more Defendants resides or transacts business in the district. 28
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I INTRADISTRICT ASSIGNMENT 2 11. Under Civil Local Rule 3-2, this civil action should be assigned to the San I Francisco or Oakland Divisions, because a substantial part of the events or omissions which give rise to the claim occurred in the City and County of San Francisco. DEFENDANTS
12. Thomas Wu, age 53, is a resident of Hillsborough, California. From 1998 to September 2009 Wu was President and Chief Executive Officer of United Commercial Bank and 8 UCBH Holdings, Inc., and chairman of the UCBH board of directors from 2001 to 2009. Wu ZE invoked his Fifth Amendment right against self-incrimination during testimony in the 10 Commission's investigation. 11 13. Ebrahim Shabudin, age 63, is a resident of Moraga, California. Shabudin joined 12 United Commercial Bank in 2003 as the bank's Chief Credit Officer. He became the Chief 13 Operating Officer of the bank and the holding company in August 2005. From September 2008 14 until March 2009, he served as both the COO and the Chief Credit Officer. Shabudin invoked 15 his Fifth Amendment right against self-incrimination during testimony in the Commission's 16 investigation. 17 14. Thomas Yu, age 48, is a resident of San Ramon, California. Yu joined United 18 Commercial Bank in 2005 as the Product Manager for Retail Lending, and was promoted to First 19 Vice President, Manager of Credit Risk and Portfolio Management in February 2008. Yu 20 invoked his Fifth Amendment right against self-incrimination during testimony in the 21 Commission's investigation. 22 15. Craig On, age 59, is a resident of Berkeley, California. On joined the bank in 23 June 2005 as the controller, and served as the Interim Chief Financial Officer of UCBH Holdings 24 from May 2008 until October 2008. From October 2008 until November 2009, On served as the 25 Chief Financial Officer of UCBH. On invoked his Fifth Amendment right against self- 26 incrimination during testimony in the Commission's investigation. 27 RELEVANT ENTITIES 28 16. UCBH Holdings, Inc. ("UCBH") was a Delaware corporation with a principal
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I place of business in San Francisco, California. UCBH subsidiary United Commercial Bank 2 accounted for substantially all of UCBH's assets and revenue. During the relevant time period,
3 UCBH common stock was registered with the Commission pursuant to Section 12(b) of the 4 Exchange Act, and was listed on NASDAQ. 5 17. United Commercial Bank ("UCB") was a California state-chartered commercial 6 bank and a wholly owned banking subsidiary of UCBH, and UCB's financial statements were 7 consolidated into UCBH's financial statements. Since 1998, UCB was regulated by the Federal
8 Deposit Insurance Corporation ("FDIC") and the California Department of Financial Institutions. 9 In November 2008, UCB received $298 million pursuant to the Troubled Assets Relief Program 'El' ("TARP"). The FDIC took control of UCB as receiver on November 6, 2009. 11 FACTUAL ALLEGATIONS 12 A. Background 13 18 United Commercial Bank was a fast-growing bank based in San Francisco, 14 California with offices in six states. The bank was the primary operating subsidiary of UCBH, 15 and UCB accounted for substantially all of the assets and revenue of UCBH. The bank and 16 holding company reported assets of more than $13 billion at the end of 2008, including loan 17 assets of $8.6 billion. UCB had grown rapidly over the prior 10 years, more than doubling its 18 total assets and outstanding loans from 2004 to 2008. Since the initial public offering of stock 19 through holding company UCBH in 1998, UCB had acquired a number of smaller banks, and in 20 2007 became the first U.S. bank to wholly own a bank in the People's Republic of China. 21 19. CEO Thomas Wu led the bank throughout the years of growth for the bank, after 22 being named CEO of the newly formed public holding company UCBH in 1998. In 2006, Wu 23 was named national Entrepreneur of the Year in the financial services industry by a prominent 24 accounting firm. In 2008, he appeared in a list of 25 notable Chinese-Americans recognized in 25 Forbes Asia magazine, receiving accolades for his leadership in growing the bank. 26 20. Beginning in 2008, the economic downturn and declining real estate market 27 caused increasing loan delinquencies and decreasing collateral values for the loans in UCB's 28 portfolio of commercial and construction loans. During the last half of 2008, overdue loans and
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1 loans in default increased, and the bank's capital ratios were deteriorating. To maintain 2 sufficient capital, in October 2008 the bank requested and received $298 million from the U.S. 3 Department of the Treasury's Trouble Asset Relief Program ("TARP") in exchange for preferred
4 stock and stock warrants. Beginning in 2008, UCBH faced increasingly serious financial 5 difficulties. From December 2008 through 2009, UCBH and UCB sought to raise capital from 6 outside investors, and Wu, On, and Shabudin were involved in these efforts.
7 21. UCBH issued a press release on January 22, 2009, disclosing unaudited financial 8 results for the year ended December 31, 2008. The company held an investor call discussing
9 these results on January 23, 2009, and Wu and On spoke on the conference call about the 10 reported financial results. Also on January 23, 2009, UCBH filed a Form 8-K incorporating the 11 earnings release and the unaudited financial results.
12 22. On March 16, 2009, UCBH filed its 2008 Form 10-K with the Commission, 13 disclosing its financial statements for the year ended December 31, 2008. By the terms of a
14 Form S-8 registering certain issuances of UCBH common stock filed on June 15, 2007, UCBH's 15 stock offering registration incorporated any subsequent Commission filings, including the 2008 16 Form 10-K filed by UCBH.
17 23. On May 20, 2009, UCBH filed with the Commission a Form 8-K, disclosing that 18 the Audit Committee of the Board of Directors determined that the company's financial 19 statements for the year 2008 should be restated. The disclosure stated that the 2008 financial 20 statements previously disclosed should not be relied upon, and stated that an examination by the 21 company determined UCBH would need to restate the 2008 financial statements and the 22 restatement would result in material adjustments to the loan loss provision, the allowance for 23 loan losses, and expenses for other real estate owned.
24 24. The California Department of Financial Institutions closed the bank and appointed 25 the Federal Deposit Insurance Corporation ("FDIC") as the receiver for the bank on November 6, 26 2009. The failure of UCB was the ninth largest bank to fail during the financial crisis of 2008 27 and 2009, and the failure was estimated to cost the FDIC Deposit Insurance Fund approximately 28 $2.5 billion.
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I 25. On November 24, 2009, UCBH filed for bankruptcy protection under Chapter 2 Seven of the federal bankruptcy code. 3 Di Accounting for Loan Losses 4 26. The financial results released on January 22, 2009, and the financial statements
5 filed with the Commission on March 16, 2009, misstated the financial results of UCBH and 6 falsely asserted that the financial statements were prepared in accordance with Generally 7 Accepted Accounting Principles ("GAAP"). The misstated financial statements materially 8 understated the loan loss reserves that UCBH should have recorded on some of UCB's troubled 9 commercial and construction loans, and materially overstated the value of some real estate and 10 other assets owned by UCB as a result of foreclosures. 11 27. GAAP states that a loan is impaired when "it is probable a creditor will be unable 12 to collect all amounts due according to the contractual terms of the loan agreement." If a loan is 13 impaired, the bank must determine the measure of impairment and record this amount in an 14 "allowance for credit losses." GAAP further requires that for collateral dependent loans, "a 15 creditor shall measure impairment based on the fair value of the collateral when the creditor 16 determines that foreclosure is probable." In addition, GAAP requires that any evidence 17 impacting the measurement of impairment determined prior to the issuance of financial 18 statements that affects the measurements at the balance sheet date shall be incorporated into the 19 I financial statements.
Rol 28. GAAP required UCBH to assess probable losses inherent in its loan portfolio as
211 of the year-end and to record these probable losses in its Allowance for Loan and Lease Losses 22 ("ALLL"). Any increase in ALLL, a balance sheet item, would have had to be accompanied by 23 the recording of a provision for loan losses, an income statement line item, thereby decreasing 24 reported income. Each of the defendants was aware that UCBH was required to accurately 25 record probable losses on UCB loans, and each was aware that the ALLL and loan loss provision 26 must be accurately disclosed on financial statements filed with the Commission. 27 29. In the instances where UCBH had foreclosed on a loan and taken possession of 28 H loan collateral in the form of inventory or real estate, other similar GAAP provisions applied.
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1 UCBH was required to accurately assess and record any impairment or loss in value of real estate 2 or other assets owned by the bank. Under GAAP, any evidence regarding a decrease in the value 3 of a bank-owned asset known to the bank prior to the issuance of the financial statements must 4 be incorporated into those financial statements.
5 30. UCBH publicly disclosed in its 2008 Form 10-K the company's policy for 6 determining the specific reserve component of the bank's allowance for loan losses:
7 The second component of the allowance for loan losses, the specific reserve, applies to loans that are considered impaired. A loan is considered impaired when 8 it is probable that UCB will not be able to collect all amounts due, including interest payments, in accordance with the loan's contractual terms. Unless the 9 loan is collateral-dependent, loan impairment is measured based on the present value of expected future cash flows that have been discounted at the loan's 10 effective interest rate. If the loan is collateral-dependent, either the observable market price or the current fair value of the collateral, reduced by estimated 11 disposition costs, is used in place of the discounted cash flow analysis. 12 31. UCB policies and internal accounting controls required the bank to determine 13 whether loans are impaired, and require the bank to determine the value of loans considered 14 impaired, including a calculation of any loan loss reserves for impaired loans. These policies 15 and accounting controls required the losses to be determined and recorded as soon as feasible, 16 and in any event within 30 days after the impairment has been identified. The policies and 17 accounting controls require that the value of collateral dependant loans shall be determined by 18 the lowest of several valuation measures including latest appraised value and latest listing price.
19 32. The internal accounting controls and bank policies required that the bank prepare 20 and maintain accurate ALLL documentation to support the ALLL loan loss reserve. The 21 accounting controls were put in place to ensure the information used to support the ALLL 22 determination is accurate and reliable, and that the financial statements related to the ALLL loan 23 loss reserve is prepared in accordance with GAAP.
24 C. Defendants Delayed Reporting of Loan Losses
25 33. CEO Thomas Wu monitored large troubled loans as the bank's loan portfolio
26 deteriorated in 2008. Beginning in early 2008, the bank's most troubled loans were managed by 27 a unit within the bank called the Special Assets Group. Thomas Yu led the group, with oversight
28 from Shabudin and assistance of other bank officials. At least from about December 2008 to
8 COMPLAINT
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1 March 2009, Wu and Shabudin held weekly meetings to discuss the largest problem loans. At 2 these meetings Wu, Shabudin, Yu and other bank employees discussed ways to delay any 3 negative financial impact from the known losses on these large loans. During these weekly 4 meetings and in other meetings and communications, Wu was told about appraisals and other
5 information indicating that collateral and bank-owned assets were declining in value. Instead of 6 properly recording these losses in the books and records of UCB and UCBH, Wu told his
7 subordinates to delay incorporating more recent appraisals and other negative information 8 regarding the value of the collateral or assets. 9 34. Wu instructed subordinates to delay recording losses and reserves even though 10 there was no legitimate business reason to delay incorporating or considering lowered collateral 11 or asset values, and no legitimate business reason to delay the accurate recording of losses. 12 35. In addition to these weekly meetings, Wu and Shabudin worked with Yu to 13 monitor problem loans and minimize the impact of these loans on UCBFI's financial statements. 14 As part of this effort Yu maintained an unofficial loan loss summary. The loan loss summary 15 listed preliminary loan loss calculations and loss estimates for various loans. Wu periodically 16 reviewed Yu' s loan loss summary and in some instances instructed subordinates to ignore
17 evidence such as more recent appraisals, sales offers, or other information reflecting the value of 18 a loan or collateral. The purpose of Wu's review of the loan loss summary and instructions to 19 subordinates was to lower the reported loan loss reserve provision and lower the bank's loss
20 allowance, resulting in lower losses reported by UCBH in the 2008 financial statements. 21 36. Senior officers including Shabudin and Yu complied with Wu's direction to 22 decrease loan losses and ignoring negative information about loans and failing to record known 23 loan losses. Wu and Shabudin directed subordinates to delay incorporating new appraisals that 24 would increase losses, instead relying on outdated appraisals that could be used to justify higher 25 property values and thereby justify lower loan loss reserve amounts. 26 37. Shabudin interacted directly with UCBH's independent auditors during the
27 auditors' review of the 2008 financial statement, and he coordinated the responses to requests for 28 information, including reviewing each memorandum sent to the auditors in response to
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I information requests. As the Chief Credit Officer, Shabudin was in charge of loan
2 administration at the bank. Shabudin knew that memoranda sent to the auditors were false and 3 misleading. Shabudin also signed the ALLL loan loss reserve package, the bank's key record on 4 the loss reserve calculation, and he knew that the ALLL package was provided to auditors to 5 support the loan loss reserve calculations. 6 38. Yu had responsibility for managing the bank's problem loans, under the 7 supervision of both Shabudin and Wu. He also had responsibility for the specific reserve 8 package, the portion of the ALLL package that related to the bank's most troubled loans, and he reviewed and signed the final version package. Yu knew that this reserve calculation was a 10 critical part of the bank's books and records, and knew that it would be provided to the
11 independent auditors to support the reserve calculations. As head of the bank's Special Assets 12 Group, Yu also had a lead role in the bank's efforts to sell troubled loans. Yu had direct 13 interaction with the audit staff and provided information regarding troubled loans. Yu knew the 14 loss reserve calculation he supervised had a direct impact on the UCBH financial statements. 15 39. Defendants Wu, Shabudin, and Yu each took steps, or instructed subordinates to 16 take steps, that resulted in negative information being omitted and not considered in the 17 calculation of loan loss reserves or asset losses. Wu, Shabudin, and Yu each took steps or 18 instructed subordinates to take steps that resulted in delays in incorporating this negative WE information into the financial statements and accounting records until after the filing of the Form 20 10-K. Defendants Wu, Shabudin, and Yu each knew or were reckless in not knowing that these 21 actions made UCBH financial statements materially false. Wu, Shabudin, and Yu took these 22 steps without regard to any legitimate business purposes. 23 Undisclosed Losses or Reserves on Seven Large Loans 24 40 At least seven large loans were recorded in books and records of UCB at inflated 25 values or with understated loss reserves, and separately and collectively these inflated values and
26 understated losses had a material impact on the 2008 financial statements. If restated to 27 accurately reflect losses and values known at the time, and restated in accordance with GAAP,
MI these seven loans would have increased UCBH's reported losses by about 50 percent, from a net
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1 loss of $134 million to a net loss of $200 million.
2 1. Commercial Loans to an Electronics Distributor
3 41. UCB made a series of loans totaling more than $44 million to a group of related 4 electronics distribution companies based in Los Angeles, California and Hong Kong. By the end
5 of 2008, the loans were in default, and UCB had taken possession of some of the collateral, 6 including certain accounts receivable and electronics inventory. The remaining loan balance was 7 secured by a pledge of cash and real estate from the borrower and principals of the borrower. On 8 or before March 16, 2009, Wu, Shabudin, and Yu were aware of information that indicated the 9 collateral and repossessed assets were worth far less than their recorded value as of the end of 10 2008. Similarly, based on information known to Wu, Shabudin, and Yu, loss reserves for the 11 loan balance were understated. Wu, Shabudin, and Yu knew that the loan loss reserves were 12 understated and the values of the repossessed assets were overstated in the 2008 financial 13 statements.
14 42. In February 2009, Wu told UCBH auditors that the loan was adequately secured is and therefore did not need an additional reserve recorded because its principals had pledged as 16 collateral about $20 million in cash. By that time, however, Wu was privately telling his senior 17 managers the borrower had "fooled" them and that the collateral was a "fraud."
18 43. In December 2008, UCB repossessed certain accounts receivable from the 19 borrower, and these accounts were recorded on UCB's books at a value of $7.1 million. Most of 20 this receivable was owed by one former Hong Kong-based customer of the borrower. By the end 21 of January 2009, however, Wu, Shabudin, and Yu knew UCB was unlikely to collect any portion 22 of this receivable. According to emails between Wu, Shabudin, and Yu, the customer had 23 ignored several demands for payment. In January 2009, a UCB employee attempted to visit the 24 purported Hong Kong headquarters of the company, and found an empty office at the address. In 25 an email dated January 16, 2009, this bank official told Wu, Shabudin, and Yu that the customer 26 could not be located.
27 44. In March 2009, before the 2008 Form 10-K was filed, Yu drafted a memorandum 28 sent to UCBH's auditors to support the value of the account receivable, stating that the bank
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1 intended to collect a large portion of the receivable. Shabudin reviewed Yu's memorandum and 2 knew it contained false and misleading information. 3 45. In December 2008, UCB took possession of the borrower's remaining inventory. 4 Classified as an asset owned by the bank, this inventory was recorded at a value of $6.1 million. 5 The bank hired an electronics retailer to sort, count, test, and sell the inventory, and the 6 technicians found problems with the inventory. Flash memory storage cards labeled "4
7 gigabytes" were actually only 16 megabytes, many of the boxes contained only unfinished parts 8 instead of completed consumer merchandise, and some storage devices contained a piece of 9 wood where the memory chip should have been. These flaws made the merchandise nearly 10 worthless for resale. Yu and other employees at the bank received updates regarding flaws in the 11 inventory throughout January and February 2009. Yu and others regularly informed Wu and 12 Shabudin about the status of the testing, but Wu directed subordinates to delay recording any loss 13 on the inventory. The loss on the inventory was not recorded in UCB's books and records until 14 March 18, 2009, two days after UCBH filed its 2008 Form 10-K. 15 46. Wu, Shabudin, and Yu never disclosed the negative information regarding this 16 loan, loan collateral, or asset impairment to UCBH's auditors. Wu certified financial statements 17 that he knew included false valuations for these assets. Wu signed the management
18 representation letter provided to the auditors in connection with the audit of the 2008 financial 19 statements and responded to an email from the auditors requesting information on asset 20 impairments on March 14, 2009, but he omitted all negative information calling into question the 21 collectability of the supposed collateral, the value of the inventory, or the collectability of the 22 repossessed account receivable. 23 2. Construction Loan for a Housing Project 24 47. Another asset with an inflated value in the 2008 financial statements involved a 25 construction loan to an entity building a housing complex in National City, California. UCB and 26 another bank had loaned $10.8 million to fund the construction of a condominium and retail 27 development. By early 2008 the borrower stopped making payments and was unable to 28 II complete construction on the project.
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1 4. In January 2009 UCB received a new appraisal that valued UCB's portion of the
2 collateral at about $7.7 million. Internal memoranda show that Shabudin and Yu knew about the 3 new appraisal and knew that the value of the property had decreased. At the same time, UCB
4 was working to sell its share of the loan note and, in a series of e-mails on February 13, 2009,
5 Shabudin and Yu discussed and approved the sale of the note for $4 million. These emails
rol referenced the fact that the sale would result in a $6.8 million loss for the bank. CFO Craig On 7 received emails regarding the sale of this loan, and prior to the filing of the 2008 Form 10-K he 8 knew or should have known that the approved note sale represented a material loss from the 9 recorded value of the loan as of December 31, 2008. Wu approved of the sale of this loan at a 10 significant loss in February 2009, prior to the filing of the 2008 Form 10-K. Wu knew or was
11 reckless in not knowing that the loss had not been recorded in the books and records of the bank, 12 had not been included in the 2008 financial statements, and was not considered in calculating an 13 appropriate loss reserve for the loan. 14 49. In late February, Yu drafted a memorandum for the outside auditors regarding 15 UCB's valuation of this loan under the applicable GAAP. Yu's memorandum hid both the 16 updated appraisal and the fact that the bank was selling the note at a loss. Shabudin reviewed the 17 memorandum before it was sent, and as a result of this deception the auditors never learned of 18 either the January 2009 appraisal or the bank's intent to sell the note at a loss. The auditors 19 signed off on a small loss reserve and UCBI-I avoided taking an additional $6 million loss.
20 3. Construction Loan for a Cape Cod Condominium 21 50. In 2007, UCB funded the construction of a 21-unit condominium on Cape Cod in 22 Massachusetts with two loans totaling $11.8 million. In November 2008, while the building was 23 still incomplete, the borrowers stopped making payments and told the bank they could not 24 continue construction. An appraisal dated December 2, 2008 valued the property securing the 25 loan at $4.9 million. In December 2008, Yu knew that UCB faced a large loss on the loan. After 26 a UCB officer recommended selling the note, Yu told him that the bank could not record a loss 27 on the loan during 2008 and therefore could not sell the note at that time. By January 6, 2009, 28 according to emails, Yu and Shabudin each knew that the loan would result in a loss of about $6
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I million. On March 1, 2009, Yu recommended selling the notes for only $4.2 million, and emails 2 show that Wu and Shabudin approved of the sale. The planned sale would close by the end of 3 the quarter, March 31, about two weeks after the Form 1 0-K was filed. 4 51. Wu, Shabudin, and Yu never told KPMG about the probable loss and new 5 appraisal, or took steps to accurately reflect the impairment or the expected loss in the loan loss 6 reserve. Emails and memoranda to Wu show he knew about the impaired loan and approved the 7 sale for a significant loss prior to the filing of UCBH's Form 10-K.. Nevertheless, Wu falsely 8 stated in the management representation letter and other communications to the auditors that 9 there were no significant impairments or asset dispositions that had not been disclosed to the 10 auditors.
11 4. Las Vegas Participation Loan
12 52. UCB participated with other banks in a loan of more than $400 million to fund a 13 housing project in Las Vegas. UCB held a 1.6 percent share of the loan. In September 2008, the 14 banks repossessed the property after the borrower defaulted on the loan. At that time UCB 15 valued its share of this asset, now classified as real estate owned by the bank, at $4.8 million 16 based on a February 2008 appraisal of the property. A new appraisal, dated September 23, 17 2008, valued the entire project at $135 million, which valued UCB ' s share at $1.9 million. A 18 UCB loan officer received the appraisal in January 2009 and then the officer discussed the 19 appraisal with Shabudin. At a weekly meeting, UCB employees discussed the new appraisal 20 with Wu and Shabudin. Wu and Shabudin told their subordinates to not reach any "conclusions" 21 or "decisions" regarding the appraisal and any additional reserve amount. Wu knew that this
22 arbitrary delay meant that the loss would not be included in the 2008 financial statements, and 23 knew or was reckless in not knowing that the negative information regarding the value was not 24 considered in calculating the appropriate loss reserve. Ignoring this information violated 25 applicable GAAP.
26 53. In February and March 2009, UCBH's auditors requested information about the 27 loan and repossessed share of the property during a review of real estate owned by the bank. 28 Shabudin discussed the property with the auditors and reviewed a memorandum sent to the
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1 auditors regarding valuation of the loan. The memorandum did not disclose the new appraisal, 2 misleading the auditors into believing that no new information had been obtained by the bank.
3 Based on the new appraisal UCB's share of the property should have been written down from a 4 recorded value of $4 million by more than 50 percent, to a value of $1.9 million. Wu and 5 Shabudin knew that the property value as recorded in UCB's records was inflated and that the 6 new appraisal received by the bank but hidden from the auditors should have triggered a write 7 down of the asset's value and a resulting increase in losses reported by UCBH.
8 5. Commercial Loan to an Electronics Importer 9 54. In May 2004, UCB extended a line of credit to an importer of consumer 10 electronics based in Los Angeles, California. By December 2007, the company owed UCB $28 11 million, secured by the company's business assets. The company stopped making payments, and 12 on September 11, 2008, UCB filed a foreclosure action to recover the company's remaining 13 assets. In an email received by Yu, attorneys hired by UCB to represent the bank in the 14 foreclosure proceedings told Yu that another bank had rights to the assets that secured the loan. 15 A receiver appointed by the court also told the UCB attorneys that most of the inventory was 16- actually either empty boxes or counterfeit. On October 16, 2008, Yu and Shabudin received an 17: email from UCB's attorneys estimating that the bank would recover less than $100,000. 18 55. Despite knowing of a likely loss of nearly the entire $28 million loan by the 19 middle of October 2008, UCB did not write down the loan entirely. Instead, by December 31,
20 2008, the bank had written down the loan by just $4.2 million and recorded a loss reserve of 21 $18.9 million. This left a net loan value of approximately $4.8 million on the bank's books and 22 records, even though Shabudin and Yu knew the bank would not be able to recover that amount. 23 Yu provided the auditors with misleading information and a memorandum falsely stating that the 24 bank would be able to collect the remaining loan balance of $4.8-million. The memorandum 25 drafted by Yu and reviewed by Shabudin omitted information indicating the loan would be a 26 complete loss.
27 6. Construction Loans for a Condominium and Retail Space 28 56. In 2006 and 2007, UCB provided two loans to a California developer, one to
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1 construct a condominium in Sacramento, California and second to construct an office building in 2 nearby Roseville. The loan balances totaled $12.1 million on the Sacramento property and $8.1 3 million on the Roseville property. By the end of 2008, both loans were delinquent. In late
4 February 2009, Wu sent an email to Shabudin and Yu approving a sale of the Sacramento note
5 for $6.2 million. In early March 2009 UCB also agreed to sell the Roseville note for $3.5
6 million, at a loss of more than $4 million. p
7 57. During the 2008 audit, the auditors asked for information about these loans to 8 support the recorded valuations. UCB's loan loss reserve analysis prepared under Yu's 9 supervision for incorporation into the 2008 financial statements valued the Sacramento
10 condominium at $8.1 million and valued the Roseville property at $7.6 million. In late February 11 2009, Yu drafted a memorandum to the auditors that did not mention the new December 2008 12 appraisal on the Sacramento property, Wu's approval of the sale of the Sacramento note for $6.2 13 million, or UCB's intent to sell the Roseville note at a significant loss. In an email to auditors 14 two days later, Yu defended his valuation of the collateral for the loans and once again failed to 15 disclose UCB's intention to sell the Sacramento note at a significant loss.
16 58. UCB had recorded on the year-end financial statements reserves for these loans 17 totaling $4.6 million, but these reserves were understated based on the known losses. The 18 recorded net book value for the Sacramento loan was $8.1 million, including the recorded 19 reserve, despite an agreed sale value of $6.2 million. The recorded net value of the Roseville
20 loan was $7.5 million, including the recorded reserve, despite an agreed sale for $3.5 million. 21 These sales prices showed declining values for these loans, and therefore the loans required
22 additional reserve amounts of $1.9 million and $4 million, respectively. UCBH understated the 23 loss reserves for these loans by a total of $5.9 million.
24 7. Loan to Convert an Apartment Building to Condominiums
25 59. UCB had made a loan to a development group to fund the conversion of a 56-unit 26 apartment complex in El Cajon, California to condominiums. In December 2008, with a loan 27 balance of $8.4 million, the developer filed for bankruptcy, and Yu and other bank employees 28 discussed selling the property at a significant loss.
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1 60. In February 2009, emails among bank employees show that the bank intended to 2 sell the loan at a price of about $4.1 million to $4.5 million. On, Shabudin, Yu, and other UCB 3 employees received emails on February 17 and 26, 2009, regarding a number of loans and assets 4 the bank would sell by the end of the quarter, including this loan that would be sold at a 5 significant loss.
6 61. Despite information about the decreased value of the loan, the bank's loss reserve 7 calculation included only a small reserve of $256,000 based on an outdated March 2008
8 appraisal. The reserve calculation completed under Yu's supervision incorporation into the 2008 9 financial statements, and later approved by Yu, Shabudin, and On, failed to consider the bank's 10 intent to sell the loan at a significant loss. As a result of the information omitted from the reserve 11 calculation, the auditors were misled and the loss reserve was understated by $3.9 million. 12 E. Defendants Withheld Information and Misled Auditors
13 62. Wu, Shabudin, and Yu misled UCBH's independent auditors by either omitting 14 information known to them about loan and asset losses, or by making false statements to auditors 15 both orally and in writing regarding the value of loans, collateral, or other assets. Throughout 16 the audit of the 2008 financial statements, auditors repeatedly asked UCBH management for 17 updated information regarding collateral values for loans, including asking for new property 18 appraisals. Auditors discussed with Shabudin and Yu the auditors' request for any information 19 regarding loan collateral values and loan losses obtained by bank officials since December 3 1', 20 2008.
21 63. One significant piece of information intentionally kept from auditors was a 22 weekly log of new appraisals received by the bank. In order to monitor the values of the 23 collateral underlying troubled loans managed by Yu's Special Assets Group, the bank's
24 Collateral Assessment Unit retained appraisers, received the appraisals, and then distributed the 25 appraisals to the bank employees monitoring the particular loans. Every week the Collateral 26 Assessment Unit staff sent out an email attaching a spreadsheet listing all the appraisals received, 27 the appraisal values for those properties, and a list of appraisals ordered but not yet received. 28 This list accurately reflected appraisals received by the bank for many of the problem loans, and
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was sent each week by email to Shabudin, Yu, and other bank employees.
2 64. Despite repeated requests for updated appraisals, neither Yu nor Shabudin 3 provided the list to the auditors. Yu instructed a subordinate to conceal the list from auditors and 4 told the subordinate to prevent the auditors from obtaining copies of the updated appraisals listed 5 on the log. After discovering the log after completing the 2008 audit, UCBH auditors estimated
6 UCB's recorded loss reserves should have increased by approximately $65 million based on the 7 appraisal values noted on the log.
8 65. CFO On signed and approved the final ALLL package, a portion of the books and 9 records of UCB that was provided to the auditors to document the loan loss reserve calculations. 10 On certified the accuracy of the 2008 Form 10-K, signed the management representation letter
11 provided to the independent auditors as part of the audit, and responded to the auditors' request 12 for updated and current information regarding any issue that could affect 2008 financial
13 statements. In both the management representation letter and the update request response, On 14 omitted what he knew or should have known about the potential sale of loan and other assets. 15 F. UCBH Filed and Disclosed False Financial Information
16 The unaudited 2008 financial statements for UCBH publicly disclosed by the 17 company on January 22, 2009, and discussed by Wu and On during an investor conference call 18 on January 23, 2009, materially misstated the loan loss reserves, allowance for loan losses, and 19 asset values. Wu and On authorized the press release and the disclosure of the unaudited 20 financial statements.
21 67. The 2008 Form 10-K filed by UCBH contained materially misstated financial 22 statements, including materially misstated the loan loss reserves, allowance for loan losses, and 23 asset values. The Form 10-K also falsely stated that the financial statements were prepared in 24 accordance with GAAP. The books and records of UCBH and its subsidiary bank were also 25 false in regard to those issues.
26 68. Defendants Wu, Shabudin, and Yu employed devices, scheme, and artifices to 27 I defraud described above with scienter, knowingly or recklessly engaging in the activities that led 28 to misstated financial statements in the 2008 Form 10-K. Wu, Shabudin, and Yu engaged in the
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1 acts, practices, and courses of business described above with scienter, knowingly or recklessly
2 engaging in the activities that led to misstated financial statements in the 2008 Form 10-K. The
3 actions described above did not serve any legitimate business purpose. 4 69. UCB and UCBH had policies in place to ensure the accuracy of the companies' 5 books and records, including policies regarding how and when loan loss reserves must be 6 recorded, and manner in which information about loans and loan collateral must be incorporated 7 into the financial statements. The controls and policies in place were insufficient to prevent bank
8 : executives and other bank employees from delaying known losses on loans, assets, and 9 collateral. 10 70. By the acts and omissions described, defendants Wu, Shabudin, and Yu 11 knowingly circumvented a system of internal accounting controls, failed to implement a system 12 of internal accounting controls, and falsified books and records of UCBH. 13 71. Defendant On should have known that UCBH's financial statements included in
14 the 2008 Form 10-K did not accurately reflect the bank's loan loss reserve, and should have 15 known that the financial statements did not comply with GAAP. On failed to implement a 16 system of internal accounting controls sufficient to ensure the accuracy of the UCBH financial 17 statements. 18 72. Wu and On signed the 2008 Form 10-K, and signed certifications pursuant to 19 Exchange Act Rule 13 a- 14, stating that the Form 10-K "does not contain any untrue statement of 20 a material fact or omit to state a material fact necessary to make the statements made, in light of 21 the circumstances under which such statements were made, not misleading," and stating "the 22 financial statements, and other financial information included in this report, fairly present in all 23 material respects the financial condition, results of operations and cash flows of the registrant." 24 73. During 2008 through August 2009, Wu was compensated as CEO, chairman, and 25 president of UCBH at a salary of $1.2 million per year. 26 27 28
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1 FIRST CLAIM FOR RELIEF 2 Violations of Exchange Act Section 10(b) and Rule 10b-5 3 By defendants Wu, Shabudin, and Yu 4 74. Paragraphs I through 73 are re-alleged and incorporated herein by reference.
5 75. By engaging in the conduct described above, Wu, Shabudin, and Yu, directly or 6 indirectly, in connection with the purchase or sale of securities, by the use of means or 7 instrumentalities of interstate commerce, or the mails, with scienter:
8 (a) Employed devices, schemes, or artifices to defraud;
9 (b) Made untrue statements of material facts or omitted to state material facts 10 necessary in order to make the statements made, in the light of the circumstances 11 under which they were made, not misleading; and
12 (c) Engaged in acts, practices, or courses of business which operated or would 13 operate as a fraud or deceit upon other persons, including purchasers and sellers 14 of securities.
15 76. By reason of the foregoing, Wu, Shabudin, and Yu have violated and, unless
16 restrained and enjoined, will continue to violate Section 10(b) of the Exchange Act [15 U.S.C. § 17 78j(b)] and Rule lOb-S [17 C.F.R. § 240.10b-5].
18 SECOND CLAIM FOR RELIEF 19 Aiding and Abetting Violations of Exchange Act Section 10(b) and Rule 10b-5 20 By defendants Wu, Shabudin, and Yu
21 77. Paragraphs 1 through 73 are re-alleged and incorporated herein by reference.
22 78. By engaging in the conduct described above, UCBH and/or other persons, directly 23 or indirectly, in connection with the purchase or sale of securities, by the use of means or 24 instrumentalities of interstate commerce, or the mails, with scienter: 25 (a) Employed devices, schemes, or artifices to defraud;
26 (b) Made untrue statements of material facts or omitted to state material facts 27 necessary in order to make the statements made, in the light of the circumstances 28 under which they were made, not misleading; and
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1 (c) Engaged in acts, practices, or courses of business which operated or would
2 operate as a fraud or deceit upon other persons, including purchasers and sellers 3 of securities.
4 79. Wu, Shabudin, and Yu knowingly provided substantial assistance to the violations 5 of Section 10(b) of the Exchange Act [15 U.S.C. § 78j (b)] and Rule lOb-5 [17 C.F.R. § 240.1Ob- 6 5], and therefore are liable as aiders and abettors pursuant to Section 20(e) of the Exchange Act 7 [15 U.S.C. §78t(e)].
8 80. Unless restrained and enjoined, Wu, Shabudin, and Yu will continue to violate 9 and to aid and abet violations of Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and 10 Rule lOb-S [17 C.F.R. § 240.10b-5]. 11 THIRD CLAIM FOR RELIEF
12 Violations of Securities Act Sections 17(a)(1), (2), and (3) 13 By defendant Wu 14 81. Paragraphs I through 73 are re-alleged and incorporated herein by reference.
15 82. By engaging in the conduct described above, Wu directly or indirectly, in the 16 offer or sale of securities, by use of the means or instruments of transportation or communication 17 in interstate commerce or by use of the mails,
18 (1) with scienter, employed devices, schemes, or artifices to defraud; 19 (2) obtained money or property by means of untrue statements of material fact or by 20 omitting to state a material fact necessary in order to make the statements made, 21 in light of the circumstances under which they were made, not misleading; and 22 (3) engaged in transactions, practices, or courses of business which operated or would 23 operate as a fraud or deceit upon purchasers.
24 83. By reason of the foregoing, Wu violated and, unless restrained and enjoined, will 25 continue to violate Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)]. 26 27 28
21 COMPLAINT
Case3:09-cv-04208-JSWCase3:11-cv-04988-JSW Document217-5 Document1 Filed10/1/11 Filed01/09/12 Page22 Page23 of of26 27 1 FOURTH CLAIM FOR RELIEF 2 Violations of Securities Act Sections 17(a)(1) and (3) 3 By defendants Shabudin and Yu 4 84. Paragraphs 1 through 73 are re-alleged and incorporated herein by reference. 5 85. By engaging in the conduct described above, Shabudin and Yu directly or 6 indirectly, in the offer or sale of securities, by use of the means or instruments of transportation 7 or communication in interstate commerce or by use of the mails, 8 (1) with scienter, employed devices, schemes, or artifices to defraud; and 9 (2) engaged in transactions, practices, or courses of business which operated or would 10 operate as a fraud or deceit upon purchasers. 11 86. By reason of the foregoing, Shabudin and Yu violated and, unless restrained and
12 enjoined, will continue to violate Sections 17(a)(1) and (3) of the Securities Act [15 U.S.C. § 13 77q(a)(1), (3)]. 14 FIFTH CLAIM FOR RELIEF 15 Violations of Securities Act Sections 17(a)(2) and (3) 16 By defendant On 17 87. Paragraphs 1 through 73 are re-alleged and incorporated herein by reference. 18 88. By engaging in the conduct described above, On directly or indirectly, in the offer Iv' or sale of securities, by use of the means or instruments of transportation or communication in O1 interstate commerce or by use of the mails, 21 (1) obtained money or property by means of untrue statements of material fact or by 22 omitting to state a material fact necessary in order to make the statements made, 23 in light of the circumstances under which they were made, not misleading; and 24 (2) engaged in transactions, practices, or courses of business which operated or would 25 operate as a fraud or deceit upon purchasers. 26 89. By reason of the foregoing, On violated and, unless restrained and enjoined, will 27 continue to violate Sections 17(a)(2) and (3) of the Securities Act [15 U.S.C. § 77q(a)(2), (3)]. 28
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I SIXTH CLAIM FOR RELIEF
2 Aiding and Abetting Violations of Exchange Act Section 13(a) 3 and Rules 12b-20, 13a-1, and 13a-11 4 By defendants Wu, Shabudin, Yu, and On 5 90. Paragraphs 1 through 73 are re-alleged and incorporated herein by reference. 6 91. Based on the conduct alleged above, UCBH violated Section 13(a) of the
7 Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20,13a-1, and 13a-1 I thereunder [17 C.F.R. 8 §§ 240.12b-20, 240.13a-1, 240.13a-1 1], which obligate issuers of securities registered pursuant
9 to Section 12 of the Exchange Act [15 U.S.C. § 781] to file with the Commission periodic 10 reports, including annual reports, with information that is accurate and not misleading. 11 92. By engaging in the acts and conduct alleged above, defendants knowingly 12 provided substantial assistance to UCBH's filing of misleading reports with the Commission.
13 93. By reason of the foregoing, defendants aided and abetted violations of Section 14 13(a) of the Exchange Act [15 U.S.C. § 78m(a)] and Rules 12b-20, 13a-1, and 13a-11 [17 C.F.R. 15 §§ 240.12b-20, 240.13a-1, 240.13a-11], and unless restrained and enjoined, will continue to aid 16 and abet such violations.
17 SEVENTH CLAIM FOR RELIEF 18 Aiding and Abetting Violations of Exchange Act Section 13(b)(2)(A) 19 By defendants Wu, Shabudin, Yu, and On 20 94. Paragraphs 1 through 73 are re-alleged and incorporated herein by reference.
21 95. Based on the conduct alleged above, UCBH violated Section 13(b)(2)(A) of the 22 Exchange Act [15 U.S.C. § 78m(b)(2)(A)], which obligates issuers of securities registered 23 pursuant to Section 12 of the Exchange Act [15 U.S.C. § 781] to make and keep books, records, 24 and accounts which, in reasonable detail, accurately and fairly reflect the transactions and 25 dispositions of the assets of the issuer.
26 96. By engaging in the acts and conduct alleged above, defendants knowingly 27 provided substantial assistance to UCBII's failure to make and keep books, records, and 28 accounts which, in reasonable detail, accurately and fairly reflect its transactions and dispositions
23 COMPLAINT Case3:09-cv-04208-JSWCase3:11-cv-04988-JSW i 01 U1 1''i1 of26 27
1 I of its assets.
2 97. By reason of the foregoing, defendants aided and abetted violations of Section
3 1 3(b)(2)(A) of the Exchange Act [15 U.S.C. § 78m(b)(2)(A)], and unless restrained and 4 enjoined, will continue to aid and abet such violations.
5 EIGHTH CLAIM FOR RELIEF
6 Aiding and Abetting Violations of Section 13(b)(2)(B) of the Exchange Act 7 By defendants Wu, Shabudin, Yu, and On 8 98 Paragraphs 1 through 73 are re-alleged and incorporated herein by reference.
9 Based on the conduct alleged above, UCBH violated Section 13(b)(2)(B) of the 10 Exchange Act [15 U.S.C. § 78m(b)(2)(B)], which obligates issuers of securities registered
11 pursuant to Section 12 of the Exchange Act [15 U.S.C. § 781] to devise and maintain a sufficient 12 system of internal accounting controls.
13 100. By engaging in the acts and conduct alleged above, defendants knowingly 14 provided substantial assistance to UCBH's failure to devise and maintain a sufficient system of 15 internal accounting controls.
16 101. By reason of the foregoing, defendants aided and abetted violations of Section
17 13(b)(2)(B) of the Exchange Act [15 U.S.C. § 78m(b)(2)(B)}, and unless restrained and enjoined, 18 will continue to aid and abet such violations.
19 NINTH CLAIM FOR RELIEF 20 Violations of Section 13(b)(5) of the Exchange Act
21 By defendants Wu, Shabudin, Yu, and On 22 102. Paragraphs I through 73 are re-alleged and incorporated herein by reference.
23 103. By the conduct alleged above, defendants violated Section 13(b)(5) of the 24 Exchange Act [15 U.S.C. § 78m(b)(5)] which prohibits anyone from knowingly circumventing a 25 system of internal accounting controls, knowingly failing to implement a system of internal 26 accounting controls, or knowingly falsifying required books, records, and accounts.
27 104. Defendants have violated and, unless restrained and enjoined, will continue to
28 violate, Section 13(b)(5) of the Exchange Act [15 U.S.C. § 78m(b)(5)].
24 COMPLAINT Case3:09-cv-04208-JSWCase3:11-cv-04988-JSW Document217-5 Document1 Filed10/1/11 Filed01/09/12 Page25 Page26 of of26 27
1 TENTH CLAIM FOR RELIEF 2 Violation of Rule 13b2-1 under the Exchange Act
3 By defendants Wu, Shabudin, Yu, and On 4 105. Paragraphs 1 through 73 are re-alleged and incorporated herein by reference.
5 106'. By engaging in the conduct described above, defendants falsified or caused to be 6 falsified UCBH's required books, records, and accounts, in violation of Rule 13b2-1 under the 7 Exchange Act [17 C.F.R. § 240.13b2-1].
8 107. Defendants have violated and, unless restrained and enjoined, will continue to 9 violate Rule 13b2-1 under the Exchange Act [17 C.F.R. § 240.13b2-1].
10 ELEVENTH CLAIM FOR RELIEF 11 Violation of Rule 13b2-2 under the Exchange Act
12 By defendants Wu, Shabudin, Yu, and On 13 108. Paragraphs I through 73 are re-alleged and incorporated herein by reference. 14 109. By engaging in the acts and conduct alleged above, each of the defendants, as an 15 officer, directly or indirectly, made or caused to be made a materially false or misleading 16 statement or omitted to state or caused another person to omit to state, material facts necessary in 17 order to make a statement made, in light of the circumstances under which such statements was 18 made, not misleading to an accountant in connection with an audit or examination of the 19 financial statements of an issuer required to be made, or the preparation or filing of reports 20 required to be filed, by the issuer with the Commission.
21 110. By reason of the foregoing, defendants have violated and, unless restrained and 22 enjoined, will continue to violate Rule 13b2-2 [17 C.F.R. § 240.13b2-2].
23 TWELFTH CLAIM FOR RELIEF 24 Violations of Rule 13a-14 of the Exchange Act 25 By defendants Wu and On 26 111. Paragraphs 1 through 73 are re-alleged and incorporated herein by reference.
27 112. Wu and On signed certifications, that were required to be made pursuant to Rule 28 13a-14 of the Exchange Act and that were included in UCBH's Form 10-K for the year ended
25 COMPLAINT Case3:09-cv-04208-JSWCase3:11-cv-04988-JSW Document217-5 Document1 Filed10/1/11 Filed01/09/12 Page26 Page27 of of26 27
1 December 31, 2008, which were false or misleading when made. 2 113. By reason of the foregoing, Wu and On violated, and unless restrained and 3 enjoined will continue to violate, Exchange Act Rule 13a-14 [17 C.F.R. § 240.13a-14]. 4 PRAYER FOR RELIEF 5 WHEREFORE, the Commission respectfully requests that this Court: 6 I. 7 Permanently enjoin defendants from directly or indirectly violating the applicable 8 provisions and rules of the Federal securities laws as alleged and asserted above. 9 II.
10 Pursuant to Section 20(e) of the Securities Act [15 U.S.C. §§ 77t(e)] and Section 21(d)(2) 11 of the Exchange Act [15 U.S.C. § 78u(d)(2)}, prohibit Wu, Shabudin, and Yu from serving as an 12 officer or director of any entity having a class of securities registered with the Commission 13 pursuant to Section 12 of the Exchange Act [15 U.S.C. § 781] or that is required to file reports 14 pursuant to Section 15(d) of the Exchange Act [15 U.S.C. § 78o(d)]. 15 III. 16 Order defendants to pay civil penalties pursuant to Section 20(d) of the Securities Act [15 17 U.S.C. § 77t(d)] and Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)]. 18 Iv. 19 Retain jurisdiction of this action in accordance with the principles of equity and the 20 Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and 21 decrees that may be entered, or to entertain any suitable application or motion for additional 22 relief within the jurisdiction of this Court. 23 V. 24 Grant such other and further relief as this Court may determine to be just and necessary. 25 Dated: October 11, 2011 Respectfully submitted, 26 27 LrOYD&IARNHAM 28 Attorney for Plaintiff SECURITIES AND EXCHANGE COMMISSION 26 COMPLAINT Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page1 of 72
EXHIBIT F Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page2 of 72
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
In the Matter of: NOTICE OF INTENTION TO REMOVE FROM OFFICE THOMAS SHIU-KIT WU, EBRAHIM AND/OR TO PROHIBIT FROM SHABUDIN, CRAIG S. ON, THOMAS T. YU, FURTHER PARTICIPATION, JOHN M. KERR, PAUL MONTELARO, NOTICE OF ASSESSMENT OF CHRISTIAN C. LEE, LAUREN A. TRAN, CIVIL MONEY PENALTIES, YIXING SUN, and TA-LUN WU, individually FINDINGS OF FACT AND and as institution-affiliated parties of CONCLUSIONS OF LAW, ORDER TO PAY, and NOTICE UNITED COMMERCIAL BANK OF HEARING SAN FRANCISCO, CALIFORNIA FDIC-11-294e (IN RECEIVERSHIP) FDIC-11-295k (INSURED STATE NONMEMBER BANK)
The Federal Deposit Insurance Corporation (“FDIC”), has determined that Thomas Shiu-
Kit Wu (“Tommy Wu” or “CEO Wu”), Ebrahim Shabudin (“Shabudin”), Craig S. On (“On”),
Thomas T. Yu (“Yu”), John M. Kerr (“Kerr”), Paul Montelaro (“Montelaro”), Christian C. Lee
(“Lee”), Lauren A. Tran (“Tran”), Yixing Sun (“Sunny Sun” or “Sun”), and Ta-Lun Wu
(collectively “Respondents”), as institution-affiliated parties of United Commercial Bank (In
Receivership), San Francisco, California (“UCB” or “Bank”), have directly or indirectly participated in or engaged in unsafe or unsound banking practices, violations of law and/or
regulations, and/or acts, omissions or practices which constitute breaches of their fiduciary duty
as officers and/or directors of the Bank; that the Bank has suffered financial loss or other Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page3 of 72
damage, that the interests of its depositors have been prejudiced; and that such practices and/or breaches of fiduciary duty demonstrate the Respondents’ personal dishonesty and/or their willful
or continuing disregard for the safety or soundness of the Bank.
Further, the FDIC has determined that Respondents’ reckless unsafe or unsound practices
and/or breaches of their fiduciary duty were part of a pattern of misconduct and/or caused or
were likely to cause more than a minimal loss to the Bank.
The FDIC, therefore, institutes this proceeding for the purpose of determining whether an
appropriate order should be issued against each Respondent under the provisions of section 8(e)
of the Federal Deposit Insurance Act (“Act”), 12 U.S.C. § 1818(e), removing Respondents Lee,
Sun, Ta-Lun Wu, and Yu, from office, and prohibiting each Respondent from further participation in the conduct of the affairs of the Bank, and any other insured depository
institution or organization listed in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A),
without the prior written approval of the FDIC and such other appropriate Federal financial
institutions regulatory agency, as that term is defined in section 8(e)(7)(D) of the Act, 12 U.S.C.
§ 1818(e)(7)(D).
Further, the FDIC institutes this proceeding for the assessment of civil money penalties pursuant to the provisions of section 8(i)(2)(B) of the Act, 12 U.S.C. § 1818(i)(2)(B).
The FDIC hereby issues this NOTICE OF INTENTION TO REMOVE FROM OFFICE
AND/OR TO PROHIBIT FROM FURTHER PARTICIPATION (“NOTICE TO PROHIBIT”) pursuant to section 8(e) of the Act, 12 U.S.C. § 1818(e), and this NOTICE OF ASSESSMENT
OF CIVIL MONEY PENALTIES, FINDINGS OF FACT AND CONCLUSIONS OF LAW,
ORDER TO PAY, and NOTICE OF HEARING (“NOTICE OF ASSESSMENT”) pursuant to
2 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page4 of 72
section 8(i) of the Act, 12 U.S.C. § 1818(i), and the FDIC’s Rules of Practice and Procedure, 12
C.F.R. Part 308, and alleges as follows:
FINDINGS OF FACT AND CONCLUSIONS OF LAW
I. Preliminary Allegations
A. Preliminary Allegations Regarding the Bank
1. At all times pertinent to this proceeding, the Bank was a corporation existing and doing business under the laws of the State of California, having its principal place of business at
San Francisco, California.
2. The Bank was, at all times pertinent to this proceeding, an insured State nonmember bank, subject to the Act, 12 U.S.C. §§ 1811-1831y; the Rules and Regulations of the
FDIC, 12 C.F.R. Chapter III; and the laws of the State of California.
3. The Bank was wholly owned by its parent holding company, UCBH Holdings,
Inc. (“UCBH”), a publicly traded company. The Bank was UCBH’s primary subsidiary.
4. On or about November 6, 2009, the Bank was closed by the California
Department of Financial Institutions (“CDFI”), which appointed the FDIC as receiver.
5. At the time the Bank was placed into receivership, the Bank had $10.9 billion in assets.
B. Preliminary Allegations Regarding the Respondents
Tommy Wu
6. Tommy Wu, who joined the Bank in 1991, served as the Bank’s President and
Chief Executive Officer (“CEO”) from January 1998 to September 2009.
7. Tommy Wu served as a director of the Bank from September 2007 to September
2009.
3 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page5 of 72
8. Tommy Wu also served as the President and CEO of UCBH from March 1998 to
September 2009, and Chairman of the Board of Directors of UCBH from October 2001 to
September 2009.
9. Tommy Wu was asked to resign from the Bank and UCBH in September 2009.
Ebrahim Shabudin
10. Shabudin was employed by the Bank from 2003 to September 2009, in the
following capacities: Chief Credit Officer from 2003 to October 2005 and from September 2008
to March 2009; and Chief Operating Officer from August 2005 to September 2009.
11. Shabudin was asked to resign from the Bank in September 2009.
Craig On
12. On was employed by the Bank from June 2005 to November 2009, in the
following capacities: Controller from June 2005 to February 2008; Deputy Chief Financial
Officer from February 2008 to October 2008; and Chief Financial Officer from October 2008 to
November 2009.
Thomas Vu
13. Yu was employed by the Bank from 2005 to June 2009, in the following
capacities: Product Manager for Retail Lending from 2005 to 2006; First Vice President, Retail
Product Manager from 2006 to February 2008; First Vice President, Manager of Credit Risk &
Portfolio Management from February 2008 to March 2009; Senior Vice President, Manager of
Credit Risk & Portfolio Management from March 2009 to June 2009.
14. Yu resigned from the Bank as of June 9, 2009.
15. Yu is currently employed by Chinatrust Bank, an insured State nonmember bank
with its principal offices located in Torrance, California (“Chinatrust Bank”).
4 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page6 of 72
John Kerr
16. Kerr was employed by the Bank from October 2005 to June 2009, in the following capacities: Senior Vice President and Chief Credit Officer from October 2005 to
January 2008; Executive Vice President and Chief Credit Officer from January 2008 to
September 2008; Executive Vice President and Director of Portfolio Management from
September 2008 to January 2009; and Chief Lending Officer from January 2009 to June 2009.
17. Kerr resigned from the Bank as of June 30, 2009.
Paul Montelaro
18. Montelaro was employed by the Bank from 2005 to November 2009, in the following capacities: Director of the Bank’s Independent Asset Review Division (“IARD”) from
2005 to August 2006; Senior Credit Approval Officer from August 2006 to January 2009;
Deputy Chief Credit Officer from January 2009 to April 2009, and September 2009 to November
2009; and Acting Chief Credit Officer from April 2009 to September 2009.
19. Montelaro was terminated by the Bank as of November 6, 2009.
Christian Lee
20. Lee was employed by the Bank from October 1998 to November 2009. At all times pertinent to the charges herein, Lee served at the Bank as a Senior Vice President and
Director of Commercial Real Estate.
21. Lee was terminated by the Bank as of November 6, 2009.
22. Lee is currently employed by Circle Bank, an insured State nonmember bank with its principal office located in Novato, California. Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page7 of 72
Lauren Tran
23. Tran was employed by the Bank from July 2004 to November 2009. In mid-
2008, Tran became an officer in the Bank’s credit policy department.
24. As of November 6, 2009, Tran was serving as a Vice President and Manager of
Financial Institution and Country Risk.
Yixing Sun
25. Sun was employed by the Bank from September 2004 to September 2009, in
various capacities, including serving as a First Vice President and Manager in the Special Assets
Group (“SAG”) from 2008 to August 2009.
26. Sun was terminated by the Bank as of September 15, 2009.
27. Sun is currently employed by Bank of America, N.A., San Francisco, California,
an insured national banking association.
Ta-Lun Wu
28. Ta-Lun Wu was employed by the Bank from December 2008 to September 2009
as an Assistant Vice President of Special Assets and Administration.
29. Ta-Lun Wu was terminated by the Bank as of September 15, 2009.
30. Ta-Lun Wu is currently employed by Chinatrust Bank.
Respondents Are Institution-Affiliated Parties
31. At all times pertinent to the charges herein, each Respondent was an “institution-
affiliated party” as that term is defined in section 3(u) of the Act, 12 U.S.C. § 1813(u), and for purposes of sections 8(e)(7), 8(i) and 8(j) of the Act, 12 U.S.C. §§ 1818(e)(7), 1818(i) and
1818(j).
6 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page8 of 72
C. Jurisdiction
32. The FDIC has jurisdiction over the Bank, the Respondents and the subject matter
of this proceeding pursuant to section 3(q)(3) of the Act, 12 U.S.C. § 1813(q)(3).
D. Additional Definitions
33. John M. Cinderey (“Cinderey”) was employed by the Bank from 2004 to
September 2009, in the following capacities: First Vice President from 2004 to 2008; Senior
Vice President and Director of Commercial Banking from 2008 to January 2009; and Executive
Vice President and Director of Loan Administration from January 2009 to September 2009.
34. Lawrence M. Zhang (“Zhang”) was employed by the Bank from November 2003
to June 2009 as a Senior Vice President and Manager of the Bank’s SAG.
35. Richard L. Swartz (“Swartz”) was employed by the Bank from January 2008 to
September 2009, in the following capacities: Vice President and Asset Review Officer from
January 2008 to March 2008; and First Vice President and Manager in the Special Assets Group
from April 2008 to September 2009.
36. At all times pertinent to this proceeding, ****** ***** (“*****”) was a director
of the Bank and Chairman of the Bank’s Credit Committee.
37. At all times pertinent to this proceeding, ***** ********** (“********”) was
employed by the Bank as a First Vice President and Director of Sarbanes-Oxley Compliance.
38. At all times pertinent to this proceeding, ***** ***** (“******”) was employed by the Bank as the Director of the Bank’s Independent Asset Review Department.
39. At all times pertinent to this proceeding, **** ******** (“********”) was
employed by the Bank as Controller.
7
Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page9 of 72
II. The Bank’s Deteriorating Loan Portfolio and Faulty Risk Rating Process
40. The Bank’s internal risk rating system operated on a 1 to 12 scale, with loans
rated as follows:
(a) Ratings of 1 through 7 equated to a “Pass” loan;
(b) An 8 rating equated to a “Special Mention” classification;
(c) A 9 rating equated to a “Substandard – Accrual” classification;
(d) A 10 rating equated to a “Substandard – Non-accrual” classification;
(e) An 11 rating equated to a “Doubtful” classification; and
(f) A 12 rating equated to a charge-off.
41. For loans that were rated 1 to 9, reserves were allocated under Financial
Accounting Standard (“FAS”) 5 based on a historic loss factor which differed by portfolio. In
2008 for the construction loan portfolio, approximately 1.3 percent of the loan balance for loans
rated 1 to 7 was provided for in the Bank’s general reserve. For construction loans rated 8,
approximately 8 percent of the loan balance was provided for in the Bank’s general reserve. For
construction loans rated 9, approximately 16 percent of the loan balance was provided for in the
Bank’s general reserve. For loans rated 10 or higher, a FAS 114 worksheet was created to
calculate the amount of impairment of the loan to determine a specific reserve amount.
42. From at least July 2008 through March 2009, UCB’s loan portfolio, particularly
its construction loan portfolio, was deteriorating. Collateral values fell as the real estate market
declined, and an increasing number of borrowers began to have difficulty making loan payments.
The Bank was facing large increases to its Allowance for Loan and Lease Losses (“ALLL”), and
particularly its FAS 114 specific reserves.
8 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page10 of 72
43. From September 2008 through March 2009, Respondents were increasingly made
aware of the deteriorating condition of the Bank’s loan portfolio, and the fact that the Bank was
not properly risk rating its loans.
44. The IARD began a review of the Bank’s construction loan portfolio “as of July
31, 2008” on August 19, 2008.
45. In or around September 2008, Director of IARD ****** circulated a list of preliminary downgrades to CEO Wu, Cinderey, Yu, and Shabudin.
46. The preliminary findings of the IARD report were discussed at an October 22,
2008 meeting of the Bank’s Credit Committee. CEO Wu, Shabudin, Kerr, Montelaro, and Yu participated in this meeting. The discussion of the IARD findings at this meeting made clear to
all in attendance that the findings of the report were negative.
47. On or about October 28, 2008, CEO Wu sent an email to some of his top
managers — Shabudin, ****** *** (“***”), Cinderey, Kerr, On, and **** ****i—with the
subject line “Q4 priorities in credit management-Confidential.” In this email, CEO Wu told his
management team that it was of “upmost importance to manage our portfolio in this quarter.”
He charged his team with bringing down balances and delinquencies in the construction,
commercial real estate, and commercial and industrial portfolios, and to work out all large non- performing loans. CEO Wu’s stated goal was to “demonstrate better credit metrics in Q4 and
manage to deleverage on all these loans to improve our credit management ratios as well as risk based capital ratios.” This was to be their “top priority.”
48. CEO Wu tasked Shabudin to lead weekly meetings to address the credit issues
outlined in his October 28, 2008 email. Respondents Tommy Wu, Shabudin, Kerr, Lee,
9 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page11 of 72
Montelaro, and Yu, regularly attended these meetings. Cinderey and Zhang also regularly
attended these meetings.
49. On or about December 15, 2008, ****** issued the IARD Report on the review
of the construction loan portfolio. The IARD report contained substantially fewer downgrades
than those originally proposed to senior management. Nonetheless, the report identified
numerous loan downgrades and weaknesses in credit administration. IARD recommended that
26 percent (30 out of 114) of the credits reviewed or 37 percent of the dollars reviewed ($194
million out of $524 million) be downgraded. The report assigned the construction portfolio an
“Unsatisfactory” rating for asset quality and “Needs Improvement” for credit management.
50. The IARD report was sent to Shabudin and Cinderey on December 15, 2008, with
copies sent to Kerr, ********, ****** *****, On, and Zhang. On December 16, 2008, Cinderey
forwarded the IARD report to Montelaro.
51. Shabudin became Chairman of the Bank’s Portfolio Review Committee (“PRC”)
in September 2008. Montelaro was the Vice Chairman of the PRC during this time frame. Kerr
and Yu were members of the PRC. The PRC also had a working group, which included
Montelaro as Vice Chairman and Tran as Secretary. In December 2008, the PRC and its
working group discussed the overall deterioration in the Bank’s loan portfolio.
52. On or about December 16, 2008, at a PRC meeting which Shabudin was leading
as Chairman, the PRC discussed the increased number of impaired loans in the Bank’s
construction portfolio. The PRC agreed that the risk level in the portfolio was high, the trend
was increasing, risk mitigation was marginal, and the impact was significant. Respondents Kerr,
Montelaro, On, and Yu were in attendance at this meeting. Cinderey and Zhang were also present.
10 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page12 of 72
53. On or about December 30, 2008, the PRC working group held a meeting. At this meeting, the working group recommended risk rating downgrades for nearly every loan reflected in the minutes. For those loans where no downgrade was recommended, properties were reported to be in foreclosure, new appraisals were being requested, or sales were being negotiated. Respondents Kerr, Montelaro, and Tran participated in this meeting. Respondents
Shabudin, Kerr, Montelaro, On, Tran, and Yu received a copy of the minutes for this meeting.
54. It was also reported at the December 30, 2008 PRC working group meeting that many risk rating downgrades were pending: the various credit units were sending in recommendations for downgrades, but they were not getting approved. Montelaro acknowledged this fact.
55. It was further discussed at the December 30, 2008 PRC working group meeting that the risk ratings appeared to be off by one grade; for example, loans that were graded a 7, should have been graded an 8, and loans that were graded an 8, should have been graded a 9.
56. On December 30, 2008, the Bank’s Chief Risk Officer, *** *******
(“*******”), specifically advised Shabudin, Cinderey, Kerr, Tran, Montelaro, Yu, and Zhang of the problems with the Bank’s risk rating process that were discovered at the PRC working group meeting. On December 31, 2008, ******* sent a follow-up email to Shabudin, Cinderey, Kerr, and Montelaro in which he again stressed the problems uncovered at the PRC working group meeting with respect to risk ratings.
57. Once the extent of the deterioration in the Bank’s loan portfolio became clear,
Respondents, in particular, Tommy Wu and Shabudin, orchestrated a scheme to manipulate information related to certain loans at the Bank in order to mask the deterioration in the Bank’s loan portfolio and to delay reserving for and/or recognizing losses in that portfolio.
11 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page13 of 72
58. As part of Respondents’ scheme to mask the deteriorating financial condition of
the Bank, Respondents artificially delayed risk rating downgrades of loans and artificially
delayed loan charge-offs.
59. Respondents consistently delayed downgrading loans to reduce the amount of provisions required to maintain an adequate ALLL. Instead of acknowledging the risk in the
loans as presented at the December 30, 2008 PRC working group meeting, Respondents ignored
the working group’s recommendations. Indeed, the Bank’s ALLL analysis as of December 31,
2008 did not reflect many of the downgrades discussed at the December 30, 2008 PRC working
group meeting.
60. In addition, accounting rules dictate that loans that are past due by more than 90
days cannot continue to accrue interest unless well secured and in the process of collection.
Notwithstanding the foregoing, the Bank continued to accrue interest on loans that were more
than 90 days past due and where full collection was unlikely.
III. Respondents Made Misrepresentations and Omissions to the Bank’s Auditors
A. KPMG’s 2008 Audit
61. The accounting firm of KPMG LLP (“KPMG”) was hired to conduct an audit of
UCBH’s financial statements as of December 31, 2008.
62. During the period of December 2008 to March 16, 2009, KPMG conducted its
audit of UCBH’s financial statement as of December 31, 2008 (“2008 audit”).
63. Since the Bank was UCBH’s primary subsidiary, KPMG’s 2008 audit of UCBH
focused primarily on the Bank’s balance sheet and operations.
12 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page14 of 72
64. On March 16, 2009, UCBH filed its audited financial statements for the year
ending December 31, 2008, also known as its 2008 Form 10-K, with the Securities and Exchange
Commission (“SEC”). CEO Wu and On signed the 2008 Form 10-K.
65. During the course of KPMG’s 2008 audit of UCB and UCBH, the Respondents
engaged in violations of law, unsafe or unsound practices, and breaches of fiduciary duty by
making significant misrepresentations and omissions to KPMG, as discussed more fully in paragraphs 66 through 273 and paragraphs 298 through 308 below.
B. Risk Ratings Issues at the 2008 Audit
66. The Bank’s risk ratings of problem loans were a critical issue during the 2008
audit of the Bank.
67. In an attempt to keep KPMG from thoroughly reviewing the Bank’s risk ratings
during the 2008 audit, Respondents controlled and significantly limited what information was
available to KPMG. For example, from the beginning of the audit, Shabudin and Montelaro
asserted control over the flow of information to the Bank’s auditors, requiring a complete listing
of all items requested by KPMG.
68. Shabudin and Montelaro repeatedly failed to provide information requested by
KPMG in a timely manner, including Risk Analysis and Action Plans (“RAAPs”) on problem
loans and internally classified and criticized asset lists.
69. On January 6, 2009, ********, the Bank officer in charge of compliance with
Sarbanes-Oxley (“SOX”), asked to meet with Shabudin regarding the risk rating process.
********* told Shabudin: “There are concerns that the process is not working and therefore
there may be SOX 404 issues.”
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70. On January 20, 2009, ****** circulated a list of problem credits to Shabudin,
Montelaro, Cinderey, and Yu for discussion. ****** indicated to Montelaro that he considered some of the risk ratings of these loans to be “really iffy.”
71. In February 2009, Shabudin received an update from ******** concerning discussions with KPMG. ******** told Shabudin that KPMG was finalizing the list of credits where there were unsupported facts, and that management would “then meet to clarify the required documented evidence to support the accuracy of the risk ratings.” Shortly thereafter,
Shabudin met with On, Montelaro, Cinderey, and ********. On distributed analyses of the financial statement impact of various risk ratings. In his email follow-up with Shabudin, and copying Montelaro, Cinderey, Yu, and ********, On stated: “Please do all you can to maintain our risk ratings.”
C. Scheme to Mask the Bank’s Deteriorating Financial Condition
72. Respondents’ scheme to mask the Bank’s deteriorating financial condition included the Respondents’ participation in the following practices:
(a) Concealing evidence of declining collateral values from KPMG;
(b) Reserving loans through either FAS 5 or FAS 114, depending on which accounting measure would result in lower reserves;
(c) Artificially modifying and granting extensions on loans in order to delay the non-accrual of interest;
(d) Making loans for the sole purpose of bringing interest due current on related loans;
(e) Delaying downgrades of loans in order to reduce the amount of required reserves;
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(f) Delaying recommended charge-offs from year-end 2008 to first quarter
2009;
(g) Ignoring subsequent events;
(h) Failing to mark loans held for sale at fair value; and
(i) Misrepresenting collateral protection of assets where security interests
were known to be unperfected.
These practices are discussed more fully in paragraphs 73 through 319 below.
D. KPMG’s Discovery of Respondents’ Scheme
73. On or around March 16, 2009, after the 2008 Form 10-K was filed, KPMG left
the Bank’s premises. KPMG returned to the Bank approximately two to three weeks later to begin the review process for the First Quarter 2009 financial statements (“First Quarter 2009
review”).
74. When KPMG returned to the Bank for the First Quarter 2009 review, KPMG
learned that the Bank had taken a significant number of charge-offs during the last two weeks of
March 2009 – in the two week period after the 2008 Form 10-K was filed. These charge-offs
included, but were not limited to, the following loans or Other Real Estate Owned (“OREO”) property: **********, *************, *************, ***********, *********, and
**********
75. KPMG reviewed this area in more detail, and learned that the Bank was aware of
updated appraisals, loan valuations, or pending note sales prior to the filing of the 2008 Form 10-
K that should have been included in the Bank’s reserve analysis for those financial statements.
The Bank had not shared this information with KPMG.
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76. KPMG’s discovery of the Bank’s concealment and misrepresentation of information during the 2008 audit led to an internal investigation and attempts to review and restate the financial statements.
77. The internal investigation and restatement efforts found that the Bank failed to charge-off at least $61.8 million in loans at the end of 2008 that were required to be charged-off, and the Bank understated its specific loan reserves at the end of 2008 by at least $53.7 million.
IV. Respondents Concealed Appraisals from KPMG
78. One method Respondents used to withhold pertinent information from KPMG was to conceal the existence of the most recent appraisals obtained by the Bank. Respondents
Shabudin, Tran, Ta-Lun Wu, Yu, and others concealed the existence of these new appraisals when the appraisals showed a decline in the value of the underlying property held as collateral for Bank loans or showed a decline in the value of OREO by the Bank, including, but not limited to, appraisals received for the following loans: **********, *************, *********,
**********, and *************. Respondents Shabudin, Tran, and Yu also concealed from
KPMG the existence of a centralized appraisal list for problem credits.
A. ********** Appraisal
79. ********** *************** (“**********”) was a 6-story mixed-use
(residential and retail) building in National City, California. The project was a participation loan with lead bank ******************* (“***”). UCB held 61.1% of the $17.7 million loan, or approximately $10.8 million, with *** and another small bank holding the balance. The loan fell into default before its February 2008 maturity date and the property swiftly dropped in value.
80. In a May 2008 appraisal, the ********** property was valued at $18,220,000 “as is.” By the time of the KPMG audit, however, the land value had dropped, so much so that
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Swartz sent an email on January 2, 2009 requesting a new appraisal. In that email, Swartz
explained that a new appraisal was needed because “prices [had] fallen significantly since May.”
81. On January 14, 2009, Swartz received an email forwarding the new appraisal preformed by the **********. The new appraisal listed the “as is” value of the land at a mere
$12,715,000, making UCB’s portion worth only $7,768,865.
82. The FAS 114 analysis, which was prepared by Yu, reflected only a modest
reserve of $780,170. The analysis was based on the stale May 31, 2008 appraised value, which
was $5.5 million higher than the January 2009 appraised value.
83. In February 2009, KPMG began questioning the Bank’s reliance on the May 2008
appraised value. Respondent Yu and Swartz drafted a memorandum to KPMG dated February
27, 2009 in response to KPMG’s questions. This memorandum did not contain any reference to
the January 2009 appraisal.
84. Respondents did not provide KPMG with a copy of the January 2009 appraisal
during the 2008 audit. KPMG did not learn about the January 2009 appraisal until after the 2008
Form 10-K was filed.
B. ************* Appraisal
85. The Bank held a participation interest of less than two percent in a loan made by
************ to *************, Inc. (“****” or “*************”) for the development of a
master-planned community in Las Vegas. UCB’s total commitment to **** was approximately
$6.47 million.
86. In February 2008, the Las Vegas property securing the loan was appraised at $300
million, effective as of January 8, 2008.
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87. In September 2008, after ************* foreclosed upon the Las Vegas property, the property became OREO and the account was transferred to the SAG. ****
********** was listed as OREO with a book value of $4.015 million at year-end 2008.
88. On January 14, 2009, Ta-Lun Wu was copied on a request for ************ to provide an updated appraisal for the **** property. ******* ******** (“*******”), another
SAG officer, received the appraisal on January 20, 2009. The updated appraisal valued the property “as is” at $135 million as of September 23, 2008, leaving only $2.16 million in
collateral for UCB, a significant decline from the earlier appraisal.
89. On January 26, 2009, Zhang scheduled an internal meeting for January 28, 2009
to prepare for an upcoming meeting with KPMG. KPMG had asked for the meeting to discuss a
number of properties held by the Bank as OREO, including ****. Since Zhang was out sick, he
emailed ******* regarding the new **** appraisal asking ******* to check with Shabudin.
******* reported back that Shabudin said the appraisal should “be thoroughly analyzed and that
a second opinion be sought.”
90. On February 24, 2009, ***** ***** (“*****”) of KPMG sent Zhang an email
asking about appraisals for a number of properties, including ****; that email indicated that
KPMG did not yet know about the updated appraisal. Zhang forwarded that email to Ta-Lun
Wu. On February 26, 2009, ***** provided a spreadsheet on four properties, including ****, to
Ta-Lun Wu and Zhang. The spreadsheet reflected a valuation of the **** property based on the
February 2008 appraisal. ***** asked for their help in obtaining support for the valuations.
Neither Ta-Lun Wu nor Zhang, in response to this request, advised KPMG about the more recent
appraisal.
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91. On February 27, 2009, KPMG and UCB management held a meeting, attended by
**** ******** and ***** from KPMG, and Zhang, Ta-Lun Wu, and ******** from the Bank,
to discuss the valuation of certain OREO properties. During that meeting, KPMG asked Zhang
several questions about ****’s valuation, including whether a more recent appraisal existed than
the February 2008 appraisal. Neither Zhang nor Ta-Lun Wu told KPMG of the existence of the
more recent appraisal.
92. Following the February 27, 2009 meeting, KPMG again asked for memoranda
regarding a number of loans, including ****. Ta-Lun Wu provided memos for the other loans but only a worksheet for ****. That worksheet again listed the **** appraised value at $300
million, the value supported by the stale January 2008 appraisal that was substantially higher
than the September 2008 appraisal.
93. In March 2009, since KPMG was not aware of the existence of the new appraisal,
KPMG suggested reducing the valuation of **** by 33 percent based on an analysis using Case-
Schiller property data. However, KPMG had still requested that the Bank prepare a
memorandum on the **** property evaluation. On March 4, 2009, Zhang responded in an email
on which he copied Shabudin, “We agree with their assessment on Vegas property by KPMG.
Therefore no memo was prepared. This was the decision made by ******, Talun and I.”
94. On March 6, 2009, Ta-Lun Wu sent the memo requested by *****. The memo,
dated March 5, 2009, again referenced the older appraisal with no mention of the more recent
one.
95. Respondents did not provide KPMG with a copy of the September 2008 appraisal
during the 2008 audit. KPMG did not learn about the September 2008 appraisal until after the
2008 Form 10-K was filed.
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C. ********* Appraisal
96. The Bank extended a loan to ********* Street LLC on August 3, 2007, with an initial commitment of $20 million and a maturity date of April 5, 2009 (“********** Loan”).
The purpose of the ********* Loan was to finance the renovation and construction of 67 condominium units and 9,500 square feet of ground floor retail space. As of December 31, 2008, the ********* Loan had an outstanding balance of $13.8 million.
97. In February 2009, KPMG began asking questions concerning the *********
Loan. Bank staff drafted a response to KPMG’s questions. The draft response included reference to a new appraisal dated January 9, 2009, which valued the underlying property at $8.5 million, more than $5 million less than the outstanding loan balance.
98. The Bank’s response was rewritten before it was sent to KPMG to omit any reference to the $8.5 million value indicated in the January 9, 2009 appraisal.
D. ********** Appraisal
99. In June 2006, UCB made a loan to ********** ************** for $44.8 million to construct a 194-unit town home development in Chula Vista, California (“****
*****”). When work on the project failed to develop after two years, the commitment was collapsed to $24.53 million in May 2008, and the project was changed from town homes to a
278-unit apartment building. A six-month extension was approved in September 2008 to finish the new building plans and obtain new financing. The borrower ceased making payments on the loan beginning in October 2008.
100. In January 2009, the Bank received an appraisal for the ********** property valuing the property at $13,740,000 as of November 21, 2008 (“January 2009 Appraisal”). The
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January 2009 Appraisal reflected a $16.39 million decline in value from an earlier January 2008
appraisal.
101. Upon receipt of the January 2009 Appraisal, UCB ordered another appraisal,
which was received in mid-February 2009 (“February 2009 Appraisal”). The February 2009
Appraisal showed a further decline in value to $7.6 million, nearly half that of the January 2009
Appraisal, resulting in a loan-to-value (“LTV”) of 323 percent.
102. In February 2009, KPMG began asking questions concerning the **********
loan. In response to KPMG’s questions, the Bank prepared a memo that relied on the January
2009 Appraisal. This memo did not disclose, among other things, that the February 2009
Appraisal valued the collateral at nearly half the value in the January 2009 Appraisal.
103. On March 4, 2009, KPMG asked for the most current appraisal on the loan. The
Bank only forwarded the January 2009 Appraisal, which included the higher valuation of the project.
E. ************* Appraisal
104. In October 2005, the Bank made a loan secured by property known as ********
*****. As of December 31, 2008, the Bank had foreclosed upon the ************* property
and recorded the property as OREO with a book value of $1,158,554.
105. The Bank obtained an appraisal of the ************* property as of December
2008 which valued the property at $1.58 million. The Bank also obtained a land-only appraisal
of the ************* property as of January 2009 which valued the land only at $480,000. Ta-
Lun Wu received a copy of the January 2009 appraisal on January 22, 2009.
106. In February 2009, KPMG began asking questions about the Bank’s valuation of
the ************* property. In response to KPMG’s questions, Ta-Lun Wu prepared a memo
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dated February 27, 2009. The February 27, 2009 memo relied solely upon the December 2008
appraised value of the ************* property, and failed to disclose the existence of the
January 2009 appraisal.
F. Centralized Appraisal System and Weekly Report
107. In September 2008, Bank employee *** *** (“***”) became responsible for
tracking and ordering appraisals.
108. Beginning in late 2008, *** distributed a weekly appraisal report to Tran and
****** ** (“**”), who were responsible for preparing the Bank’s FAS 114 calculations. ***
regularly provided copies of the weekly appraisal report to Kerr and Yu. *** also provided
copies of the weekly appraisal report to Shabudin on at least three occasions.
109. The weekly appraisal report contained three parts: appraisals with orders pending; all appraisals received in the past month; and all appraisals completed since September
2008.
110. Tran was responsible for providing appraisal information regarding loans to
KPMG during the 2008 audit. However, Tran never told KPMG about the existence of the
centralized appraisal process or the weekly appraisal report.
111. KPMG specifically asked Tran for appraisals that had been received in 2009.
However, Tran did not provide such appraisals to KPMG, nor did she provide at least one
appraisal that had been received in 2008.
112. On March 12, 2009, *** sent an email to Shabudin attaching an updated FAS 114
spreadsheet with updated valuation information, along with the most recent appraisal report. The
spreadsheet forwarded to Shabudin indicated which FAS 114 valuations had not been updated to
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reflect values from more recent appraisals. Shabudin knew upon receipt of this spreadsheet that
more recent appraisals were not being considered in the Bank’s ALLL calculations.
113. It was not until after the 2008 Form 10-K was filed that KPMG learned about the
weekly appraisal report and discovered many loans and properties on the weekly appraisal report
for which there were recent appraisals that had not been provided to them.
114. As a result of the failure of Tran, Yu, and Shabudin to ensure that the Bank
considered updated appraisals for certain loans and OREO properties and that KPMG knew of
such appraisals, the impact to the Bank’s financial statements was at least $12,565,000.
V. Respondents Concealed Pending Note Sales from KPMG
115. Respondents Tommy Wu, Shabudin, Kerr, Montelaro, On, Yu, and others
concealed the existence of pending note sales from KPMG, including, but not limited to, sales of
the **********, *************, *********, and ********** credits. In fact, the Bank had plans to sell a large number of notes in the first quarter of 2009. These plans were not disclosed by Respondents to KPMG during the 2008 audit.
A. ********** Note Sale
116. As early as November 26, 2008, Swartz and Zhang had decided that selling the
********** note at a loss was the Bank’s best option. By the end of January 2009, Swartz was
already weighing the pros and cons of the note sale and was aware of the fact that any sale would bring with it a substantial loss to the Bank.
117. By mid-February 2009, Respondents Shabudin, On, and Yu, and Swartz and
Zhang were in accord that the note should be sold at a loss to the Bank. In a series of emails
dated February 13, 2009, Bank management contemplated selling the loan. Yu stated: “sell if
can be done before Q1.” On was in agreement: “sell for that price only if there is a condition
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that it close by say the third week in March.” Zhang acknowledged that the Bank would take a
“$6.8mm hit,” but urged that it be done “quickly by end of 1Q.”
118. By email dated February 16, 2009, Zhang notified Swartz of the likely intent to
sell at a loss and “take the hit now . . . by 3/31/09,” and Zhang further informed Swartz that a
decision would be made “in [the] next day or two.”
119. Zhang and Swartz sent a memo dated February 17, 2009 through Shabudin to
CEO Wu, with copies to Kerr, On, Yu, ***** ***, and Ta-Lun Wu. In this memo, Zhang and
Swartz recommended selling the ********** note for $6.5 million, of which the Bank’s share
would be $3.975 million, which would result in the Bank taking a $6.8 million loss.
120. The next day, Zhang notified *** that “UCB agrees to sell its [share] of the participation loan . . . for no less than USD4 million . . . subject to the deal be closed by
3/15/09,” the day before the filing of the 2008 Form 10-K.
121. In February 2009, when KPMG began asking questions about the **********
loan, Yu failed to disclose to KPMG the Bank’s plans to sell the ********** note at a loss of
$6.8 million.
122. As planned since February 2009, the ********** note was sold on or about
March 26, 2009 at a loss of $6.8 million.
B. ********* Note and Short Sales
123. In December 2006 and January 2007, the Bank made two loans to *********,
Inc., a company owned by ******** (“*****”) and *********** (“******”). The first loan
was made for $12.15 million and was secured by a downtown Sacramento condominium and
retail project (“H Street Loan”). The second loan was for $9.65 million and was secured by a
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Roseville office project (“Roseville Loan”). ***** and ****** provided guarantees for both
loans.
124. By the second half of 2008, both the H Street and Roseville Loans had
significantly deteriorated, and the Bank had started considering either note sales or short sales for both properties. CEO Wu, Shabudin, Kerr, Montelaro, On, and Yu failed to disclose the Bank’s
sale plans regarding either the H Street Loan or the Roseville Loan to KPMG.
H Street Loan
125. In December 2008, due diligence was ongoing for the H Street property by potential purchasers ************** (“******”) and *********** (“*****”). In mid-
December 2008, the Bank was negotiating with ***** on either a short sale of the property or a
sale of the note. After negotiations faltered at the end of the year, the Bank resumed negotiations
with prospective purchasers in January 2009. CEO Wu, Shabudin, Cinderey, Kerr, Yu, and
Zhang were all involved in these negotiations.
126. On January 15, 2009, the Bank received a $6 million offer for the H Street Loan
from ******, who was the ultimate purchaser of the note. The Bank forwarded this offer to its
counsel.
127. On February 9, 2009, the Bank also received a short sale offer of $8.2 million
from a different buyer. The Bank considered this offer at the same time as the ****** offer;
however, the new potential purchasers had not yet performed any due diligence on the property.
In an email exchange on February 24, 2009, Zhang, Shabudin, Kerr, and Yu discussed the merits
of the $6 million note offer versus a potential short sale of $7 million to $8 million. Zhang
indicated that he would discuss it with CEO Wu the following day.
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128. On February 26, 2009, the broker for ****** sent an email directly to CEO Wu,
attaching a $6.15 million note sale offer. CEO Wu forwarded this offer to Shabudin, Kerr,
Montelaro, Zhang, and Yu, with a copy to On. This offer became known as “Tommy’s deal.”
129. On February 27, 2009, the $8.2 million short sale offer was withdrawn. Yu,
Zhang, and Kerr received notice of the withdrawal. Zhang then sent an email to CEO Wu, with a
copy to Shabudin and Yu, recommending accepting the $6.15 million ****** offer. CEO Wu
agreed with Zhang’s recommendation.
130. On March 5, 2009, Zhang, ***** ******* (“********”), and ***** *** (“***”)
sent a memo to Shabudin and Kerr, with copies to Cinderey, Yu, and *******. The memo
recommended releasing the guarantors from their guarantees in order to sell the loan before the
end of the first quarter.
131. On March 8, 2009, On specifically asked KPMG about the status of its review of
the ********* loans. That same day, On received an email from Zhang indicating that the purchase and sale agreement would be signed “in the next day or two.” On did not share this
information with KPMG.
132. On March 9, 2009, ******, the purchaser, executed the purchase and sale
agreement. This was discussed at the March 10, 2009 PRC meeting, at which Shabudin, Kerr,
Montelaro, and Yu were in attendance. On March 13, 2009, Kerr executed the purchase and sale
agreement on behalf of the Bank.
133. Tran forwarded the FAS 114 that Yu prepared on ********* to KPMG on March
13, 2009, the date the Bank executed the purchase agreement. The FAS 114 worksheet indicated
a value of $8.95 million for the H Street Loan. Yu based this valuation on the $8.2 million short
sale offer that the Bank had received, even though it had already been withdrawn. Yu did not
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mention the fact that the Bank had entered into an agreement to sell the note instead for $6.15
million.
134. On March 14, 2009, KPMG asked Yu whether the $8.2 million sale was
completed. Yu replied, copying ********, On, and Shabudin, that the $8.2 million sale did not
close, but that the borrower and Bank were getting offers. Yu did not disclose that the Bank had,
in fact, already agreed to sell the note for $6.15 million. On and Shabudin said nothing to correct
this critical omission. The sale closed six days later.
Roseville Loan
135. At the same time that the Bank was involved in negotiations to sell the H Street
Loan, the Bank was also attempting to secure a short sale for the Roseville property.
136. On February 24, 2009, the Bank received an offer for a short sale from the borrower’s real estate agent. On February 24, 2009, Kerr sent an email to Yu indicating that he
was inclined to accept an offer for $4.1 million, which would net the Bank approximately $3.8
million.
137. On March 6, 2009, Zhang advised *** that he had received Shabudin’s “ok” on a
short sale for $3.46 million. Shabudin, Kerr, and Yu were copied on this email. This was also
discussed at the March 10, 2009 PRC meeting, at which Shabudin, Kerr, Montelaro, and Yu
were in attendance.
138. On March 12, 2009, the broker submitted to the Bank the executed purchase
agreement for the short sale of the Roseville property. The purchase agreement was dated March
9, 2009.
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139. On March 13, 2009, Tran forwarded the FAS 114 that Yu prepared on the
Roseville Loan to KPMG. The FAS 114 worksheet valued the collateral for the Roseville Loan
at $8.39 million, less 10 percent liquidation costs.
140. Yu assigned a specific reserve of $597,497 for the Roseville Loan. Yu stated in
the FAS 114 worksheet that the valuation was based on a November 2008 sale of one unit of the property, but failed to disclose that the Bank had already agreed to a short sale of the property for
$3.464 million.
141. The Roseville short sale closed on March 24, 2009.
C. First Quarter 2009 Plans to Sell Non-Performing Loans
142. The Bank’s sales of the ********** loan and ********* – H Street Loan were
not isolated occurrences. CEO Wu had directed his senior management team to sell as many
non-performing loans as they could by the end of the first quarter 2009.
143. In February 2009, Zhang reported back to CEO Wu on the progress of planned
sales of 24 non-performing assets totaling $149 million, including, but not limited to, the ******
******* and ********** loans. Zhang told CEO Wu that they were trying to complete the
sales prior to the end of the quarter. Shabudin, On, and Yu were copied on this email.
144. KPMG, however, did not learn of the Bank’s planned or completed sales of non- performing loans in the first quarter of 2009 until after the 2008 Form 10-K was filed. None of
the Respondents shared this information with KPMG during the 2008 audit. In fact, Wu and On
confirmed to KPMG in “Down-to-Date” emails used to verify the finality of audit items, and
signed Management Representation Letters which stated that no such sales were planned, as
more fully discussed in paragraphs 298 through 308 below.
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VI. Respondents Concealed Negative Information Concerning Repossessed Assets and Collateral from the Bank’s Auditors and Regulators
145. Respondents Tommy Wu, Shabudin, Kerr, Montelaro, On, Sun, Yu, and others
concealed negative information concerning repossessed assets and collateral from the Bank’s
auditors and regulators, including, but not limited to, information relating to loans made to
*******, ***********, and *********
A. ******* Loan
146. The Bank’s loan to ******* was one of the largest loans in the Bank. The loan became very complex due to the different types and locations of collateral for the loan, its very
troubled status, and the need to repossess collateral that secured the loan. CEO Wu was directly
involved in the Bank’s management of the ********** ******* credit. CEO Wu, Shabudin,
Kerr, Montelaro, On, Sun, and Yu became aware of a multitude of problems with the collateral
and repossessed assets from November 2008 to January 2009. Notwithstanding the foregoing,
none of these Respondents disclosed any of the known deficiencies with the collateral and
repossessed assets to KPMG. In addition, CEO Wu misrepresented the condition of the
collateral to the FDIC during the FDIC’s April 2009 examination.
Background
147. **************************** and **************************** were both 100% owned by ****************** (together, “*******”). ******* imported and
distributed consumer electronics and memory products. The company purchased over 50 percent
of its inventory from ******* *****************************, which was majority-owned by **********************************, a publicly listed company in China (“*******”)
*********** was the CEO and 40.8 percent owner of *******, and her brother, *********,
was the Chairman of the Board of ******************************.
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148. In April 2006, UCB granted ******* a $25 million asset-backed revolving line of credit to provide working capital and issue import letters of credit. This line was subsequently increased to $50 million in November 2006, and a participation of $6 million was sold to
************. The Bank held a UCC-1 blanket lien on *******’s business assets. ********
**** and ******* *********** also provided guarantees of $25 million each.
149. In September 2007, ******* lost a lawsuit filed by ****************
(“******”) for patent infringement. On October 3, 2007, ******* filed a bankruptcy petition under Chapter 11 due to a $12 million judgment obtained by ******. In June 2008, ********
**** was paid off; *******’s outstanding balance to the Bank remained at $44 million. On July
11, 2008, the Bank learned that the *****judgment against ******* had increased to $45 million.
150. On August 31, 2008, the Bank executed a settlement agreement with *******
****. In this agreement, she agreed to cooperate and use her best efforts to assist the Bank in realizing a recovery on the collateral for the ******* loan. On September 14, 2008, the Bank executed three agreements with companies owned by the ***** to assign new collateral to the
Bank. By virtue of these agreements, the Bank obtained collateral in China consisting of $20 million in Chinese banks owned by ******* and real estate in Shanghai.
151. On November 20, 2008, the bankruptcy court granted the Bank possession of
*******’s cash accounts and accounts receivable, consisting of $2,555,358 cash and $9,995,971 in accounts receivable from *********, which were nine months old. On December 24, 2008, the bankruptcy court officially gave the Bank access to *******’s inventory.
152. As of December 31, 2008, the outstanding principal balance of the loan was
$27,866,047. The Bank reported assigning a specific reserve of $5,820,195 for the ****** loan.
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The Bank also reported repossessed assets consisting of inventory valued at $6,100,000, and
accounts receivable valued at $7,496,978.
Cash Collateral
153. One of the largest pieces of collateral for the ******* loan in which the Bank
claimed a security interest was $20 million in cash owned by ******* that was located in banks
in China. Questions about the validity of this pledge of cash began to surface in the fall of 2008.
154. In November 2008 and December 2008, Chinese counsel hired by the Bank
advised the Bank of numerous problems that would need to be addressed before the Bank would be able to perfect its interest in the cash collateral. This information was provided to CEO Wu,
Kerr, and Shabudin.
155. During this timeframe, the Bank and its counsel had problems verifying the
names of the banks where the cash was held, account numbers, and the amount of cash held in
such accounts. CEO Wu, Shabudin, Kerr, and Yu were all aware of these problems.
156. On December 23, 2008, CEO Wu stated in an email that “[t]he $20,000M cash
can not be verified. Bank names keep changing and there is no account info. I doubt whether
we can ever get the money! My guess is that since they knew they will never get the money
from the Government due to the fraud committed by them, they might as well give it to us if it
exists . . . .”
157. Notwithstanding the foregoing, CEO Wu, Shabudin, Kerr, and Yu failed to
disclose to KPMG during the 2008 audit that there was no documentation supporting the
existence of the cash collateral and that the Bank had not perfected any security interest in the
cash accounts.
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158. In April 2009, KPMG returned to the Bank to begin conducting its audit of the
Bank’s First Quarter 2009 financial statements. During this time period, the FDIC and CDFI
also began a targeted review of the Bank’s asset quality.
159. At that time, KPMG and FDIC raised questions concerning the existence of the
$20 million cash collateral. KPMG was beginning to insist that a full reserve be taken against
the $20 million cash collateral, and the FDIC and CDFI examiners were questioning whether the
entire $20 million should be charged-off.
160. On April 27, 2009, the IARD alerted CEO Wu that KPMG would likely insist that
a full reserve be taken against the ******* loan unless the cash balances were supported. On
April 29, 2009, the FDIC and CDFI examiners held a loan review meeting with CEO Wu and
Montelaro concerning the ******* loan. At this meeting, CEO Wu asserted that the Bank would be repaid the $20 million on account in China.
161. Following the meeting, CEO Wu provided a document dated April 29, 2009 from
Director *** of *************************************** that acknowledged and
reconfirmed that $20 million was deposited at *****************************, *****
*************, and ****************** in Shanghai. In addition, CEO Wu provided what
seemed to be a bank statement from *****************************, a reconciliation slip
from ******************, and a verification of deposit letter from *******************
The FDIC and CDFI examiners relied on CEO Wu’s assertions and the Chinese documents he provided in their classification of the ******* credit as “Doubtful” instead of “Loss”.
32 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page34 of 72
Real Estate in China
162. Another large piece of the collateral supporting the ******* loan was real estate
in China. This real estate was purportedly pledged to the Bank by three ******* subsidiaries.
Questions began to surface in December 2008 concerning the value of this pledge of property.
163. In November and December 2008, the Bank’s Chinese counsel advised the Bank
that the property in China which had purportedly been pledged to UCB had been mortgaged to
another bank and had been frozen by the Chinese courts at least two times. This information was provided to CEO Wu, Kerr, and Shabudin.
164. The Bank’s counsel advised that the property had, in fact, been frozen in March
2008, which was earlier than the execution of the assignment. The Bank’s counsel further
advised that after the property was frozen, no fresh mortgage would have been allowed to be
created over the property. Consequently, the assignment of sales proceeds to be derived from the
frozen property did not seem feasible. CEO Wu, Shabudin, Kerr, and Yu were all aware of these
facts.
165. Notwithstanding the foregoing, the Bank valued the collateral at $4,942,647 on its books. CEO Wu, Shabudin, Kerr, and Yu failed to disclose to KPMG during the 2008 audit that
the Bank had no security interest in the Shanghai real estate, and would be unable to perfect one.
Accounts Receivable
166. The Bank also held a blanket UCC-1 lien on *******’s business assets, including
its accounts receivable. ******* purportedly had approximately $10 million in accounts
receivable from a company called ********. In December 2008, questions began to surface
concerning the existence of these accounts receivable.
33 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page35 of 72
167. As early as December 23, 2008, CEO Wu questioned the existence of the $10
million in ******** receivables. *** traveled to China and Hong Kong in January 2009.
During her trip, *** visited the address identified as belonging to ********. *** reported back
to CEO Wu in an email dated January 16, 2009 that the company was not at the site. *** told
CEO Wu that she did not believe that the company or the accounts receivable existed. CEO Wu,
Shabudin, Kerr, and Yu were all aware of these facts.
168. Notwithstanding the foregoing, the Bank initially valued the accounts receivable
at $7.5 million, 75 percent of the stated ******** accounts receivable. In March 2009, KPMG began to question this valuation. On March 7, 2009, On emailed CEO Wu to tell him that
KPMG was really challenging the $7.5 million ******** accounts receivable due to a lack of
support.
169. On March 8, 2009, On again told CEO Wu that KPMG was indicating that the
Bank did not have documentation supporting the collectability of the accounts receivable.
170. In response to On’s email, CEO Wu stated that the Bank had received
confirmation of the accounts receivable in late 2008. However, CEO Wu knew, in fact, that the
Bank could not locate ******** and that the Bank had no support for their collectability. Yu
then replied to CEO Wu that he had discussed the accounts receivable with On.
171. None of the Respondents advised KPMG during the 2008 audit of the problems
identified with respect to the ******** account receivables.
Inventory
172. The Bank’s UCC-1 filing also included *******’s inventory, which consisted of
such items as memory cards and digital picture frames. The Bank foreclosed upon and
repossessed the inventory on December 24, 2008. The repossessed items were initially valued at
34 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page36 of 72
$6.1 million. Significant issues began to surface with the content, quality, and value of
*******’s inventory shortly after the Bank took possession.
173. The Bank hired a third party company, *******, to provide an inventory of the repossessed items, and to value and dispose of the items. Sunny Sun was the primary Bank officer who corresponded with *******. Sun reported to Zhang and Yu.
174. On January 26, 2009, Sun received an email from ******* providing initial sorting information for the ******* inventory. The attached documentation indicated that of
30,560 items tested, 19,550 were empty and 11,010 had contents with a substantial portion of the contents mislabeled.
175. On January 30, 2009, Zhang emailed Shabudin to advise him that he was traveling to Los Angeles because “[s]omething serious [o]ccurred to our inventory.”
176. On February 6, 2009, ******* sent an email to Sun forwarding an initial inventory of what was shipped to ******* for valuation and disposition. Sun forwarded this inventory list to Yu and Zhang.
177. On March 9, 2009, ******* forwarded an updated inventory list to Sun. This updated list confirmed a significant variance from the original inventory audit due to mislabeling
(e.g., reported 4GB versus 256MB compact flash memory), empty boxes, and boxes filled with wood chips instead of memory cards. On March 10, 2009, Sun forwarded the updated inventory list to Zhang.
178. On March 12, 2009, Sun drafted a memorandum to Zhang and Yu for the benefit of KPMG. The memorandum was dated as of March 2, 2009. This memorandum attached a spreadsheet consisting of a listing of the inventory of items that were shipped to ******* for review. The memorandum stated that the volume of the inventory was consistent with the
35 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page37 of 72
physical inventory conducted in August 2008. The memorandum from Sun did not reflect the
material discrepancies which were identified by *******. The columns of the spreadsheet from
******* that reflected the discrepancies were removed prior to providing the spreadsheet to
KPMG.
179. Only eight days after sending the misleading sorting information to KPMG and
only four days after the filing of the 2008 Form10-K, on March 20, 2009, the Bank charged-off
$5.1 million of the inventory as of February 28, 2009.
B. *********** Loan
180. As of December 2007, the Bank had an outstanding loan to ****************
(“***”), an importer and wholesaler of consumer electronics, in the amount of $28 million. ***
was owned by ********** (“******”). Collateral consisted of a security agreement and a
UCC-1 blanket filing on the borrower’s business assets.
181. In 2008, another ******-owned company defaulted on a $5 million loan made by
******************* (“***”). *** filed suit against ****** in May 2008. In August 2008, the
Bank was approached by an independent receiver appointed by the court to liquidate the
company.
182. The receiver informed the Bank of fraudulent business practices and the potential
that *** may have engaged in similar business practices. The Bank learned that the inventory
that had been pledged by ******* to secure the Bank’s loan was also used to secure the ***
loan.
183. The receiver found that 80 percent of the inventory that was maintained at
******’s Ontario warehouse was either empty or contained counterfeit products. The value of
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the inventory was estimated at less than $100,000 as opposed to the $4 million represented by
******
184. In early September 2008, the Bank scheduled a meeting with ****** at ******’s
Vernon warehouse. Kerr, Zhang, and Bank employee **** ** traveled to the Vernon warehouse
for this meeting. After ******* failed to appear, they obtained entry to the warehouse. The
warehouse was filled with pallets of empty boxes and boxes filled with waste paper. On
September 11, 2008, the Bank filed suit against ****** and ***. The outstanding balance of the
*** loan was $28,007,444 at that time.
185. On October 16, 2008, the Bank’s outside counsel sent Kerr an email providing a
status report on the *** litigation. Among other things, the Bank’s outside counsel indicated that
the receiver’s estimated value of the inventory from the Vernon warehouse was likely to be well below $100,000. A half-hour after this email was sent, Zhang sent an email to Yu, with a copy
to Shabudin, asking what this will “do to the number?”
186. On November 14, 2008, Yu and Zhang received an email from Sun that attached a
draft charge-off memo for ***, recommending a charge-off of $4,201,117, or 15 percent of the
loan balance.
187. On January 30, 2009, Yu sent Sun an email that attached a revised charge-off
memo for ***, backdated to December 23, 2008. The revised charge-off memo excluded
material negative facts pertaining to the inventory, guarantor assets, and remote prospects to get
full recovery from the borrower’s and guarantor’s assets. These facts were included in the
original charge-off memo. The amount of the recommended charge-off did not change.
188. Between January 30 and February 3, 2009, the new charge-off memo was
distributed to Sun, James Chan (“Chan”), Shabudin, On, and CEO Wu, who backdated their
37 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page39 of 72
signatures to December 23, 2008. Accordingly, the Bank approved a charge-off of $4,201,117 as of December 23, 2008.
189. On information and belief, Respondents did not advise KPMG of the negative facts contained in the November 14, 2008 draft of the charge-off memorandum during the 2008 audit.
190. On March 12, 2009, outside counsel forwarded the receiver’s report to the Bank.
It indicated that receipts from the collection of accounts receivable and other assets totaled
$254,132, and that the receiver’s expenses totaled $316,222, which left negative proceeds after liquidation. This report was issued four days prior to the filing of the 2008 Form 10-K.
191. KPMG did not become aware of the existence of the receiver’s report or the net loss until after the 2008 Form 10-K was filed.
C. ********* – Valuation of H Street Property
192. As alleged in paragraph 125 above, in December 2008, due diligence was ongoing for the ********* - H Street property by potential purchasers ****** and *****.
193. ***** asked a realtor from *********** to provide the Bank with a valuation of the property.
194. On December 11, 2008, Kerr received a copy of the valuation from ******
*****. ********** valued the property at $7 million, which was approximately $5 million less than the appraisal obtained by the Bank in April 2008, just eight months earlier.
195. ***, who was the underwriter for the loan, reviewed the valuation. *** confirmed the raw data that formed the basis for the valuation, and forwarded his memorandum to Kerr and
Yu on December 15, 2008.
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196. The Bank utilized the ********** valuation for purposes of assessing the value of the H Street property, including this information in a RAAP dated December 22, 2008 which was prepared in advance of the December 30, 2008 PRC working group meeting.
197. The ********** valuation was specifically discussed at the December 30, 2008
PRC working group meeting attended by Kerr and Montelaro. At this meeting, ******* indicated that the Bank should charge-off the amount of the collateral shortfall based on the
********** valuation. This charge-off was not taken.
198. The ********** valuation was also included in subsequent RAAPs prepared on the ********* – H Street Loan, including a RAAP dated March 5, 2009 that was signed by
Shabudin. This RAAP was discussed at the March 10, 2009 PRC meeting attended by Shabudin,
Kerr, Montelaro, and Yu.
199. Notwithstanding the foregoing, Shabudin, Kerr, Montelaro, and Yu failed to disclose the existence of the December 2008 ********** valuation of $7 million to KPMG.
Instead, Shabudin and Yu relied on an $8.2 million short sale offer for purposes of calculating the Bank’s FAS 114 specific reserves.
VII. Respondents Misrepresented Information Contained in ALLL Calculations
200. Yu worked closely with Tran, On, Shabudin, and others to determine the amount of the Bank’s ALLL as of December 31, 2008. The Bank’s ALLL consisted of two types of reserves, a general reserve and a specific reserve. The specific reserve was maintained in accordance with FAS 114, which generally requires that specific amounts be set aside for a loan when the loan is deemed to be impaired.
201. The Bank’s ALLL package for December 31, 2008 was finalized on January 16,
2009. The ALLL package was signed as reviewed by Shabudin and Yu, and signed as approved
39 Case3:09-cv-04208-JSW Document217-6 Filed01/09/12 Page41 of 72
by On. The ALLL package dated January 16, 2009 included a FAS 114 reserve of $78,479,000.
The FAS 114 provision summary, included as part of the ALLL package, was signed by **,
Tran, and Yu.
202. Respondents Tommy Wu, Shabudin, Kerr, Montelaro, On, Sun, Tran, Yu, and
others made several misrepresentations and omissions in order to conceal the Bank’s
understatement of its reserves from KPMG during the 2008 audit, including misrepresentations
contained in the Bank’s FAS 114 reserve calculations concerning the ***********, ******
****, *************, *******, ***********, and ********* loans.
A. *********** Loan
203. UCB extended a $21,912,000 loan to ***************** (“***********”) to
develop residential units located in San Francisco, California. The loan was secured by a first
deed of trust on the development project. **************** became a junior lien holder on the property in January 2007 when the company borrowed an additional $4,443,200 to complete the project.
204. In December 2008, the Bank was considering a two-year extension of the loan if
*********** would make a $4 million payment. In January 2009, the Bank approved the
extension on the condition that the $4 million payment be made from an additional loan by
****************. $3.75 million of the payment was to be used to pay down the loan balance,
and $250,000 was to be used as an interest reserve.
205. On January 29, 2009, Shabudin indicated that the *********** loan should be
downgraded from an 8 to a 10, and moved to a troubled debt restructuring (“TDR”)
classification. The RAAP was signed on February 12, 2009 to accomplish this downgrade.
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206. In February 2009, KPMG asked why the *********** loan was not graded as
Substandard or worse at year-end. The Bank’s responses focused on the estimated $4 million pay-down. The Bank’s responses further omitted the fact that since there had been no sales, the borrower intended to lease out the units. The appraisal obtained by the Bank on November 14,
2008 indicated that the projected value of the property as a rental property was $17.1 million,
versus $21 million if the units were to be sold.
207. During this time frame, Yu prepared a FAS 114 worksheet for the ***********
loan that reflected that the $4 million from **************** was in escrow, and that the
appraised value of the property was $21 million. To the contrary, no money was in escrow and
the appraised value should have been listed as $17.1 million, not $21 million, since the sale of
units was no longer viable. Yu’s calculations in the FAS 114 worksheet resulted in a collateral
overage of $738,000, with no specific reserve required.
208. In March 2009, KPMG began asking Yu questions about the $4 million payment being in escrow. On March 11, 2009, Yu told KPMG that the junior lien holder, ********
********, had agreed to pay down the loan by $4 million. Yu stated that the payment had been
approved, but it was in the closing process, and information was to be provided by the title
company. KPMG asked Yu for support for the $4 million payment.
209. The following morning, On became involved. KPMG had alerted him to the
situation. On sent an email to CEO Wu stating that the FAS 114 prepared on the ***********
loan looked flawed because it represented that a potential principal pay down of $4 million was
sitting in an escrow account. On told CEO Wu that KPMG checked and found that there was no
such amount in escrow.
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210. That afternoon, Yu emailed CEO Wu and Shabudin a copy of the FAS 114
worksheet that he had prepared on ***********. Yu explained that the FAS 114 worksheet was prepared only as a draft to see the impact on the reserve. That evening, Cinderey also became
involved. He forwarded an email to CFO On, Shabudin, CEO Wu, and ******** attaching a
draft memo to KPMG. The draft memo indicated that earlier that day, ****************
advised that it would not provide the $4 million.
211. Shortly thereafter, Tran sent ******** copying Yu and Shabudin, a revised FAS
114 calculation on the *********** loan that showed a collateral protection shortfall of
$6,326,249 based on a loan balance of $21,716,249, an as-is appraised value of $17.1 million,
and recognition that junior lien holder **************** did not make a $4 million payment on
the loan.
212. Based on the foregoing, KPMG downgraded the balance of the loan, $21.6
million, from a risk rating of 7 to 9. This resulted in an additional general reserve of $3,176,000
for December 31, 2008. A specific reserve of $6,326,000 was established at March 31, 2009.
B. ********** Loan
213. As discussed in paragraphs 79 through 84 above, Respondents concealed the
existence of a more recent appraisal from KPMG during the 2008 audit.
214. The FAS 114 analysis for the *********** loan, which was prepared by Yu
and/or his team, reflected only a modest reserve of $780,170. The analysis was based on the
stale May 31, 2008 appraised value, which was $7 million higher than the January 2009
appraised value. In addition, the FAS 114 made no mention of the Bank’s plan to sell the loan at
a loss of $6.8 million.
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215. Since KPMG never found out about either the lower January 2009 appraisal or the
Bank’s intent to sell the note at a loss of $6.8 million, the Bank was able to reserve for its $11
million portion of the ********** loan at a mere $780,170. The Bank should have charged-off
$6.8 million in loss instead.
C. ************* Loan
216. As of December 31, 2008, the Bank had a loan outstanding to *************
********* (“*************”) in the amount of $8,359,712. The Bank estimated that it would
cost an additional $653,000 to complete the project for a total projected outstanding amount of
$9,012,712. The Bank’s loan to ************* was for the purpose of converting a 56-unit
apartment building into condominiums.
217. In January 2009, Yu and/or his team prepared a FAS 114 worksheet for the
************* loan. In this worksheet, Yu indicated that the value of the underlying real estate
collateral was $9.73 million less 10 percent liquidation costs, for a gross estimated recovery to
UCB of $8,757,000.
218. The FAS 114 worksheet prepared for the ************* loan used stale and/or
false information, stating that the borrower “has recently entered agreement to rent the completed property” to justify a low reserve figure. However, there is no evidence to show that there was
ever an agreement to rent the property.
219. The FAS 114 worksheet prepared for the ************* loan also failed to
disclose that at the end of 2008, the Bank intended to sell the loan at a significant loss.
D. ******* Loan
220. As discussed in paragraphs 146 through 179 above, Respondents made
misrepresentions to, and concealed information from, KPMG concerning the cash and real estate
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collateral for the ******* loan, and the ******* inventory and accounts receivable held by the
Bank as repossessed assets.
221. Yu and/or his team prepared a FAS 114 worksheet for the ****** loan in January
2009. The FAS 114 worksheet reflected an outstanding loan balance of $28,744,866, estimated
gross recovery of $22,045,851, and a specific reserve of $5,820,195. The FAS 114 worksheet
for the ******* loan was part of the Bank’s ALLL package signed as reviewed by Shabudin and
Yu, and approved by On. The supporting information for the FAS 114 worksheet for the
******* loan was provided to KPMG by Tran on January 22, 2009.
222. In the FAS 114 worksheet for the ******* loan, the cash collateral was valued at
$15 million, which was 75 percent of the pledged amount. In the comment section of the
worksheet, it was stated that the cash collateral in China was discounted by 25 percent “as the
account is frozen by the Chinese government pending investigation.” The FAS 114 worksheet
failed to disclose the fact that there was no documentation supporting the existence of the cash
collateral and that the Bank had not perfected any security interest in the cash accounts.
223. In the FAS 114 worksheet for the ******* loan, the Bank’s interest in the
Shanghai property was valued at $7,589,706, less a senior lien in the amount of $2,647,059. The
worksheet failed to disclose the fact that the property had been pledged as collateral to another bank prior to the date the property was pledged as collateral to UCB; the property had been
frozen by the Chinese government; and the Bank’s counsel had indicated that it did not seem
feasible that the Bank would be able to derive any proceeds from the property.
E. *********** Loan
224. Yu and/or his team prepared a FAS 114 worksheet as of December 31, 2008 for
the *** loan which assigned a specific reserve of $18,974,644, leaving a remaining value of
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$4,831,683. This FAS 114 worksheet was part of the Bank’s ALLL package signed as reviewed by Shabudin and Yu, and approved by On.
225. The FAS 114 worksheet for the *** loan indicated that the Bank would recover
30 percent of the inventory held as collateral, even though the receiver had previously indicated
that the estimated value of the inventory at the Ontario warehouse was less than $100,000, and
the Bank’s counsel had previously indicated that the estimated value of the inventory at the
Vernon warehouse was likely to be well below $100,000.
226. In addition, on information and belief, Shabudin and Yu knew prior to the filing
of the 2008 Form 10-K that there was a shortfall in the collateral based on the receiver’s report
received on March 12, 2009. This information should have been considered in the Bank’s
calculation of its reserves and should have been disclosed to KPMG prior to the filing of the
2008 Form 10-K on March 16, 2009.
F. ********* Loans
227. As discussed in paragraphs 123 through 141 and 192 through 199 above,
Respondents concealed a lower valuation of the H Street property and the existence of pending
note and short sales for the ********* – H Street and Roseville Loans from KPMG.
228. Yu prepared FAS 114 worksheets for the ********* – H Street Loan and ****
***** – Roseville Loan in March 2009. Tran forwarded the FAS 114 worksheets that Yu prepared on the ********* loans to KPMG on March 13, 2009.
229. The FAS 114 worksheet for the H Street Loan indicated a collateral value of
$8.958 million, less 10 percent liquidation costs. Yu based this valuation on the $8.2 million
short sale offer that the Bank had received, even though it had already been withdrawn. Yu did
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not mention the fact that the Bank had entered into a different agreement on March 12, 2009 to
sell the note for $6.15 million. That sale closed on March 20, 2009.
230. The FAS 114 worksheet for the Roseville Loan valued the collateral at $8.39
million, less 10 percent liquidation costs. Yu assigned a specific reserve of $597,497 for the
loan. Yu stated in the FAS 114 worksheet that the valuation was based on a November 2008 sale
of one unit of the property, but failed to disclose that the Bank had agreed to a short sale of the property for $3,464,000. The sale closed on March 24, 2009.
G. Supplement to ALLL Package
231. In a series of emails dated March 11, 2009, On discussed with CEO Wu and
******** how reserves were to be calculated.
232. In the March 11, 2009 email chain, On argued against the need for an additional
$5 million provision to the Bank’s ALLL, proposing instead to identify ranges of reserves for the
******* and *********** loans.
233. On suggested that by “going to the low end” of the ranges, UCB would be able to
free up $10 million in reserves. On further stated, “This will make [KPMG] not look at the 10
(not yet looked at) FAS 114 deals.”
234. The Bank’s ALLL package was supplemented on March 15, 2009 with a memo
from Shabudin and On. In this memo, Shabudin and On represented that the Bank’s ALLL as of
December 31, 2008 was adequate.
235. The March 15, 2009 memo stated that the Bank had increased its fourth quarter provision from $112 million to $152 million, and its overall ALLL to $230 million. The increase
in the Bank’s ALLL included a range of loss for ******* of between $2.5 million and $7.5
million, and a range of loss for *********** of between $0 and $5 million.
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VIII. Respondents Artificially Brought Past Due Interest Current
236. One of the methods that Respondents used to mask the deteriorating financial
condition of the Bank was to artificially bring past due interest current. One example of this practice was the Bank’s extension of credit to a borrower’s related entity in order to bring past
due interest current on other loans at the Bank. This lending relationship is described in paragraphs 237 through 255 below.
A. ***** and ************** Loans
237. As of November 2008, the Bank had an extensive lending relationship with a
group of related borrowers led by ********* (“*****”), as follows:
(a) ********************************* (“******”) Loans. ***** was
owned by *****, **********, ***********, and **********. The Bank had a $16,354,000
loan to ***** for the Northwest parcel of the shopping center property. This loan is commonly
referred to as the “Northwest Parcel Loan.” The Bank also had an $11,581,000 loan outstanding
to ***** to cover cost overruns for the ************** construction loan, discussed in
subparagraph (b) below. This loan is commonly referred to as the “Mezzanine Loan.”
(b) ****************** (“**************”) Loan. ***************
was owned by *****, who later sold an 85 percent membership interest to *****************
(“****”). **** was owned by *****’s business partner, ******** (“****”). The Bank held a
10.17 percent interest in a construction loan to ************** for construction of the *****
shopping center; *************** held the remaining interest in the loan. This is commonly
referred to as the “Construction Loan.” As of November 2008, the outstanding balance due to
the Bank for the Construction Loan was $11,580,000.
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(c) *************** Loan. *************** (“***********”) was
another company owned by ****. The Bank had a $23 million loan outstanding to ***********
secured by the *********** shopping mall.
(d) Other ********* Related Loans. The Bank also had loans outstanding to
*****, in the amount of $2.2 million; **************, a ****-related company, in the amount
of $18.86 million; **************, another *****-related company, in the amount of $14.5
million; and other loans to various related interests totaling $6.97 million.
238. In September 2008, ***** and ************** had filed for bankruptcy protection under Chapter 11. In September 2008, following the bankruptcy, the Bank extended
the due date of the ****** Northwest Parcel Loan to December 15, 2008 to avoid it going 90
days past due. By November 2008, the remaining ***** and ************** loans were more
than 90 days past due with no payments being made, and should have been placed on non-
accrual status.
239. In December 2008, CEO Wu, Shabudin, Kerr, and Lee discussed ways in which
to bring the past due interest on the ***** and ************** loans current.
240. By late December 2008, CEO Wu, Shabudin, Kerr, and Lee decided to extend an
additional $5 million line of credit to ***********, a ****-related entity that had not filed for bankruptcy protection, for the purpose of bringing the interest current on the ***** and
************** loans.
B. *********** Line of Credit Is Used to Bring Interest Current
241. In January 2009, **** provided two checks to the Bank which were dated
December 31, 2008. The first was a check from his partner, ****, for $1 million. The second
was a $500,000 check from ******************* (“********”), another company owned by
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**** with an account at the Bank. These amounts were used to bring the ***** and *********
Loans current on or about January 8 and January 12, 2009.
242. The $500,000 check from ******** overdrew ********’s account at the Bank by
$497,777. On January 12, 2009, Lee requested Kerr’s approval to allow the overdraft, stating that a line of credit for *********** would be available soon. Kerr approved this request.
However, no application for a line of credit had yet been submitted for approval.
243. That same day, a Credit Commitment Report (“CCR”) was prepared for the $5 million line of credit to *********** by the Bank’s Southern California office. The CCR was dated December 30, 2008. The stated purpose of the line of credit was “investment purposes.”
However, CEO Wu, Shabudin, Kerr, and Lee intended that the line of credit be used to make interest payments on the ***** and ************** loans.
244. Lee concurred with the *********** CCR on January 12, 2009; Shabudin concurred on January 18, 2009; and CEO Wu and Kerr concurred on January 23, 2009.
245. The Bank then prepared RAAPs backdated to December 31, 2008, which showed the ***** and ************** loans as no longer being past due. These RAAPs did not disclose the Bank’s intent to extend $5 million to ***********. These RAAPs were signed by
Shabudin, Kerr, and Lee.
246. On January 26, 2009, Montelaro forwarded the *********** CCR to Director
****, of the Board’s Credit Committee, recommending his approval. The memo from Montelaro stated that the loan would be used for a cash infusion into the ***** project. Director ***** approved the credit on January 28, 2009.
247. On January 29, 2009, a Bank employee processing the ******** overdraft emailed Kerr expressing a concern that they had no information on the application for a credit
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line that was to be used to clear the overdraft. Kerr responded, “The application is in name of
**************. Tommy authorized. Christian will try to fix the OD [overdraft].”
248. On February 5, 2009, **** signed the loan documents for the *********** line of credit, but refused to sign the deed of trust securing the credit. Lee emailed Kerr to advise him of this development, and to indicate that the Bank’s branch office was giving him problems clearing the $500,000 overdraft. Lee asked Kerr to discuss these issues with CEO Wu. Kerr forwarded Lee’s email to CEO Wu.
249. The following day, February 6, 2009, $1 million of the proceeds of the *****
****** line of credit were disbursed: $500,000 was wired to ****’s **** account at ****
******** to partially repay his advance of funds, and $500,000 was transferred to the ******** account to cover the January 12, 2009 overdraft.
250. In March 2009, CEO Wu and Lee again used the *********** line of credit to make interest payments on the ************** loan. Specifically, on March 25, 2009, CEO
Wu instructed Lee to debit the line of credit to pay off three months of interest payments for the
************** loan that would have become past due if payment was not received by March
31, 2009.
251. On March 31, 2009, Lee authorized a draw of $234,508 from the *********** line of credit, which was used to pay the past due interest on **************. There are no documents indicating that **** authorized this draw on his line of credit.
252. In April 2009, Lee authorized the use of the *********** line of credit to replenish the Debtor in Possession account for the bankruptcy (“DIP Account”). Specifically, on
April 30, 2009, Lee instructed Bank officer ***** *** (“***”) to approve a draw of $500,000 by
****, which **** used to transfer the funds to the DIP Account. This replenished the DIP
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Account for funds withdrawn by **** on March 24, 2009 to pay the interest due on the *****
loan.
C. Misrepresentations to KPMG
253. On February 27, 2009, Lee provided a memo to KPMG justifying the “7” rating
given to the ***** loan. One of the stated rationales for the rating was that, ostensibly, the
customer was current on the interest payments, though, in fact, the interest was paid by the Bank
through the *********** line of credit.
254. As support for the memo, Lee attached copies of two checks purporting to show
the interest payment – one showed the $1 million payment by ****; the other showed a $500,000 payment from an entity called ********************** (“**********”) with an account at
*********************.
255. As discussed in paragraphs 241 through 252 above, the actual $500,000
contribution was made by UCB account-holder ******** by a loan at the Bank in the form of an
overdraft. The true source of the $500,000 interest payment was not discovered until after the
2008 Form 10-K was filed.
IX. Respondents Sanitized Memos to KPMG
256. In February 2009, during the 2008 audit, KPMG began asking a series of
questions concerning problem loans at the Bank. On February 9, 2009, KPMG submitted a list
of questions to the Bank regarding 19 loans, including the following: **************,
************** and *****, ********* Street, ***********, **********, and *********
The questions focused on why the loans should not be downgraded to a more severe risk rating.
KPMG also asked questions on other loans and OREO, including ******************, ***
****************, **********, and *************.
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257. KPMG’s questions were initially forwarded to the individual account officers to prepare draft responses. Cinderey, Montelaro, and Yu were instrumental in putting the Bank’s
responses to KPMG’s questions into memos.
258. Montelaro was responsible for gathering all of the memoranda for Shabudin’s
final review. Montelaro forwarded 21 memos to Shabudin on February 27, 2009, and provided
additional memos and revisions the first week of March 2009. The memos forwarded to KPMG
included memos on ********, ******************, ***********, *******************,
**********, *********, **********, *********, and *****
259. Montelaro, Shabudin, and Yu were very familiar with these problem loans, and
knew that the memos being provided to KPMG did not tell the whole story. To the contrary, the
memos omitted key pieces of information. In some cases, the memos were specifically edited to
exclude key pieces of information that would negatively impact the Bank’s risk rating of the loan
and/or valuation of the loan or OREO. These memos are discussed in paragraphs 260 through
273 below.
A. ******** Memo
260. In January 2007, the Bank made a loan to the ************** for the
development of a 9.6 acre parcel of property (“******** Loan”). In September 2008, the Bank
approved a reduction in the interest rate floor to 6 percent and an extension of the life of the
interest reserve.
261. On February 25, 2009, KPMG asked the Bank several questions about the
******** loan and proposed downgrading the loan’s risk rating.
262. The memo prepared in response to KPMG’s questions concerning the ********
loan misrepresented the interest rate as having increased, when it had actually decreased.
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B. ****************** Memo
263. In September 2006, the Bank made a loan to ********* in the amount of $6.8
million secured in part by a mixed use building in San Francisco, California (“********* property”). The Bank foreclosed on the ********* property in November 2008, and recorded it
as OREO in the amount of $4,959,000 as of December 31, 2008.
264. Ta-Lun Wu misrepresented the value of the ********* property in a February 27,
2009 memo for KPMG. Ta-Lun Wu based the $4,959,000 book value on a September 2008
appraisal and comparable real estate sales. However, Ta-Lun Wu knew that the ********* property had been listed for sale at only $3,999,000. Ta-Lun Wu also knew that the appraised
value had been based on fraudulent information provided to the appraiser.
C. *********** Memo
265. The memo prepared in response to KPMG’s questions concerning the ****
******* loan initially failed to include updated appraisal information, the fact that the loan was
re-evaluated and downgraded to a risk rating of 10 in January 2009, the fact that the interest
reserves were depleted in December 2008, and the fact that since no sales had occurred, the units
were to be leased. A handwritten note from Shabudin also indicated that a $4 million payment
was to be placed in escrow the week of March 10, 2009, which was further misleading.
D. *** Memo
266. In 2007, the Bank made a loan to ******************* to construct a *******
*** in Ontario, California (“*** Loan”). In February 2009, the Bank granted a six-month
extension of the loan. The interest reserve for the loan was expected to be exhausted in April
2009.
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267. On February 13, 2009, Montelaro, responding to an inquiry from Cinderey, noted that the *** Loan would likely be downgraded by KPMG.
268. The memo prepared in response to KPMG’s questions on the *** Loan reported that December 2008 occupancy was at 45 percent and that the hotel was operating with sufficient cash flow to service interest. In fact, in a February 2009 CCR, the occupancy level was listed at only 40 percent in December 2008. The breakeven occupancy rate was estimated at 42 percent.
At 40 percent occupancy, the hotel was unable to service the interest on the loan.
E. ********** Memo
269. The memo prepared in response to KPMG’s questions concerning the ******
**** loan omitted the fact that CEO Wu, Shabudin, Swartz, Yu, and Zhang had decided to sell the note for a $6.8 million loss, and that the Bank had received an appraisal that reflected a significant decline in the value of the underlying property.
F. ********* Memo
270. The memo prepared in response to KPMG’s questions concerning the ********* loan omitted the following negative information known to the Bank: the guarantors had minimal outside net worth; management could not meet day-to-day business needs; a new appraisal dated
January 1, 2009 indicated an as-is asset value of $8.5 million and a LTV of 165%; and 3 of the 6 members of the LLC wanted to sell their interest for $1.
G. ********** Memo
271. The memo prepared in response to KPMG’s questions concerning the **** ***** loan contained misrepresentations about the potential payoff of the loan through the sale of a quarry owned by the borrower, significantly overstated the borrowers’ net worth, and failed to
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disclose the Bank’s receipt of a more recent appraisal which valued the collateral at half of the previous appraisal relied upon in the memo.
H. ********* Memo
272. The memo prepared in response to KPMG’s questions concerning the *********
loans failed to mention a more recent valuation of the H Street property which reflected a
significant decline in value and failed to mention that the Bank had agreed to sell the H Street
note at a significant discount.
***** and ************** Loans
273. The memo prepared in response to KPMG’s questions concerning the ***** and
************** loans stated that the loans were brought current by the principals but failed to
mention that these loans had been artificially brought current through a separate extension of
credit to **********. The memo also attached a check from ********** rather than ********,
misrepresenting the source of funds for the payment of interest in January 2009.
X. Respondents Made Misrepresentations and Omissions to the Bank’s Regulators
274. Respondents Tommy Wu, Shabudin, Kerr, Lee, Montelaro, On, and Yu engaged
in unsafe or unsound practices and breaches of fiduciary by making misrepresentations and
omissions to the Bank’s regulators, as discussed more fully in paragraphs 275 through 297 below.
A. Misrepresentations During the 2008 Visitation
275. The FDIC and the CDFI conducted a Visitation of the Bank in December 2008.
276. Respondents Tommy Wu, Shabudin, Kerr, Montelaro, On, and Yu controlled the
extent of information available to FDIC and CDFI examiners at the December 2008 Visitation of
the Bank.
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277. For the December 2008 Visitation, Respondents knew that the examiners were focused on the Bank’s asset quality at year-end, and specifically the type of migration of loans’ risk ratings that was demonstrated in the IARD report. On December 9, 2008, Montelaro authored an email to ********, On, *******, Shabudin, ***** ******, Cinderey, Kerr, CEO
Wu, ********, and Yu in which he explained that the FDIC’s “main dilemma” was “not so much with the problem credits already identified, but if there will be significant migration at year-end and into 1Q2009.”
278. Rather than advocate that others at the Bank cooperate with the FDIC, Montelaro directed that “[i]t is very important that we keep [Examiner *******] focused on today, so he doesn’t base the AQ rating on what he thinks will happen next week, next month, or next quarter.” CEO Wu responded, “Thanks Paul, and I agree completely with you! Let’s work together on this important area. Tommy.” Thus, from the beginning of the December 2008
Visitation, Respondents planned to obstruct, rather than assist, FDIC’s review.
279. Later that evening, Montelaro emphasized this point with respect to one of the larger credits in the Bank, the Bank’s loan to ******** ******. Montelaro sent an email to
Chiu-Yee, Cinderey and Yu, with the subject line of “Loan Discussion with FDIC ********,” stating, “No matter what our year-end plans may be, we have to support the current risk rating
SM-8.”
280. In fact, none of these Respondents shared the results of the IARD’s construction review with examiners, nor did these Respondents paint an accurate picture of the continued deterioration in the Bank’s loan portfolio and the level of reserves this deterioration necessitated.
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281. At meetings held during the week of December 1, 2008 to discuss the Bank’s budget and the condition of the Bank’s loan portfolio, examiners asked what the Bank’s
estimated loan provision expense would be for the fourth quarter 2008.
282. At a December 2, 2008 meeting held with *******, On, and ********, the
examiners were told that the Bank had budgeted $15 million a month for loan provision expenses
for the fourth quarter. On indicated that this number was based on an analysis performed by Yu,
and a recommendation to the Finance Department from Shabudin. When asked about the level
of write-downs, On responded that he thought the number would be similar to the previous
quarter. When the examiners specifically asked whether the write-downs were coming from
management or the IARD, On suggested that they discuss this with Kerr and Montelaro.
283. In a follow-up meeting with Kerr, Montelaro, and ******* that afternoon, the
examiners asked what the Bank’s estimated loan provision expense would be for fourth quarter
2008. Kerr said there were “too many moving parts” to guess. Ultimately, the examiners were
again told that the Bank had budgeted $15 million a month for the fourth quarter. The examiners
were also told that the migration of performing loans to deteriorating loans was slowing down.
No one at the meeting mentioned the IARD findings or any of the other indicia that the
deteriorating loan migration was in fact increasing at the time.
284. The FDIC and CDFI examiners held an exit meeting on December 17, 2008 with
the Bank. Among those attending the exit meeting from the Bank were CEO Wu, Shabudin,
Kerr, and Montelaro. At the exit meeting, it was represented that the Bank’s fourth quarter provision expense would be in the $30 to $40 million range.
285. At the exit meeting, none of the Respondents disclosed the results of the IARD’s
review of the Bank’s construction loan portfolio; the fact that the IARD report had been finalized
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and issued two days earlier; or the extent of the deterioration in the construction loan portfolio as had been discussed the day before at the December 16, 2008 PRC meeting.
286. The following month, on January 22, 2009, UCBH announced in its fourth quarter
2008 earnings release that its fourth quarter provision expense would be $112.1 million, versus the $30 to $45 million represented to examiners during the December 2008 visitation.
B. Misrepresentations during Presentations to the San Francisco Regional Office
287. CEO Wu and other members of senior management, including Shabudin, Kerr, and On, met with the FDIC and CDFI in the San Francisco Regional Office (“Regional Office”) in November 2008. The purpose of the meeting was for the Bank to update the regulators on the condition of the Bank following the issuance of UCBH’s third quarter earnings release.
288. At the November 2008 meeting, Shabudin gave a presentation on the condition of the Bank’s loan portfolio, including the Bank’s construction loan portfolio. During the course of the presentation, Shabudin did not disclose any information concerning the negative IARD review of the Bank’s construction loan portfolio or the significant deterioration in that portfolio.
289. During the course of the November 2008 meeting, CEO Wu, Kerr, and On failed to provide any information to the FDIC or the CDFI about the deterioration in the Bank’s construction loan portfolio, as determined through the IARD review.
290. Another quarterly meeting was held in the Regional Office in January 2009.
Once again, CEO Wu, Shabudin, Kerr, and On failed to disclose the deterioration in the Bank’s loan portfolio revealed in the IARD report.
C. Misrepresentations During the April 2009 Targeted Review
291. In April 2009, the FDIC and the CDFI conducted a targeted review of the Bank’s asset quality.
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292. As discussed in paragraphs 153 through 161 above, during the April 2009
Targeted Review, Respondents Tommy Wu and Montelaro participated in misrepresentations and omissions concerning the valuation of cash collateral securing the Bank’s ******* loan.
D. Submission of a False Officer’s Questionnaire During the August 2009 Targeted Review
293. In August 2009, the FDIC and the CDFI conducted an additional targeted review of the Bank. During the course of the review, the Bank’s officers were asked to complete an
Officer’s Questionnaire (“Questionnaire”). The Questionnaire required that the Bank’s officers certify that the statements contained therein are true and correct. On August 24, 2009, CEO Wu signed an Officer’s Certificate (“Officer’s Certificate”) certifying that the statements contained in the Questionnaire were true and correct.
294. Included in the Questionnaire were questions regarding the payment of interest on loans and accommodation loans. Specifically, Question 1 of the Questionnaire asked the following:
List all extensions of credit and their corresponding balances which, since the last FDIC examination, have been renewed or extended under any of the following circumstances: a) without full collection of interest due b) with acceptance of separate notes for the payment of interest c) with capitalization of interest to the balance of the note.
295. In response to Question 1, the Bank did not disclose that it had made a separate loan to *********** for the purpose of making interest payments to bring the ***** and
************** loans current. Lee signed the response to this question, knowing that the response was not accurate. CEO Wu signed the Officer’s Certificate knowing that the response was not accurate.
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296. Question 3 of the Questionnaire asked the following:
List all extensions of credit made for the accommodation or direct benefit of anyone other than those whose names appear either on the note or on other related credit instruments. Only include extensions of credit made since the previous FDIC examination. Indicate if any executive officer, principal shareholder, director, or their related interest (per Federal Reserve Board Regulation O definitions) is or was involved.
297. In response to Question 3, the Bank stated “None.” However, the Bank had made a $5 million line of credit to *********** that was actually for the accommodation and benefit of ***** and **************. CEO Wu signed the Officer’s Certificate knowing that this response was not accurate.
XI. Respondents Filed a False 2008 Form 10-K, False 2008 Call Reports, and False Management Representation Letters to KPMG
A. Down-to-Date Emails and Management Representation Letters
298. On March 14, 2009, KPMG requested that CEO Wu and On respond to certain questions related to fraud and subsequent events. These questions are commonly referred to as
“down-to-date inquiries” or “down-to-date emails.” The purpose is to ensure that the auditors are advised as to any last minute developments that could impact the accuracy of the financial statements. The answers to such questions are then used to help draft management representation letters relied upon in the auditors’ certification of the financial statements.
299. Question 7 of KPMG’s down-to-date inquiries states: “Are you aware of any significant or unusual transactions that have occurred since 12/31/08 not otherwise disclosed in the financial statements? These would include . . . c. Dispositions or acquisitions of assets.”
300. On March 14, 2009, CEO Wu responded generally to all of the questions in
KPMG’s down-to-date email, “Nothing and thanks.”
301. On March 15, 2009, On responded specifically to Question 7, “None.”
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302. On March 16, 2009, the Bank provided a letter to KPMG for purposes of making
certain representations relied upon by KPMG as part of its 2008 Year-End Audit of the Holding
Company (“Management Representation Letter”). The Management Representation Letter was
signed by CEO Wu, On, and ********
303. The Management Representation Letter represented that the Bank’s financial
statements were presented in conformance with generally accepted accounting procedures, and
that all financial records, data, minutes, and regulatory reports were provided to KPMG. The
Management Representation Letter further certified that there were no events that occurred
subsequent to the balance sheet date and through the date of the letter that would require
adjustment to or disclosure in the financial statements.
304. Paragraph 9 of the Management Representation Letter specifically states: “The
Company has no plans or intentions that may materially affect the carrying value or classification
of assets and liabilities.” If the Bank had any plans to sell notes or agree to short sales regarding
collateral for loans, and such plans could materially affect the value of the loans, the Holding
Company could not make such a representation.
305. CEO Wu’s and On’s responses to the down-to-date inquiry and the Management
Representation Letter were false.
306. CEO Wu was very familiar with the Bank’s plans to sell loans after December 31,
2008. During the KPMG Audit, the Bank had developed plans to sell a number of loans, which plans were not disclosed to KPMG. CEO Wu was not only aware of such plans, he had directed
his senior management to sell as many non-performing loans as it could by the end of the first
quarter.
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307. In February 2009, Zhang reported back to CEO Wu on the progress of planned sales of 24 non-performing assets totaling $149 million. Zhang told CEO Wu that they were trying to complete the sales prior to the end of the quarter. Examples of specific loan sales that
CEO Wu was aware of are **********, *********, and **********
308. On was also aware of the Bank’s plans to sell loans. On knew of specific loan sales that were planned or in the works in the first quarter of 2009, including *********, ******
**** and **********.
B. 2008 Form 10-K
309. Respondents violated Sections 10(b), 13(a), and 13(b) of the Securities Exchange
Act of 1934, 15 U.S.C. §§ 78j(b); 78m(a); and 78m(b), by: causing UCBH to file a 2008 Form
10-K with the SEC that significantly understated the Bank’s ALLL provisions and level of charge-offs and significantly overstated its earnings and capital; failing to appropriately make and keep books, records and accounts; and failing to maintain appropriate internal controls.
310. As discussed in paragraph 77 above, the Bank’s charge-offs for loans and other assets as of December 31, 2008 were understated by at least $61.8 million and the Bank’s FAS
114 reserve as of December 31, 2008 was understated by at least $53.7 million.
311. The misrepresentations and omissions Respondents made with respect to the specific loans and other assets discussed herein contributed materially to the total understatement of the Bank’s charge-off and reserve amounts. Those misrepresentations and omissions resulted in a net impact to the financial statements of the Bank and UCBH of at least ($65,811,512), as follows:
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(a) The Bank’s FAS 114 reserves and/or charge-off amounts for the ******
**** Loan were understated, resulting in a net impact to the financial statements of approximately ($6,019,830);
(b) The Bank’s FAS 114 reserves and/or charge-off amounts for the ******
******* Loan were understated, resulting in a net impact to the financial statements of approximately ($4,179,000);
(c) The Bank’s charge-off amount for the ************* OREO was understated, resulting in a net impact to the financial statements of approximately ($2,070,900);
(d) The Bank’s FAS 114 reserves and/or charge-off amounts for the ******* loan and other assets were understated, resulting in a net impact to the financial statements of approximately ($36,521,649);
(e) The Bank’s FAS 114 reserves and/or charge-off amounts for the **
********* loan were understated, resulting in a net impact to the financial statements of approximately ($4,831,683);
(f) The Bank’s FAS 114 reserves and/or charge-off amounts for the ********
***** loan were understated, resulting in a net impact to the financial statements of approximately ($702,554);
(g) The Bank’s FAS 114 reserves and/or charge-off amounts for the ****
***** – H Street Loan and Roseville Loan were understated, resulting in a net impact to the financial statements of approximately ($5,999,199); and
(h) The Bank’s FAS 114 reserves and/or charge-off amounts for the *****
***** loan were understated, resulting in a net impact to the financial statements of approximately ($5,486,697).
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312. The Bank also routinely continued to accrue interest on loans that were more than
90 days past due and where full collection was unlikely, which resulted in earnings that were overstated.
313. CEO Wu and On signed the 2008 Form 10-K, attesting to its accuracy, when they knew that the 2008 Form 10-K was not accurate.
C. December 31, 2008 Call Reports
314. Respondents violated Section 7(a)(1) of the Act, 12 U.S.C. § 1817(a)(1), by causing the Bank to file false reports of condition (“Call Reports”) with the FDIC for the period ending December 31, 2008 by significantly understating provision expenses and charge-offs, and significantly overstating its earnings and capital.
315. Based on the Bank’s restatement, the Bank’s charged-off loans and assets as of
December 31, 2008 were understated in the Call Reports by at least $61.8 million and the Bank’s
FAS 114 reserve as of December 31, 2008 was understated by at least $53.7 million.
316. Furthermore, as discussed in paragraph 311 above, Respondents’ misrepresentations and omissions regarding the specific loans and other assets discussed herein resulted in a net impact to the Bank’s Call Reports of at least ($65,811,512).
317. Respondents also failed to charge off loans that met the regulatory definition of
“loss,” opting instead to set up specific reserves and wait to charge off the loans until loan losses were certain. This had a significant impact on the Bank’s Call Reports as follows: the Bank’s reported charged-off loans were artificially low, and the Bank’s reported ALLL was overstated in this area.
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318. The Bank also routinely continued to accrue interest on loans that were more than
90 days past due and where full collection was unlikely, which resulted in earnings that were overstated.
319. On attested to the accuracy of the Bank’s Call Reports when he knew that the Call
Reports were false.
XII. Effect of Respondents’ Misconduct
320. By reason of the Respondents’ violations of law and/or regulations, unsafe or unsound practices, and breaches of fiduciary duty, the Bank suffered financial loss or other damage and the interests of the Bank’s depositors were prejudiced.
A. Failure of the Bank
321. As a result of the inaccurate Call Reports and 2008 Form 10-K filed by the Bank and UCBH, the Bank was required to file amended Call Reports and UCBH was required to restate its 2008 Form 10-K.
322. Due to the nature and extent of the omissions and misrepresentations, UCBH was unable to complete the restatements.
323. By the summer of 2009, the Bank’s financial condition had deteriorated, requiring a significant injection in capital to be able to continue its operations. However, given the lack of audited financial statements, investors were unwilling to inject new capital into the holding company and its bank subsidiary.
324. Without new capital, the Bank was placed into receivership at an estimated cost of
$2.5 billion to the FDIC’s Deposit Insurance Fund.
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B. Internal Investigation
325. As discussed in paragraphs 73 through 77 above, the omissions and
misrepresentations to KPMG led to an internal investigation. The Bank and UCBH were
charged $3,896,945 in legal fees for the cost of conducting this investigation, and $3,345,515 in
accounting fees for the forensic component of the investigation.
326. The Bank also suffered reputational damage in the community as a result of the public disclosure of the findings of the internal investigation.
XIII. Grounds for Section 8(e) Orders
327. As a result of the Respondents’ foregoing acts, omissions and/or practices, the
Respondents have committed violations of law and/or regulations.
328. As a result of the Respondents’ foregoing acts, omissions and/or practices, the
Respondents have engaged and/or participated in unsafe or unsound banking practices in
connection with the Bank.
329. As a result of the Respondents’ foregoing acts, omissions and/or practices, the
Respondents breached their fiduciary duty to the Bank.
330. By reason of the violations, practices, or breaches alleged herein, the Bank has
suffered financial loss or other damage.
331. By reason of the violations, practices, or breaches alleged herein, the interests of
the Bank’s depositors have been prejudiced.
332. The acts, omissions and/or practices of the Respondent alleged herein evidence
the Respondents’ personal dishonesty and/or demonstrate a willful or continuing disregard for
the safety or soundness of the Bank.
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XIV. Grounds for Assessment of Civil Money Penalties
333. As a result of the foregoing facts and conclusions, the FDIC concludes that
Respondents committed violations of law.
334. As a result of the foregoing facts and conclusions, the FDIC concludes that
Respondents recklessly engaged in unsafe or unsound practices in conducting the affairs of the
Bank.
335. Further, as a result of the foregoing facts and conclusions, the FDIC concludes that Respondents breached their fiduciary duty to the Bank.
336. Further, as a result of the foregoing facts and conclusions, the FDIC concludes that Respondents’ reckless unsafe or unsound practices and/or breaches of fiduciary duty to the
Bank were part of a pattern of misconduct.
337. Further, as a result of the foregoing facts and conclusions, the FDIC concludes that Respondents’ reckless unsafe or unsound practices and/or breaches of fiduciary duty to the
Bank caused more than a minimal loss to the Bank.
ORDER TO PAY
By reason of the reckless unsafe or unsound practices and/or breaches of fiduciary duty set forth in the NOTICE OF ASSESSMENT, the FDIC has concluded that a civil money penalty should be assessed against each Respondent pursuant to section 8(i)(2) of the Act, 12 U.S.C. §
1818(i)(2). After taking into account the appropriateness of the penalties with respect to the size of financial resources and the good faith of each Respondent, the gravity of the reckless unsafe or unsound practices and/or breaches of fiduciary duty, and such other matters as justice may require, it is:
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ORDERED, that by reason of the violations of law and reckless unsafe or unsound practices and/or breaches of fiduciary duty set forth in paragraphs 1 through 337 hereof, a penalty of $500,000 be, and hereby is, assessed against Respondent Tommy Wu pursuant to
section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2); a penalty of $250,000 be, and hereby is,
assessed against Respondent Shabudin pursuant to section 8(i)(2) of the Act, 12 U.S.C. §
1818(i)(2); a penalty of $200,000 be, and hereby is, assessed against Respondent On pursuant to
section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2); a penalty of $200,000 be, and hereby is,
assessed against Respondent T***as Yu pursuant to section 8(i)(2) of the Act, 12 U.S.C. §
1818(i)(2); a penalty of $150,000 be, and hereby is, assessed against Respondent Kerr pursuant
to section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2); a penalty of $150,000 be, and hereby is,
assessed against Respondent Montelaro pursuant to section 8(i)(2) of the Act, 12 U.S.C. §
1818(i)(2); a penalty of $100,000 be, and hereby is, assessed against Respondent Lee pursuant to
section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2); a penalty of $50,000 be, and hereby is,
assessed against Respondent Tran pursuant to section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2);
a penalty of $20,000 be, and hereby is, assessed against Respondent Sun pursuant to section
8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2); and a penalty of $20,000 be, and hereby is, assessed
against Respondent Ta-Lun Wu pursuant to section 8(i)(2) of the Act, 12 U.S.C. § 1818(i)(2);
FURTHER ORDERED, that the effective date of this ORDER TO PAY be, and hereby
is, stayed with respect to each Respondent until 20 days after the date of receipt of the NOTICE
OF ASSESSMENT by each such Respondent, during which time each such Respondent may file
an answer and request a hearing pursuant to section 8(i)(2)(H) of the Act, 12 U.S.C. §
1818(i)(2)(H), and section 308.19 of the FDIC Rules of Practice and Procedure, 12 C.F.R. §
308.19.
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If any Respondent fails to file a request for a hearing within 20 days of receipt of this
NOTICE OF ASSESSMENT, the penalty assessed against such Respondent, pursuant to this
ORDER TO PAY, will be final and shall be paid within 60 days after the date of receipt of this
NOTICE OF ASSESSMENT.
NOTICE OF HEARING
IT IS FURTHER ORDERED, that, if any Respondent requests a hearing with respect to
the charges alleged in this NOTICE OF ASSESSMENT and NOTICE TO PROHIBIT, the
hearing shall commence sixty (60) days from the date of receipt of this NOTICE OF
ASSESSMENT and NOTICE TO PROHIBIT at San Francisco, California, or at such other date
or place upon which the parties to this proceeding and the Administrative Law Judge may agree.
The purpose of the hearing will be for the taking of evidence on the charges, findings and
conclusions stated herein in order to determine: (1) whether a permanent order should be issued
to remove the Respondent from office and/or prohibit the Respondent from further participation
in the conduct of the affairs of the Bank and any insured depository institution or organization
enumerated in section 8(e)(7)(A) of the Act, 12 U.S.C. § 1818(e)(7)(A), without the prior permission of the FDIC and the appropriate Federal financial institutions regulatory agency, as
that term is defined in section 8(e)(7)(D) of the Act, 12 U.S.C. § 1818(e)(7)(D); and (2) whether
the FDIC’s ORDER TO PAY should be sustained.
The hearing will be public, and in all respects conducted in accordance with the provisions of the Act, 12 U.S.C. §§ 1811-1831u, the Administrative Procedure Act, 5 U.S.C.
§§ 551-559, and the FDIC Rules of Practice and Procedure, 12 C.F.R. Part 308. The hearing will be held before an Administrative Law Judge to be appointed by the Office of Financial
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Institution Adjudication pursuant to 5 U.S.C. § 3105. The exact time and precise location of the
hearing will be determined by the Administrative Law Judge.
In the event any Respondent requests a hearing, such Respondent is hereby directed to
file an answer to this NOTICE TO PROHIBIT and NOTICE OF ASSESSMENT within 20 days
from the date of service as provided by section 308.19 of the FDIC Rules of Practice and
Procedure, 12 C.F.R. § 308.19.
An original and one copy of the answer, any such request for a hearing, and all other
documents in this proceeding must be filed in writing with the Office of Financial Institution
Adjudication, 3501 N. Fairfax Drive, Suite VS-D8116, Arlington, Virginia, 22226-3500, pursuant to section 308.10 of the FDIC Rules of Practice and Procedure, 12 C.F.R. § 308.10.
Also, copies of all papers filed in this proceeding shall be served upon the Office of the
Executive Secretary, Federal Deposit Insurance Corporation, 550 17th Street, N.W., Washington,
D.C. 20429; A. T. Dill, III, Assistant General Counsel, Legal Division, Enforcement Section,
Federal Deposit Insurance Corporation, 550 17 th Street, N.W., Washington, D.C. 20429; and
upon Joseph J. Sano, Regional Counsel, San Francisco Regional Office, Federal Deposit
Insurance Corporation, 25 Jessie Street at Ecker Square, Suite 1400, San Francisco, California
94105.
PRAYER FOR RELIEF
The FDIC prays for relief in the form of the issuance of an Order of Removal and
Prohibition pursuant to 12 U.S.C. § 1818(e) against Respondents Yu, Lee, Sun, and Ta-Lun Wu;
an Order of Prohibition pursuant to 12 U.S.C. § 1818(e) against Respondents Tommy Wu,
Shabudin, On, Kerr, Montelaro, and Tran; an Order to Pay Civil Money Penalty pursuant to 12
U.S.C. § 1818(i) in the amount of $500,000 against Respondent Tommy Wu; an Order to Pay
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Civil Money Penalty pursuant to 12 U.S.C. § 1818(i) in the amount of $250,000 against
Respondent Shabudin; an Order to Pay Civil Money Penalty pursuant to 12 U.S.C. § 1818(i) in the amount of $200,000 against Respondent On; an Order to Pay Civil Money Penalty pursuant to 12 U.S.C. § 1818(i) in the amount of $200,000 against Respondent Yu; an Order to Pay Civil
Money Penalty pursuant to 12 U.S.C. § 1818(i) in the amount of $150,000 against Respondent
Kerr; an Order to Pay Civil Money Penalty pursuant to 12 U.S.C. § 1818(i) in the amount of
$150,000 against Respondent Montelaro; an Order to Pay Civil Money Penalty pursuant to 12
U.S.C. § 1818(i) in the amount of $100,000 against Respondent Lee; an Order to Pay Civil
Money Penalty pursuant to 12 U.S.C. § 1818(i) in the amount of $50,000 against Respondent
Tran; an Order to Pay Civil Money Penalty pursuant to 12 U.S.C. § 1818(i) in the amount of
$20,000 against Respondent Sun; and an Order to Pay Civil Money Penalty pursuant to 12
U.S.C. § 1818(i) in the amount of $20,000 against Respondent Ta-Lun Wu.
Pursuant to delegated authority.
Dated at Washington, D.C., this __7th ___ day of October, 2011.
Serena L. Owens Associate Director Supervision and Applications Branch Division of Risk Management Supervision
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AO 440 (Rev. 12/09) Summons in a Civil Action UNITED STATES DISTRICT COURT
for the Northern District of California
) Kyung Cho, et al., ) Plaintiff ) v. ) Civil Action No. CV-09-4208-JSW ) UCBH Holdings, Inc., et. al., ) Defendant )
SUMMONS IN A CIVIL ACTION
To: (Defendant’s name and address) UCBH HOLDINGS, INC.; THOMAS S. WU; THOMAS YU; EBRAHIM SHABUDIN; CRAIG ON; DENNIS WU; ROBERT NAGEL; JOHN M. KERR; DANIEL M. GAUTSCH; DOUGLAS MITCHELL; BURTON D. THOMPSON; JOHN CINDEREY; JOSEPH J. JOU; PIN PIN CHAU; LI-LIN KO; QINGYUAN WAN; GODWIN WONG; DAVID NG; DANIEL P. RILEY; RICHARD LI-CHUNG WANG; and JOHN DOES 1-10,
A lawsuit has been filed against you.
Within 21 days after service of this summons on you (not counting the day you received it) — or 60 days if you are the United States or a United States agency, or an officer or employee of the United States described in Fed. R. Civ. P. 12 (a)(2) or (3) — you must serve on the plaintiff an answer to the attached complaint or a motion under Rule 12 of the Federal Rules of Civil Procedure. The answer or motion must be served on the plaintiff or plaintiff’s attorney, whose name and address are: Laurence Rosen, Esq. (SBN 219683) The Rosen Law Firm, P.A. 355 South Grand Avenue, Suite 2450 Los Angeles, CA 90071 Tel: (213) 785-2610; Fax: (213) 226-4684; E-mail: [email protected]
If you fail to respond, judgment by default will be entered against you for the relief demanded in the complaint. You also must file your answer or motion with the court.
CLERK OF COURT
Date:
Signature of Clerk or Deputy Clerk Case3:09-cv-04208-JSW Document217-7 Filed01/09/12 Page2 of 2
AO 440 (Rev. 12/09) Summons in a Civil Action (Page 2) Civil Action No.
PROOF OF SERVICE (This section should not be filed with the court unless required by Fed. R. Civ. P. 4 (l))
This summons for (name of individual and title, if any)
was received by me on (date) .
LI I personally served the summons on the individual at (place) on (date) ; or
LI I left the summons at the individual’s residence or usual place of abode with (name) , a person of suitable age and discretion who resides there,
on (date) , and mailed a copy to the individual’s last known address; or
LI I served the summons on (name of individual) , who is designated by law to accept service of process on behalf of (name of organization) on (date) ; or
LI I returned the summons unexecuted because ; or
LI Other (specify): .
My fees are $ for travel and $ for services, for a total of $ .
I declare under penalty of perjury that this information is true.
Date: Server’s signature
Printed name and title
Server’s address
Additional information regarding attempted service, etc: