Loss of trust: The fall of Delaware's banking institution Chapter 1

Share This Story Tweet Share Share Pin Email

Robert V.A. Harra Jr., the longtime, homegrown face of the once-esteemed Wilmington Trust Corp., knew at the end of 2009 that his institution had deep problems with its loan portfolio – so deep, in fact, the bank's chief credit officer had dubbed many loans "credit turds," the federal government alleges.

"We [and the economy] didn't make this mess overnight, and unfortunately we can't clean it all up in a short timeframe either," former chief credit officer William B. North wrote to Harra in a late 2009 email, court filings show.

Yet, Harra, 66, the former bank president, received a bump in his salary and North was awarded a bonus in February 2010 based on the bank's 2009 performance, court filings say. At the same time, executives also were planning to sell more stock to investors.

Despite knowing the true state of the loan portfolio, Harra took steps to hide the truth by keeping the full extent of past-due loans from being publicly reported, according to a lawsuit filed by the U.S. Securities and Exchange Commission. Unknown to investors, the bank had understated its delinquent loans in the third quarter of 2009 by $351 million, the SEC alleges.

Details in the SEC complaint paint a fuller picture of a once-venerable bank buried by an avalanche of delinquent, non-performing and charged-off loans, many of which were for housing and shopping center projects in southern Delaware. The civil fraud case portrays officials scheming to camouflage the deteriorating situation by omitting from public reports hundreds of millions in past due loans that were current on interest.

Less than a year after North described the loan "mess," the bank was crumbling. Faced with a "narrowing set of alternatives," Wilmington Trust struck a last-minute deal to be bought by M&T Bank Corp. of Buffalo, New York. When the transaction was announced Nov. 1, 2010, shareholders were stunned to see their shares discounted by more than 40 percent from the previous day's trading price. Not only did millions of dollars in shareholder value evaporate overnight in one of banking history's biggest fire sales, but more than 600 employees lost their jobs.

Now, former shareholders and employees are hoping the government will make the bank's former leaders pay. Federal prosecutors in Delaware have brought eight criminal actions against individuals following the demise of the bank, including five prosecutions of former bank officials. The cases are rare examples of the federal justice department moving against individuals following the financial crisis. Former U.S. Attorney General Eric Holder has been criticized for failing to bring such prosecutions.

To Erika Bush of North Wilmington, who worked for 25 years at Wilmington Trust and retired as a branch banking officer, the fall of her former employer is both "heartbreaking" and galling. Her husband, Frank, had put some of their retirement savings in Wilmington Trust stock.

"I would have staked my life on the bank – and I did. I put a lot of money into stock. I bought stock for my grandkids. And boy, did they screw us over," said Bush, who banked with the Wilmington Trust since 1959. "Wilmington Trust had such a reputation for being conservative that everybody believed everything they were told."

Merrily Headley of North Wilmington, whose grandfather, Harry R. Craig, started at the bank in 1905 and retired as a vice president of commercial banking, called the demise of Wilmington Trust "shocking beyond belief." Craig was listed as a member of the board's advisory committee in the bank's 50th anniversary publication.

“My grandfather used to say: If Wilmington Trust ever falls, the banking industry in this country is going down.” Merrily Headley, granddaughter of Harry R. Craig, who started at the bank 1905 and retired as a VP of commercial banking.

"My grandfather used to say: If Wilmington Trust ever falls, the banking industry in this country is going down," said Headley, who worked at the bank in the 1990s.

Not only did Headley and her sister Julie inherit stock her grandfather had accumulated, but their mother, Headley and her sister also bought shares through the years. She estimates they lost more than $100,000.

"We want the people who brought the bank down to be held accountable," she said.

Some investors and former employees say they're encouraged by the justice department's criminal prosecutions and a civil lawsuit filed earlier this month by the SEC against Harra and three other executives. The SEC is alleging civil fraud and other federal securities law violations by Harra; David R. Gibson, 58, former Wilmington Trust chief financial officer; North, 55; and Kevyn Rakowski, 61, former controller.

In addition, North and Rakowski have been charged criminally by the U.S. Department of Justice for making false statements to the SEC and Federal Reserve. Many are waiting to see if others are charged.

Former Wilmington Trust president, Robert V.A. Harra Jr.’s house (left) next to the home of the bank's former chief financial officer on Kentmere Parkway in Wilmington.

(Photo: SUCHAT PEDERSON/THE NEWS JOURNAL)

The SEC is seeking a stiff punishment, including asking the court to order that the four give up their "ill-gotten gains." As part of the merger with M&T, the executives were assured a comfortable old age with the vesting of an executive retirement plan. An SEC filing in 2011, lists Harra as eligible for $6.54 million in supplemental executive retirement benefits as of December 2010. Gibson was listed as eligible for $2.65 million and Rakowski for $235,059.

The government is also asking they pay civil penalties. The SEC wants Harra and Gibson, who are next-door neighbors on Kentmere Parkway in Wilmington, to be barred from serving as an officer or director of any public company. Harra and others, through their lawyers, have vowed to mount vigorous defenses.

"We intend to fight this all the way," said Andrew Lawler, Harra's attorney, who added that Harra will deny the allegations in a court filing.

Kenneth Breen, the lawyer for Gibson, said his client "looks forward to his day in court." North, who has pleaded not guilty, intends to take the case to trial, according to his lawyer, David Wilks. Rakowski's lawyer said earlier this month his client will address the charges in court. She is scheduled to be arraigned in June.

Startling development Chapter 2

What Bush and others didn't know in 2009 was that the bank was scrambling to avert a catastrophe following the burst of the real estate bubble, court records say.

It was a sea change for a bank Bush remembers as being "super conservative." Wilmington Trust's heritage could be traced to its du Pont founders and their active presence on the board for the first 50 years.

The bank started in a parlor and dining room of a house at 915 Market St. Directors included du Pont cousins T. Coleman du Pont and Pierre S. du Pont, two of the three cousins who created the modern DuPont Co.

Former Wilmington Trust employee Erika Bush with former bank president Robert V.A. Harra Jr. (left) and former CEO Ted Cecala.

(Photo: Supplied)

Pierre du Pont of Longwood was still on the board in 1953, along with the late Lammot du Pont Copeland, Henry B. du Pont, H.F. du Pont, Pierre S. du Pont III and J. Simpson Dean.

The bank then was characterized as a "plain, hard-working American bank."

"Think of us as having a sound start, a healthy growth, an active present and a challenging future," the 1953 publication said.

But by 2000, something had changed at Wilmington Trust. For starters, the bank listed its stock on the New York Stock Exchange starting on Jan. 12, 1999. It had been listed on NASDAQ since 1971. Harra made the first trade under the new ticker symbol WL. Specially minted coins of one troy ounce of silver, featuring the classical façade of its Rodney Square headquarters building, were distributed at the exchange and to Wilmington Trust employees.

It had also outlived other large independent banking stalwarts in Delaware, becoming one of the last major independent institutions in the state. To Wilmington Trust officials, the unsettled competitive landscape represented an opportunity for the bank to capitalize on its "relationship-oriented approach in which Wilmington Trust specializes," the 1998 annual report said.

1967 Brandywine High School yearbook picture of Robert V.A. Harra Jr.

(Photo: Photo submitted)

"We live and work in the communities we serve," Harra said in the company's 2003 annual report.

By 2003, the bank decided to use its relationship approach in building its regional banking business in southern Delaware, annual reports show. The thinking was that the state's low taxes, central location and new Del. 1 north-south highway made Kent and Sussex counties ripe for a population and housing boom that would draw retirees and others, annual reports say.

Top company officials cultivated the relationships by socializing with customers at golf outings, lunches and cocktail parties.

And it aggressively went after developers of projects in southern Delaware, lending millions in mortgages for projects being built by contractors with Delaware connections. The company reported in 2007 that construction loans accounted for much of its loan growth in 2006 and 2007 as the bank funded residential developments and shopping centers.

What it couldn't see lurking around the corner was the burst of the real estate bubble, which brought with it the Great Recession and the nation's worst housing downturn since the Great Depression.

Wilmington Trust through the years 1903 1912 1921 1930 1939 1948 1957 1966 1975 1984 1993 2002 2011 Wilmington Trust Co. is formed T. Coleman du Pont, president of E.I. du Pont de Nemours and Co., and several prominent Delaware business leaders form the Wilmington Trust Co. The bank opens on July 8.

Downtown Wilmington Moves into the DuPont Building at 10th and Market streets. It is based there for 76 years.

State's largest bank Wilmington Trust becomes the largest bank in Delaware.

USA Today file Survives the Depression Capital holdings exceed $4 million, enabling the bank to weather the Great Depression.

1933 Wilmington Trust plays a major role in the U.S. economic recovery, lending to leading businesses including Wilson Line for shipbuilding, Coca-Cola and GMAC.

Begins to expand The bank begins expansion in Delaware with acquisition of seven financial institutions over the next eight years.

1961 Working with IBM, Wilmington Trust begins automation of installment and commercial loans, deposit accounts and personal trusts.

1970s 1970 The bank introduces its first credit card through Mastercard.

1974 The first Wilmington Trust ATM machine appears.

1980s 1980 Wilmington Trust announces plan to erect 13-story office building incorporating headquarters on Rodney Square.

1983 First office outside Delaware opens, in Stuart, Fla.

1990 Bank purchases People's Bank of Harrington for $9.2 million. Later says it will acquire Sussex Trust for $68 million, an on again-off again deal that closes in 1991.

1991 Wilmington Trust Corp. is formed, driving the bank's growth in wealth management and trust markets and leading to new office openings in Florida, Maryland, New York and California through Wilmington Trust FSB.

Acquisitions and expansion 1991-1992 Begins push into southeastern Pennsylvania and Cecil County, acquiring Bank of the Brandywine Valley in West Chester. People fret as stock falls from $50s to the mid-40s.

1993 Wilmington Trust purchases $100 million Freedom Valley Bank in Pennsylvania for $11.8 million.

1996 Ted T. Cecala named chairman and Robert V.A. Harra Jr. president.

100th Anniversary Wilmington Trust celebrates a century of service.

2008 Buys AST Capital Trust Co. and UBS Fiduciary Trust Co. Trust receives $330 million cash infusion from U.S. Treasury through the Capital Purchase Program, part of the TARP bank bailout, in return for preferred shares.

2009 First-quarter net income is $21.8 million in April -- the last quarterly profit the bank will report before its sale. Named to serve as a bondholder trustee in General Motors bankruptcy in June. The bank reports a loss of $9.1 million in July and $5.9 million in October.

January 2010 Reports loss of $11.2 million for the fourth quarter of 2009.

February 2010 Completes sale of 18.8 million shares of common stock, raising $238.2 million to be used to boost Tier 1 capital and possibly redeem TARP assistance.

Reports of losses continues April 2010: Reports a loss of $29.2 million for the first quarter.

June 2010: Ted Cecala retires as chairman and CEO; Donald Foley, a bank board member since 2006, assumes both roles.

July 2010: Reports a loss of $116.4 million for the second quarter.

October 2010: Stock falls 11.7 percent to $7.71 a share after a Bloomberg News story says the bank may put itself up for sale if an effort to raise new capital through private-equity firms fails.

November 2010: Reports a loss of $365.3 million for the third quarter and announces agreement of sale to M&T Bank of Buffalo for $351 million.

2011 June 2011 In an amended federal lawsuit filed against Wilmington Trust and some former officers and directors, investors allege a massive securities fraud perpetrated by "one little clan" of top executives who "took the company to the race track" while hiding behind the company's reputation for stability and safety.

December 2011 Investigators announce Wilmington Trust is the subject of investigations by the FBI and SEC.

October 2012 The News Journal reports prominent Delaware developer Michael Zimmerman is the target of a federal investigation that focused on allegations he and some of his partners falsified document to access loans from Wilmington Trust.

Zimmerman indicted Zimmerman is indicted for bank fraud and money laundering by a federal grand jury. He gets more than $37 million in financing from the former Wilmington Trust Co. for three developments in Kent and Sussex counties.

Terranova pleads guilty Joseph Terranova, a former Wilmington Trust loan officer, pleads guilty to conspiracy to commit bank fraud. Terranova conspired with others to execute a scheme to defraud Wilmington Trust, prosecutors allege. The object was to extend credit to bank customers under terms inconsistent with with those approved by the bank's loan committee, prosecutors said. It was the also the objective of the conspiracy to conceal the bank's true financial condition, they allege.

Leone agrees to testify before a grand jury Dover real estate developer Salvatore J. Leone admitts he submitted phony requests for cash payments totaling $784,568 from loans granted by Wilmington Trust. As part of his plea, Leone agrees to cooperate with prosecutors, including testifying before a grand jury and at any hearing or trial.

Ladio pleads guilty James Ladio, founder and former chief executive of MidCoast Community Bank, pleads guilty to two counts of bank fraud and two counts of money laundering for a scheme involving involving the use of his bank's money to pay personal debts. The federal investigation exposed the unusual practice of Ladio and a former top Wilmington Trust executive banks authorizing loans to each other.

Brian Bailey indicted; Judge rules on dismissal February 2014 Brian Bailey, a former vice president of Wilmington Trust Co. is indicted by a federal grand jury in a lending scheme to defraud Wilmington Trust Co., Artisans' Bank and MidCoast Community Bank. Bailey, who once was Delaware market manager with Wilmington Trust, conspired with Ladio to provide multiple loans to each other on favorable terms, according to the indictment. In most cases the money was used for purposes other than what were disclosed to the banks, the indictment charges.

March 2014 U.S. District Judge Sue L. Robinson rules that the investors "have sufficiently alleged that defendants made false and misleading statements" to survive an attempt by the former executives and the officers to have the case dismissed.

Federal grand jury indicts Hayes July 2014 Peter W. Hayes, who worked at Wilmington Trust from 1991 through 2011 as a commercial real estate "relationship manager," is accused of engaging in a self-dealing arrangement with a Middletown home builder. He is indicted by a federal grand jury on seven-counts alleging bank fraud and other crimes.

August 2014 Brian Bailey admits in federal court that he conspired with other bank officials to hide the bank's true financial condition from federal regulators, including failing to report loans as past due and extending credit to borrowers so they could make loan interest payments. As part of his plea deal, Bailey has agreed to cooperate with the government, including testifying before a grand jury and at a trial.

Agreement reached with SEC Wilmington Trust reaches an agreement with the U.S. Securities and Exchange Commission to pay $18.5 million to settle charges that it made false and misleading disclosures about its past-due loans over multiple quarters in 2009 and 2010.

October 2014 The U.S. Attorney's Office in Delaware and the criminal fraud section of the U.S. Department of Justice file a motion to intervene in the civil securities case brought by institutional investors against Wilmington Trust officers and directors. Prosecutors want to halt until March the legal discovery process, which they believe could undermine the government's case at a critical point.

Hayes agrees to cooperate with federal investigation Peter Hayes admits he received a roughly $70,400 loan from one of his bank clients and it influenced his business decisions at the bank.



May 2015: Four former top executives at Wilmington Trust Co., including ex-bank president Robert V.A. Harra Jr., were charged with civil fraud and securities violations by the U.S. Securities and Exchange Commission for allegedly understating past due bank loans during the recent economic crisis. Besides Harra, 66, the SEC has charged David R. Gibson, 58, Wilmington Trust's former chief financial officer; Kevyn N. Rakowski, 61, former controller; and William B. North, 55, former chief credit officer.

May 2015: Four former top executives at Wilmington Trust Co., including ex-bank president Robert V.A. Harra Jr., were charged with civil fraud and securities violations by the U.S. Securities and Exchange Commission for allegedly understating past due bank loans during the recent economic crisis. Besides Harra, 66, the SEC has charged David R. Gibson, 58, Wilmington Trust's former chief financial officer; Kevyn N. Rakowski, 61, former controller; and William B. North, 55, former chief credit officer.



Loan extensions Chapter 3

As the country's economic crisis deepened and the real estate market struggled, Wilmington Trust's regional banking business was hit hard. The bank admitted in its 2009 annual report that loan repayment problems had escalated.

Most of the non-performing and charged-off loans were commercial loans for projects in Delaware, the bank reported.

But the bank told investors to remember that the loans had personal guarantees from the borrowers and were "collateralized" by the value of the underlying project.

In fact, the bank came to have an "exceedingly high volume" of matured loans, or loans that had reached the end of their terms without the principal being paid off or its term renewed or extended, the government says.

Matured loans were classified as past due or delinquent in the bank's accounting system until a "change in terms agreement" was completed and recorded, the SEC lawsuit says.

Investors, analysts and regulators were closely scrutinizing past due and extended loans in public reporting because these loans have a "high potential" to result in financial losses, the SEC complaint says.

Despite the bank's policy regarding change-in-terms agreements, Harra, Gibson, Rakowski and North "and others," had a practice of omitting or "waiving" matured loans that were still accruing interest from its public disclosures, according to the complaint. By October 2009, North approved a delinquency report that waived approximately $351 million in matured, interest-current loans that were past due 90 days or more. The four executives knew the huge volume of waived loans would not be disclosed to investors, the complaint says.

A Wilmington Trust building at 11th and Washington streets in Wilmington.

(Photo: THE NEWS JOURNAL/WILLIAM BRETZGER)

That same month, the SEC alleges, the bank's earning release disclosed only $38.7 million in past due loans that were 90 days or more past due but still collecting interest – understating the matured past due loans by $351 million. Gibson, Harra and Rakowski approved the third quarter earnings release and former chief executive Ted Cecala signed the SEC form, the SEC complaint says.

"Omitting past due loans from reporting had the effect of falsely and misleadingly making the bank's loan portfolios appear to the public to have less potential for deterioration than they actually did," the SEC alleges.

At the end of October 2009, the bank signed a memorandum of understanding with the Federal Reserve Bank of Philadelphia. As part of the agreement, Wilmington Trust agreed to provide more frequent and in-depth reporting to the Federal Reserve concerning the past due loans.

About this time, Wilmington Trust's senior management, including Cecala, Harra, Gibson, Rakowski and North, acknowledged internally that the "matured loan problem had reached such a magnitude," it was likely to get the attention of regulators and auditors, the complaint says.

Wilmington Trust building in Rodney Square in Wilmington.

(Photo: JENNIFER CORBETT/THE NEWS JOURNA)

By that time, a "material portion" of the undisclosed interest-accruing loans had elevated credit risks, the SEC alleges. Before its earnings release and third-quarter SEC filing, the bank had classified $131.5 million of undisclosed past due loans with risk ratings below a "pass," including $67.7 million loans it rated "substandard," the SEC alleges.

Senior managers initiated steps to begin phasing out the practice of omitting the matured loans from reporting. The plan was to get the loans extended by the end of 2009, the SEC alleges. Harra sent an email on Oct. 26, 2009 to the bank's regional senior managers of commercial lending instructing them to focus on the matured loans and extensions, the complaint alleges.

Harra described it as "critical issues to me."

"And I cannot over-emphasize the importance to the company," he wrote.

But the plan to extend the loans by year-end 2009 could not be accomplished, the lawsuit says.

Instead, with "Harra's knowledge, approval and encouragement," North supervised and implemented, along with others, an abbreviated process to authorize, but not complete, short-term extensions of matured loans by year end.

This included approving temporary extensions of loans that Wilmington Trust either couldn't or wouldn't extend for longer terms because of the borrowers' financial condition, lack of appraisal, financial documentation or other condition.

Using this process, the lawsuit alleges, North approved almost all of the bank's matured loans for extension, "despite knowing that they were exhibiting signs of instability."

CLOSE Former Wilmington Trust executive William North pleaded not guilty to falsely reporting to regulators. 5/21/15 Damian Giletto/The News Journal

The public offering Chapter 4

The year 2010 began with North sending an email to Harra, Gibson and Rakowski and others that noted "a lot of extensions" were done without the proper underwriting, the SEC alleges. In January 2010, North provided Gibson with documentation that showed deterioration in 10 of the bank's largest commercial real estate loan relationships, the SEC says.

But when Wilmington Trust issued its 2009 year-end earnings release and SEC filings in the first two months of 2010, it disclosed only $30.6 million in interest-accruing loans 90 days or more past due. As a result, the filings "understated its accruing loans past due 90 days or more by $330.2 million," the lawsuit says.

"Neither the year-end earnings release nor the Form 10-K contained any disclosures regarding the bank's massive waiver of past due loans, the mass authorizations of extensions of its matured loan portfolio, or its credit concerns regarding both its waived and extended loans," the SEC alleges.

Sample of Wilmington Trust stock certificate saved by one of the former bank employees.

(Photo: SUCHAT PEDERSON/THE NEWS JOURNAL)

The 10-K for 2009 also said the bank mitigated credit risk with "rigorous loan underwriting standards and apply them consistently."

Despite "widespread internal awareness of deep problems in the bank's loan portfolios," Gibson suggested to Cecala that the bank attempt to raise additional capital though a public offering, the SEC alleges. Harra knew about the public offering and participated in some of these discussions, the lawsuit says.

The common stock offering was announced in February 2010 with the bank filing documents with the SEC that contained "materially false statements and omissions" concerning the loans that were accruing but past due 90 days or more, the SEC said.

The bank sold $287 million in common stock and netted $274 million after costs and commissions.

Some of the buyers were prominent businessmen in Delaware. The bank, which called the offering "enormously successful," said the results were a testament to investors' confidence in the bank.

"The proceeds will enhance our already-strong capital position," the 2009 annual report says.

A few weeks after the public offering closed, North emailed Harra and Cecala to request a meeting concerning Wilmington Trust's matured and maturing loan portfolio, the SEC alleges. North attached a memorandum describing the "looming issue," the lawsuit says.

Final months Chapter 5

The public offering was not enough to save the bank as an independent institution. Within three months, the bank announced the sudden retirement of chief executive Cecala.

By August 2010, Wilmington Trust had begun discussions with an unnamed financial institution about a potential capital investment. Separately, it was talking to a financial investor about possible loan portfolio sale, according to a 2011 SEC filing related to the merger with M&T. A financial adviser was retained in September 2010 to provide an opinion on the sale of a portion of the bank's commercial loan portfolio.

Wilmington Trust promotional items given to employees.

(Photo: SUCHAT PEDERSON/THE NEWS JOURNAL)

That same month, managers told the board of directors that preliminary estimates of the third quarter results, including estimated loan loss provision, charge-offs, and net loss for the quarter, as well as other issues would, in total, reduce the bank's tangible book value by approximately 50 percent. Tangible book value excludes the value of goodwill and other intangible assets.

"It became clear to Wilmington Trust's board of directors and management that, if Wilmington Trust did not enter into a strategic transaction suitable to its regulators on or before the release of its third quarter results... it would likely suffer a material decline in the value of its common stock, a decline in its credit ratings, a significant loss of clients, the potential termination of business relationships tied to Wilmington Trust's credit rating and capital ratios, and significant regulatory actions," the SEC filing says.

Late in the evening on October 31, 2010, the merger agreement was completed. The deal was announced the next morning before the opening of the financial markets in New York City. The bank also released its third-quarter results, reporting a pre-tax loss of $264.6 million for the quarter. The bank's tangible book value fell by 54 percent to $3.84 per share.

Wilmington Trust employees pose for a group photo in 1989.



(Photo: SUCHAT PEDERSON/THE NEWS JOURNAL)

Face of the bank Chapter 6

As more details from indictments and lawsuits trickle out, some former employees and investors wonder why Cecala was not named in the SEC lawsuit.

Some, like Headley, believe Harra could not have known what was going on. Harra who graduated from Brandywine High School, served as the human face of the more than 100-year-old institution. Harra was considered a local success story. A 1971 accounting graduate from the University of Delaware, he started in the bank's credit department and rose steadily to president and chief operating officer.

"Mr. Harra was wonderful. He would never, never not talk to everyone, the tellers, the office managers, the customers," Headley said.

Harra served on numerous boards, from the Delaware Business Roundtable to the Grand Opera House. He dispensed advice as a college commencement speaker and accepted numerous community awards.

"I've known Bob since I took this job in the mid-1980s, he's always been good to me and anything he could do for the community, especially the banking community, he was always there," said David Bakerian, former chief executive of the Delaware Bankers Association.

But Bush believes Harra and others at the top had to know what was going on.

"We at the branch level had to be so careful. They really followed the rules to a T. Why didn't this go all the way up the ladder?" she said.

Carolyn Humes of Milford, a long-time Wilmington Trust stockholder who said she owned shares since she was a child," said she would like to see some kind of recovery for investors.

"For anybody that sends a bank down the tubes there has to accountability," Humes said.

Helen Bowers, chair of the finance department at the University of Delaware, said some people who lost their jobs and retirement incomes, might never recover from the loss.

"It will take a very long time, if ever," Bowers said.