Mortgage

Exec at center of first TARP bank failure gets 8 years in prison

Fraud scheme cost taxpayers more than $300 million

The bank executive at the center of one of the largest bank failures in recent years will spend the next 8 years in prison for his part in a scheme that cost the American taxpayers more than $300 million.

Ebrahim Shabudin, the former chief operating officer and chief credit officer at United Commercial Bank, was sentenced to 97 months in federal prison for securities fraud and other corporate fraud offenses stemming from the failure of United Commercial.

United Commercial was the first bank to fail after receiving bailout funds through the government’s Trouble Asset Relief Program, and government officials are calling Shabudin’s prosecution the “most significant for crimes arising out of the bailout.”

According to a release from the Special Inspector General for the Troubled Asset Relief Program, Shabudin was the second most senior officer in executive management at UCB after former chief executive officer Thomas Shiu-Kit Wu.

According to SIGTARP’s Christy Romero, United Commercial pursued an “aggressive, risky” growth strategy in the run-up to the financial crisis.

As a result of its pre-crisis practices, the bank faced massive amounts defaulting loans and was faced with shrinking collateral.

According to Romero, Shabudin was the senior person in charge of determining the risk rating of bank loans, downgrading those loans, and reserving for or charging off losses. Shabudin intentionally concealed the truth of these loans in the bank’s books, Romero said.

 “Like many bankers during the financial crisis, this senior officer of a TARP bank faced defaulting loans and declining collateral, but unlike others, Ebrahim Shabudin deliberately turned to crime to deceive, and now he will spend the next eight years in federal prison,” SIGTARP Christy Romero said.

According to Romero, Shabudin was “fixated on protecting the bank’s reputation.” To facilitate that reputation rescue, Shabudin embarked on an elaborate criminal scheme to hide the bank’s declining financial condition, Romero said.

“Ebrahim Shabudin had every opportunity to do the right thing, but he was motivated instead to preserve the bank’s reputation at all costs, even if it meant committing a crime,” Romero said.

According to Romero, Shabudin’s goal was to make the bank break even on the books.

To do so, he masked the loans that should have been downgraded because the downgrade meant that the bank would have to reserve for losses or charge off loans, and the bank would show a loss, Romero said.

Then, the next quarter, he continued with the criminal scheme, always working backwards from how he wanted the bank’s financials to look to the world, rather than telling the truth in the bank’s books, Romero added.

“Even after he knew that no collateral inventory existed for one risky loan, and was made aware that the borrower’s warehouse was full of empty boxes that according to trial testimony looked like a ‘staged movie set,’ he directed that the bank not charge off the loan,” Romero said. “Over and over, he directed that the bank’s books be falsified, with overstated loans and understated losses, hoping that things would get better.”

Eventually, TARP provided approximately $298 million in federal funds to United Commercial in Nov. 2008. Dividends on the TARP loan grew to over $3 million before the bank failed, bringing the total loss to taxpayers to over $300 million.

On Nov. 6, 2009, United Commercial was taken over by the Federal Deposit Insurance Corporation. With over $10.9 billion in assets, United Commercial’s failure was the ninth largest failure since 2007 of a bank insured by the FDIC’s Deposit Insurance Fund, according to the FDIC.

United Commercial was also the first bank to fail after receiving TARP funds.

In 2013, the FDIC estimated that total losses for United Commercial would be more than $1.1 billion. Through 2014, however, with the recovery of the United States economy, FDIC now estimates the loss to the Deposit Insurance Fund to be approximately $677 million.

Shabudin was eventually charged with conspiring with others within the bank to falsify key bank records as part of a scheme to conceal millions of dollars in losses and falsely inflate the bank’s financial statements.

Among the records Shabudin was charged with falsifying were those filed with the Securities and Exchange Commission and FDIC related to the third and fourth quarters of 2008 describing United Commercial’s “Allowance for Loan Losses.”

Shabudin also falsified documents relating to United Commercial’s quarterly and year-end earnings per share.

All in all, Shabudin was found guilty of seven crimes:

Count One: Conspiracy to Commit Securities Fraud, with a maximum penalty of 25 years of imprisonment, a $250,000 fine, a 5-year term of supervised release, and a $100 special assessment.

Count Two: Securities Fraud, with a maximum penalty of 25 years of imprisonment, a $250,000 fine, a 5-year term of supervised release, and a $100 special assessment.

Count Three: Falsifying Corporate Books and Records, with a maximum penalty of 20 years of imprisonment, a $5,000,000 fine, a 3-year term of supervised release, and a $100 special assessment.

Count Four: False Statements to Accountants, with a maximum penalty of 20 years of imprisonment, a $5,000,000 fine, a 3-year term of supervised release, and a $100 special assessment.

Count Five: Circumventing Internal Accounting Controls, with a maximum penalty of 20 years or imprisonment, a $5,000,000 fine, a 3-year term of supervised release, and a $100 special assessment.

Count Six: Conspiracy to Commit False Bank Entries, Reports, and Transactions, with a maximum penalty of 5 years of imprisonment, a $250,000 fine, a 3-year term of supervised release, and a $100 special assessment.

Court Seven: False Bank Entries, Reports, and Transactions, with a maximum penalty of 30 years of imprisonment, a $1,000,000 fine, a 5-year term of supervised release, and a $100 special assessment.

 Shabudin was also sentenced to three years’ supervised release, and ordered to forfeit $348,000.

“This massive criminal scheme defrauded investors, including Treasury who became an investor through TARP,” Romero said. “He was essentially gambling with taxpayers’ bailout dollars, and it was taxpayers who ultimately lost more than $300 million when the bank failed one year after receiving TARP funds.”

Romero called the case “one of the most significant prosecutions” to come out of the financial crisis, and noted that SIGTARP investigators worked for more than five years with its law enforcement partners to unravel the crimes at United Commercial Bank.

Shabudin’s sentencing was jointly announced by Christy Romero, Special Inspector General for the Troubled Asset Relief Program, Melinda Haag, U.S. Attorney for the Northern District of California, Fred Gibson, Acting Inspector General for the Federal Deposit Insurance Corporation, Mark Bialek, Inspector General for the Board of Governors of the Federal Reserve System and the Consumer Financial Protection Bureau, and David Johnson, FBI Special Agent in Charge.

“As the Chief Operating Officer and Chief Credit Officer of United Commercial Bank, Ebrahim Shabudin presided over one of the largest securities fraud schemes in the history of this district,” said Haag.

“His prison term should serve as a warning to persons who believe that complex commercial crime will not be detected and prosecuted,” Haag continued. “I am proud of all the hard work of the attorneys and staff of this office and of our federal partners that resulted in this successful prosecution.”

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