A Chesapeake, Va.-based developer is facing 11-plus years in prison for running a $41 million bank fraud scheme that collapsed the Bank of the Commonwealth in Virginia.

The Federal Deposit Insurance Corp. took the Norfolk, Va.-based bank over after it collapsed in September 2011.

Officials blame Eric H. Menden, 53, of Chesapeake, Va., for sinking the bank by collaborating with officials inside the institution to commit bank fraud and for steering a tax-credit scheme. Menden pled guilty earlier this year to conspiracy to commit wire fraud, making false statements and conspiracy to commit bank fraud.

A federal judge sentenced him to 11.5 years this week, according to a report from the Special Inspector General for the Troubled Asset Relief Program that oversees TARP funds injected into banks after the financial crisis.

Christy Romero, special inspector general for SIGTARP said, "Menden received $35 million in bank loans with such preferential treatment that bank employees referred to the bank as the Bank of Eric and George."

Authorities say Menden in 2008 began conspiring with bank insiders to acquire underperforming bank-owned properties. The bank employees cooperating with Menden would advance loan proceeds so Menden and his business partner could make the purchases. The bank later wrote those loans off as significant losses.

The pair also agreed to bid on bank-owned properties at prices that would allow the bank to pay off the underlying loans. Romero says bank insiders would essentially fund the loans to Menden and his partner, so they could then make fraudulent transactions.

"In one instance, the bank funded more than $900,000 to purchase property at auction in 2008. In April 2011, the bank obtained an appraisal that indicated that the building had no useful life, and the bank charged off more than $500,000 of this loan as a loss," SIGTARP said in its report.

In November 2008, the Federal Reserve asked the Bank of the Commonwealth to withdraw its application for TARP funds due to concerns about the bank's stability. The institution, at the time, promised regulators it would not extend, renew or restructure any loans to troubled borrowers. Despite this agreement, authorities claim the bank continued to sell underperforming bank-owned property to Menden through a nominee borrower.

During the three-year period, Menden allegedly submitted construction draw requests with inflated values to the bank for worknever completed. 

Menden and his business partner, George P. Hranowskyj, 47, also were accused of borrowing funds from banks to purchase and renovate homes that could qualify for historic rehabilitation tax credits. Eventually illegitimate tax credits on those properties were sold off to investors for about $8.7 million. The sale eventually cost the U.S. government $6.2 million and the state of Virginia an additional $6.3 million, SIGTARP said.

Hranowskyj already pled guilty for his role in the conspiracy and is scheduled for sentencing next month.

kpanchuk@housingwire.com