TierOne Bank Securities Enforcement Case: The Appraisals Management Wouldn’t Use

In the 2012 TierOne Bank securities enforcement case, two former executives and the chief executive’s son agreed to pay nearly $1.2 million to settle Securities and Exchange Commission charges involving understated loan losses and a separate insider-trading allegation. The Commission alleged that management ignored falling property values to make the bank appear to meet its capital requirements. If you worked in credit, loan workouts, accounting or audit, the telling records would look familiar: a lower appraisal, an internal loss estimate and a public filing that used neither.

This page follows TierOne’s loan files, management warnings and announced civil settlements. The broader explanation of reserves, impairment and asset values connects that evidence to the accounting estimate an insider may know.

The Bank, the Holding Company and the Defendants

TierOne Bank was a federally chartered savings bank based in Lincoln, Nebraska, owned by the publicly traded TierOne Corporation. One complaint named the former chief executive and board chair, the former president and chief operating officer, and the chief executive’s son. A separate complaint named the former chief credit officer.

The Securities and Exchange Commission alleged that the executives concealed loan and repossessed-property losses from investors and banking regulators. The son’s alleged role concerned trading on confidential information about a proposed asset sale.

How Stale Appraisals Kept Capital Up

TierOne’s reported capital depended on recognizing its loan losses, and the complaint alleged that management kept those losses too low by keeping property values too high. The bank had traditionally made residential and agricultural loans in the Midwest. It expanded into development lending in Las Vegas, Florida and Arizona, where repayment often depended on finishing and selling or refinancing a project. Falling real estate prices threatened both the projects and the collateral behind the loans.

The Office of Thrift Supervision directed TierOne to maintain higher capital ratios. The Securities and Exchange Commission’s complaint against the chief executive and president explains the accounting pressure under the rules then in force: probable losses on impaired loans belonged in the allowance for loan and lease losses. Increasing that allowance required an expense that increased reported losses and reduced capital. TierOne generally measured losses on collateral-dependent loans using the collateral’s fair value.

Foreclosed property presented a similar problem. Repossessed real estate, called other real estate owned, had to be carried at the lower of book value or fair value, less selling costs. The complaint says current appraisals, broker price opinions, comparable sales, project status and offers all mattered to valuation. It alleged that management delayed new appraisals and disregarded information that would have required losses.

The Loan Files Behind the SEC’s Allegations

The complaint describes information about particular properties reaching senior management before the bank published its numbers. Those records included another lender’s appraisal, a workout consultant’s estimates and an internal challenge to the value of proposed collateral.

Gemm Homes and the Lender Who Wanted to Sell

TierOne foreclosed on the Gemm Homes development property in January 2008. The complaint contrasted a September 2007 appraisal of $5.1 million with later broker opinions and another lender’s appraisal putting its value around $3 million. According to the complaint, the president ignored the newer appraisal and rejected a recommendation to write down the property. The chief executive and president then approved buying the participating lender’s interest.

The complaint alleged that the purchase covered up the failure to recognize a $1.8 million loss and that the executives kept the newer appraisal from accounting staff and the outside auditor. The other lender pressed for a sale at the lower value, and management bought out the lender. The unwelcome appraisal stayed out of the accounts.

A Las Vegas Developer’s Loss Estimates Went Unused

A Las Vegas workout consultant sent the president written collateral estimates showing millions of dollars of losses in a developer’s loan portfolio. The email reached the chief executive too. The complaint alleged that neither executive caused the bank to obtain new appraisals or reassess those collateral values, leaving the associated loss provisions millions of dollars too low.

Towne Vistas Kept Its Old Appraisal

For the Towne Vistas condominium project, the complaint describes a $32.3 million loan supported by an undiscounted 2005 appraisal of $46.5 million. In early 2009, the workout consultant told the president the project was likely worth only $15 million. The complaint alleged that management ignored that estimate, kept it from accountants and the auditor, and treated the loan as unimpaired using the old appraisal.

New Credit for Brother Sonny and Jericho

The Brother Sonny development loan was delinquent, with millions owed to project vendors, when TierOne extended an additional $13.6 million in credit. The complaint alleged that management relied on an old Brother Sonny appraisal and an unsigned, expired purchase letter for the separate Jericho collateral. The chief credit officer had already questioned whether Jericho could be worth even half its claimed value.

According to the complaint, the chief executive and president approved the modification without obtaining the appraisals the bank’s policy required. The complaint alleged that the modification masked the delinquency, allowing the loan to appear performing while millions in losses went unrecognized.

Management Ordered a Loss Estimate and Left It Out

The Securities and Exchange Commission alleged that management received a loan-by-loan analysis showing additional loss provisions of $36 million in the best case, $60 million in the expected case and $114 million in the worst case. The chief credit officer and others prepared the spreadsheet at the chief executive’s request. It reached the chief executive and president, but the complaint says it did not feed into the allowance and provisions reported for the first or second quarters of 2009.

The warnings about the loan-loss allowance and repossessed property were direct. Before the annual filing, the special assets executive sent management this email, quoted in the Commission’s complaint:

The complaint alleged that management ignored the email and rejected internal audit’s recommendation for mandatory annual reappraisals of repossessed property. An August memorandum again challenged stale collateral values and delaying losses into later quarters. According to the complaint, the chief executive and president learned of that memorandum, made no correction and subsequently gave the disclosure committee assurances that the statements contained no material misstatements or omissions.

A Loan-Loss Worksheet Disappeared Before Audit Review

The separate complaint against the chief credit officer shows how contrary evidence allegedly disappeared from the auditor’s view. For the Mansions at Canyon Creek condominium loans in Kansas, the special assets executive prepared a worksheet recommending a $5.8 million charge-off. The complaint alleged that the chief credit officer overruled the impairment decision and the worksheet was deleted from the final package sent to the outside auditor.

The complaint says he told the special assets executive that he knew the loans were impaired but the bank could not afford the losses. When Office of Thrift Supervision examiners visited, the special assets executive provided the worksheet, and the regulator directed an appropriate charge-off based on a newly ordered appraisal. For someone who prepares or reviews credit files, the difference between the draft worksheet and the package actually sent for review can be the substance of the case.

In the complaint against the chief executive and president, the Commission also alleged that they signed false management representation letters to the auditor. Those letters asserted that required losses had been recorded and denied knowledge of employee allegations of fraud. The complaint alleged that the executives withheld both specific adverse valuation information and the broader loss-scenario analysis.

Updated Appraisals Reached the Public Numbers

The Office of Thrift Supervision required updated appraisals, and TierOne subsequently announced substantial additional losses. It reported an additional $13.9 million provision for the second quarter and said it intended to restate that quarter’s financial statements. It reported a further $120.2 million provision for the third quarter.

The Securities and Exchange Commission reported that TierOne’s stock price fell more than 70% following the loss announcements. Its complaint alleged that recognizing the losses in the proper periods would have put the bank below its required capital ratios as far back as the end of 2008. Investors had been told the bank met those requirements while management allegedly held information showing otherwise.

The Office of Thrift Supervision closed TierOne Bank. The Federal Deposit Insurance Corporation became receiver, Great Western Bank took over the bank’s assets and deposit accounts, and TierOne Corporation filed for bankruptcy.

The Separate Asset-Sale Trading Allegation

The insider-trading allegation concerned confidential negotiations with Great Western Bank, rather than the loan-loss calculation. The Securities and Exchange Commission alleged that the chief executive tipped his son about the proposed sale while negotiating the transaction. The complaint described a confidentiality agreement, a trading blackout for certain officers and directors, and communications between father and son.

According to the complaint, the son bought 209,985 TierOne shares between June and early September 2009 using the confidential information. TierOne announced the proposed transaction on September 4, and its stock closed up more than 45%. The son then sold the shares for alleged profits of approximately $225,921. The transaction records and communications connect who knew about the deal with who traded before investors heard about it.

What the SEC Announced in the Settlements

The Securities and Exchange Commission’s September 25, 2012 announcement said the former chief executive agreed to a $500,921 civil penalty and the former president agreed to a $225,000 civil penalty. Both also agreed to permanent bars on serving as officers or directors of public companies. The son’s settlement required him to give up his alleged trading profits and pay a civil penalty equal to those profits. We see civil penalties that were small beside the losses the bank eventually disclosed.

What Evidence Is Needed for Whistleblowing?

For hidden loan losses, key securities fraud evidence shows the gap between the appraisal management received and the number investors saw. Financial reporting moves through transaction records, estimates, accounting entries, review and officer certifications. We examine that sequence with the person who knows it, including a worksheet changed before audit review or a warning omitted from management’s assurances.

The 2018 Journal of Forensic & Investigative Accounting study The Significance of Whistleblowing as an Anti-Fraud Measure found that whistleblowers detected 35.9% of frauds in its complete-data sample, compared with 21.4% detected through internal controls. In TierOne, the complaint alleged that information reached management without reaching accounting staff or the auditor.

An eligible SEC whistleblower can earn 10% to 30% of the sanctions collected in an action with more than $1 million in monetary sanctions. Where the conduct involves false claims to the government, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know Which Valuation Was Left Out

If you saw a lower appraisal rejected or a loss worksheet removed before review, speak with our whistleblower experts about building your strongest securities fraud whistleblower case. We put your knowledge of the credit files to work, bring in securities fraud whistleblower lawyers who understand accounting and disclosure cases, and stay beside you throughout the case.