MEMORANDUM AND ORDER
JOSEPH F. BATAILLON, District Judge.
This matter is before the court on the defendant's motion to dismiss for failure to state a claim, Filing No. 16. This is an enforcement action brought by the Securities and Exchange Commission ("SEC") for securities violations under the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78a et seq. In the complaint, the SEC alleges that defendant Don A. Langford, former chief credit officer and a senior vice-president at TierOne Bank, performed a number of deceptive acts in order to further a scheme to defraud investors.
The facts alleged in the SEC's complaint involve the receivership and eventual closure of TierOne Bank (hereinafter referred to as "TierOne" or "the Bank") in Omaha, Nebraska. In a detailed 30-page complaint, the SEC alleges that, as the chief credit officer and a senior vice-president, Langford played a dominant role in a scheme to hide millions of dollars of loan losses from the Bank's regulators, auditors and the investing public. Specifically, the SEC alleges that the defendant participated in a scheme to defraud; aided and abetted TierOne's fraud; violated various books, records, and reporting requirements; deceived TierOne's auditors; and aided and abetted TierOne's false SEC filings and false books and records.
TierOne Bank had traditionally been a thrift bank focused on residential and agricultural loans in Nebraska, Iowa and Kansas. Filing No. 1, Complaint at 1. Beginning in about 2004, the Bank expanded beyond its traditional borders and began making riskier loans to real estate developers in Las Vegas, Florida and Arizona. Id. When real estate prices plummeted in 2008, many of the loans had faltered or were faltering. Id. at 5. In June 2008, the Office of Thrift Supervision ("OTS") conducted a periodic examination of TierOne and reported significant concerns with the Bank's management and financial condition. Id. at 5. As a result, the OTS directed TierOne to maintain higher capital ratios. Id. The SEC alleges that Langford and other senior executives then began a scheme to manipulate and materially understate TierOne's losses. Id. at 2, 6.
The SEC alleges that TierOne was required to report losses on loans if the value of the underlying collateral (i.e., the underlying real estate project) dropped below the book value of the loan and to record the value of real estate repossessed by the Bank- called Other Real Estate Owned, or OREO-at the property's fair value. Id. at 2, 6-7. It alleges that declines in value generally required the Bank to report a loss. Id. at 7. Under Generally Accepted Accounting Principles ("GAAP"), TierOne was required to use all current, relevant information to value the collateral or OREO property. Id. Generally, an increase in loan or OREO losses would drive the Bank's capital ratios down, which meant TierOne would be closer to falling below the OTS-mandated levels. Id. at 6. The SEC alleges that TierOne's management, including Langford, "intentionally delayed the process of obtaining current appraisals for properties that had declined in value, relying instead on inaccurate data and assumptions." Id. at 7.
The SEC alleges that Langford was part of an informal committee that evaluated the Bank's impaired or potentially impaired loans, which were documented in spreadsheets that contained estimates of the value of the collateral underlying the loans and loan impairment determinations (the "impaired loan templates"). Id. at 7-8. Langford was central to the scheme in that he managed the Bank's loan and OREO valuation process. Id. at 6-8. He was directly involved in the preparation of the so-called "impaired loan templates" that contained purported valuation estimates, and allegedly falsified the templates that were provided to the Bank's outside auditors. Id. at 6-7, 25. It contends that Langford played a key role in a scheme to inflate collateral values, hide loan losses, and thereby falsely report-to the regulators as well as the investing public-that TierOne was in compliance with the OTS-mandated capital ratios. Id. at 13-16. The SEC alleges that Langford's conduct in this regard included: "(1) ignoring new appraisals; (2) failing to obtain updated appraisals of collateral and OREO even when observable market conditions established that there was substantial deterioration in value since the last appraisal; (3) masking problem loans by extending additional credit to establish interest reserves (extend and pretend'); and (4) failing to properly evaluate loans for impairments." Id. at 9.
The SEC outlines several specific actions that Langford allegedly performed to further the scheme. Id. at 13-18. In the summer of 2008, Langford refused to sell an OREO property (Gemm Homes) at a significant loss because, in Langford's words, "we no longer have the luxury of hitting the loan loss reserves." Id. at 10. He voiced that concern within one week of meeting with OTS to discuss the Bank's loan losses. Id. Later, in the fall of 2008, Langford fired an employee who requested an appraisal on an OREO property that showed the Bank should have taken an $800, 000 loss, and he refused to take the write-down. Id. at 12. Langford then allegedly helped to extend millions of dollars in additional credit to a delinquent borrower without a new appraisal- in violation of TierOne's lending policy-despite stating he was "bewildered" that the property was worth "even half of what we're being told it's worth." Id. at 15.
The SEC alleges that Langford's actions allowed the Bank to mask delinquency of loans, thereby delaying the recognition of any additional loss. Id. at 15-16. In September 2008, Langford refused to accept an offer on property stating that "[w]e have a 2008 appraisal which would allow us to... hold at our current reserved position and that's all we can afford until we earn our way out." Id. at 13. The SEC alleges that in connection with that property, although he knew of significant deterioration in the value of the collateral, he did not order new appraisals for the properties, nor take into consideration the estimates of a Las Vegas workout consultant's estimates in preparing the impaired loan templates for those loans. Id. at 13.
In early 2009, Langford disregarded a new appraisal on the certain property that would have resulted in a $1.8 million write-down, in spite of warnings from the Bank's special assets executive. Id. at 11. Further, the SEC alleges that Langford continued using a four-year-old appraisal to value a major, $30 million Las Vegas loan during the first and second quarters of 2009, despite acknowledging that an updated appraisal would show the Bank was "wildly deficient on collateral, " and despite being informed of an updated valuation showing the property was likely worth only half the loan amount. Id. at 13-14. Also, the SEC alleges that in the spring of 2009, Langford deleted an impairment loan template showing a delinquency that would have required a $5.8 million write-off and told TierOne's special assets executive that he knew certain loans were impaired, but that the Bank could not afford the losses that would result from that determination. Id. at 17. In addition, the SEC alleges that Langford failed to include critical information about collateral values in the Bank's impaired loan templates even though he knew those inaccurate templates would be provided to TierOne's external auditors. Id. at 7-8.
The SEC also alleges that Langford failed to inform TierOne's accounting staff or external auditors of current, relevant valuation information on a number of loans and OREO properties. Id. at 11, 13-15, 16. It also alleges that Langford did nothing in response to an email in February 2009 from the Bank's special assets executive that expressed concern about the use of outdated appraisals, listed stale appraisals, and informed Langford that "astronomical" write-downs would result from properly valuing the loans. Id. at 19. The special assets executive asked, "In good conscience how long can we continue to believe these [loans] are properly reserved?" Id. Several months later, the special assets executive again wrote to Langford, reiterating the concern that the Bank "refuse[d] to update collateral valuations, out of the fear of what impact these actions may have on reserve levels, " and explicitly expressing fear that the Bank was "misleading the public." Id. at 20-21. The SEC alleges that Langford took no action to correct the loan and OREO losses in TierOne's financial statements, nor did he forward the email to TierOne's accounting staff or outside auditors. Id. Also, he made no mention of the troubling email at the Sarbanes-Oxley (SOX) Committee meeting three days later, when he provided positive assurances to the committee that no one believed the financial statements contained material misstatements or omissions. Id. at 21.
Further, the SEC alleges that Langford played a major role in developing an internal estimate of losses embedded in TierOne's loan portfolio, but did not disclose that estimate to auditors or regulators. Id. at 19. Langford's initial analysis indicated the Bank needed an additional $65 million in loan loss reserves; a refined analysis, entitled the "Best/Worst Case Scenario, " showed losses ranging from a "best case" of $36 million to a "worst case" of $114 million. Id. at 19-20. The SEC alleges that Langford did not incorporate his Best/Worst Case Scenario figures into the impaired-loan templates, or share those figures with the Banks' accounting staff or external auditors. Id. at 20. The Bank's outside auditors resigned when they learned the analysis had been withheld. Id.
The SEC also alleges that Langford's role in the scheme to defraud the regulators is shown in emails in the spring of 2009, including one that stated "I've been telling people around here for months now that this unwillingness/inability to admit what appears to be a reality must come to an end with new appraisals in hand before the regulators show up in October." Id. at 22. When the OTS ultimately required TierOne to update its appraisals, the appraisals revealed more than $130 million in loan losses. Id. at 23. TierOne was shut down by the OTS in June 2010, and filed for bankruptcy later that month. Id. The SEC further alleges that as a result of the scheme to defraud, TierOne issued financial statements that were materially misstated in several public filings. Id. at 23-25.
The SEC asserts seven claims against Langford: (1) violations of Section 10(b) and Rules 10b-5(a) and (c); (2) aiding and abetting violations of Section 10(b) and Rules 10b-5(a) and (c); (3) Violations of Section 13(b)(5) of the Exchange Act, 15 U.S.C. § 78m(b)(5)-Circumvention of Internal Controls and Falsified Books and Records; (4) violations of Exchange Act Rule 13b2-1, 17 C.F.R. § 240.13b2-1-Falsified Books and Records (Fourth Claim for Relief); (5) violation of Rule 13b2-2 of the Exchange Act, 17 C.F.R. § 240.13b2-2-Deceit of Auditors; (6) violations of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13, 15 U.S.C. § 78m(a) and 17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a-11, and 240.13a-13-Aiding and Abetting False SEC Filings; and (7) violations of Section 13(b)(2)(A) of the Exchange Act, 15 U.S.C. § ...