Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, May 16, 2007

Four Defendant Settle SEC Charges on Bank Conversion Fraud

This is the first I've heard of this brand of securities fraud:

The Securities and Exchange Commission today charged a former Wall Street executive and three other individuals with securities fraud for perpetrating a decade-long scheme to defraud savings banks and their depositors in connection with the banks' conversion from mutual to stock ownership.

The SEC's complaint alleges that Bert Fingerhut spearheaded a sophisticated scheme to circumvent federal and state banking regulations in order to make lucrative stock purchases in bank conversions. From January 1997 through January 2007, Bert Fingerhut's scheme generated a total of more than $12 million in fraudulent profits from secondary market sales of bank stock illegally obtained in 65 public offerings. The other three defendants were nominees for Bert Fingerhut who knowingly played active roles in implementing the scheme and profited from their efforts.  The complaint alleges that the defendants made numerous misrepresentations in stock subscription agreements and order forms to carry out their fraudulent scheme. All four of the defendants have agreed to settle the SEC charges.

Mark K. Schonfeld, Director of the Commission's New York Regional Office, said, "When banks convert from mutual ownership by their depositors to stock ownership by shareholders, the depositors are supposed to get first priority to purchase stock. Here, the defendants defrauded banks and depositors around the country and, in effect, jumped ahead of that line. As a result, they lined their pockets with money that should have gone to legitimate depositors. Spanning 10 years and 65 stock offerings, this is the most extensive bank conversion fraud we have ever seen."

David Rosenfeld, Associate Regional Director of the New York Regional Office, said, "The conduct in this case was particularly egregious. The defendants ran this scheme as a shrewdly calculated business enterprise, serially defrauding banks and reaping millions in illegal profits at the expense of innocent depositors."

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