Wednesday, April 24, 2013
The SEC charged Capital One Financial Corporation and two senior executives for understating millions of dollars in auto loan losses incurred during the months leading into the financial crisis. Capital One agreed to pay $3.5 million to settle the SEC’s charges. The two executives – former Chief Risk Officer Peter A. Schnall and former Divisional Credit Officer David A. LaGassa – also agreed to settle the charges against them.
An SEC investigation found that in financial reporting for the second and third quarters of 2007, Capital One failed to properly account for losses in its auto finance business when they became higher than originally forecasted. The profitability of its auto loan business was primarily derived from extending credit to subprime consumers. As credit markets began to deteriorate, Capital One’s internal loss forecasting tool found that the declining credit environment had a significant impact on its loan loss expense. However, Capital One failed to properly incorporate these internal assessments into its financial reporting, and thus understated its loan loss expense by approximately 18 percent in the second quarter and 9 percent in the third quarter.
Capital One’s material understatements of its loan loss expense and internal controls failures violated the reporting, books and records, and internal controls provisions of the federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20 and 13a-13. Schnall and LaGassa caused Capital One’s violations of Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rule 13a-13 thereunder and violated Exchange Act Rule 13b2-1 by indirectly causing Capital One’s books and records violations.
Schnall agreed to pay an $85,000 penalty and LaGassa agreed to pay a $50,000 penalty to settle the SEC’s charges. Capital One and the two executives neither admitted nor denied the findings in consenting to the SEC’s order requiring them to cease and desist from committing or causing any violations of these federal securities laws.