Monday, May 28, 2007

Sterling Financial Uncovers Fraud

Sterling Financial Corporation, which owns banks in Pennsylvania, disclosed that an internal investigation uncovered a loan fraud scheme at its equipment leasing division.  The company had disclosed on April 30 that its financial statements were no longer reliable, and the reason now is clear.  According to the company's 8-K (here):

[The company] has been conducting an investigation into financing contract irregularities at its financial services group affiliate, Equipment Finance LLC ("EFI"). As of this date, the preliminary results of that investigation have revealed evidence of a sophisticated loan scheme, orchestrated deliberately by certain EFI officers and employees over an extended period of time, to conceal credit delinquencies, falsify financing contracts and related documents, and subvert the Corporation's established internal controls and reporting systems. (Italics added)

The company terminated five officers from the subsidiary, including its chief operating office and a vice president.  The company's stock took a significant hit from the disclosure, dropping 35%, and it disclosed that the fraud would result in a charge of $145 million to $165 million, causing it to suspend its dividend.  A press release (here) from Sterling Financial states that it "is working closely with its regulators and all appropriate federal authorities on the ongoing investigation."  Needless to say, federal prosecutors will be on the scene very quickly to pursue a fraud case. (ph) 

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