Feds find massive fraud at shuttered Bridgeport bank whose prez was found dead

Feds find massive fraud at shuttered Bridgeport bank whose prez was found dead

Feds find major fraud, poor oversight at failed Bridgeport bank whose CEO killed himself

Washington Federal Bank for Savings, 2869 S. Archer, was shut down in December for unsafe or unsound practices days after its president was found dead in an apparent suicide. A federal audit has uncovered an $82.6 million fraud at the bank. | Google Street View

“The manager disclosed that she had been informed by a bank employee that the employee and the banks then-president had been regularly falsifying loan payments for at least 29 loans totaling approximately $68 million in aggregate assets, and had falsified Washington Federals loan trial balance before providing it to examiners,” the report said.

At the time of the banks closing, that accounted for half of Washington Federals total loans of $137 million. The estimated hit to the Federal Deposit Insurance Corp.s insurance fund for depositors as of Sept. 30 was an astounding $83 million, according to the report. Clearly, regulators have found more problems since they quickly closed the bank at the end of 2017. The estimated loss now is up considerably from the $61 million estimate at end of 2017.

The fraud was uncovered Nov. 28, 2017, the report said. Thats when the manager alerted regulators to Gembaras wrongdoing. Five days later, on Dec. 3, Gembara hanged himself. He was found dead at the Park Ridge home of a longtime friend, one of the banks customers, according to the Chicago Sun-Times.

The inspector generals report didnt provide much detail on the nature of the fraud, other than that it went on for years. The Office of the Comptroller of the Currency was the thrifts regulator.

There were numerous red flags indicating things were amiss at Washington Federal, but regulators for years overlooked them. Part of the problem was that the thrifts operations were perceived as so basic by regulators that it served as something of a training ground for new bank examiners, according to the report.

“Based on the perception that Washington Federal was a non-complex bank with a low risk profile, OCC considered the bank a good place to assign pre-commissioned examiners to work as first-time (assistant examiners-in-charge) under the supervision of an experienced EIC,” the report said. “A few of the examiners told us that Washington Federal was perceived as a training or practice bank.”

In 2013 and 2014, the examiners leading the review of Washington Federal were examining a bank for the first time, the report said.

Prominent among the red flags cited in the report were that the bank through 2016 documented loans manually rather than through an automated system that regulators expect banks to use.  

One key examiner “told us that the bank did not see a need to upgrade their core processing system because the bank saw itself as a simple, residential lender,” the report said. “He accepted the banks reasoning and did not force an upgrade until 2016.”

Another red flag simply defied common sense: “The bank claimed never to have a credit loss in its 103-year history. Instead of arousing suspicion, examiners used this claim as a positive attribute to support their supervisory strategy, plan the scope of the examinations and assess compliance with agency policy,” the report said.

One party that could shed light on the fraud is Washington Federals auditor, Chicago-based Bansley & Kiener. So far, the firm is unwilling.

So the FDIC in August sued Bansley & Kiener over its refusal to cooperate in that agencys investigation of the failure. The auditor is fighting the FDICs subpoena for records pertaining to Washington Federal, deriding it in court filings as “an unwarranted fishing expedition” aimed at eventually suing the firm for damages.

Have something to get off your chest? You can send us an email. Or tell us on our Facebook page or on Twitter, @CrainsChicago.


Posted in Bridgeport