Bank of New England Corp. yesterday settled a civil fraud suit with securities regulators, who had charged the giant Boston bank with hiding its loan losses and deceiving holders of its stocks and bonds.
The settlement with the Securities and Exchange Commission had been long awaited by the banking, insurance and brokerage industries, which are under increasing pressure from the SEC to fully disclose loan troubles to the public in a timely fashion.
"I hope the action would have an effect on other institutions," said SEC Chairman Richard Breeden, especially those trying to raising money from investors at the same time they have undisclosed bad loans in their portfolios.
According to Breeden, more than 1,100 thrifts and banks have failed in the last five years, at a loss exceeding $8 billion for thousands of shareholders.
The 150-year-old Bank of New England was the second-largest bank in New England until this year, when massive losses caused by problem loans forced the bank to sell a number of its divisions and other assets. Still, the bank is teetering on the brink of insolvency and has been working with regulators to avoid a federal takeover.
Without admitting or denying guilt, Bank of New England Corp. agreed to correct its financial statement for the third quarter of 1989 and refrain from future violations of the sort the SEC alleged in the suit.
In that third quarter statement for 1989, the SEC charged, the bank company knowingly included false information that vastly understated its loan losses at the very time it was selling $250 million in bonds to the public. Several months later, the bank announced it was increasing its reserve against loan losses by more than $1 billion, the first public indication of serious financial difficulties.
The SEC suit charged that the company should have acted months earlier, before the bond offering in September. The SEC also said the company should have warned shareholders in the spring and summer of 1989 about how the company's profits might be hurt by the economic slump in New England, particularly in the real estate market.
The settlement included no fines because, at the time the alleged violations occured, the SEC had no authority to impose monetary penalities for anything other than insider trading violations. As of Oct. 15, however, Congress gave the SEC the power to fine companies up to $500,000 and individuals up to $100,000 for every disclosure violation.
The Bank of New England suit is the first loan-loss disclosure case the SEC has brought since it formed a special bank and thrift enforcement unit a year ago.
"It's a significant case and to some extent sends a message to publicly held holding companies of banks that financial statements have to be accurate," said William McLucas, director the SEC's division of enforcement.
The SEC's new get-tough attitude on disclosure by financial institution has increasingly put the agency at loggerheads with bank regulators, who traditionally have preferred to deal with bank problems behind closed doors to maintain confidence in the banking system.
"Obviously, we care a great deal about public confidence in the banking system," Breeden said yesterday. "We don't believe public confidence is increased by allowing billions of dollars in losses by shareholders who may have incurred the losses on false information."
The settlement could bolster a class-action suit brought in March against the company alleging it misrepresented its financial position to the detriment of investors.
"I'm sure plaintiffs' lawyers and shareholders take a look at these things," McLucas said.
"We're pleased we were able to arrive at a satisfactory settlement with the SEC and that we can put this matter behind us," a bank spokesman said. "The SEC settlement has no effect on the company's current business operations and will in no way interfere with our ongoing affairs."
Bank of New England shares fell 25 cents to close at $1 a share on the New York Stock Exchange yesterday.
In a related matter, holders of Bank of New England bonds announced yesterday they have reached an agreement among themselves on a proposal that would give them 92 percent ownership of Bank of New England and infuse $605 million in new capital into the company.
But the spokesman said the bondholder agreement had not yet been presented to the company.
The debt plan was hailed by its investment bankers as a way to avoid a Federal Deposit Insurance Corp. bailout, but analysts cautioned that even if the offer succeeds, the federal government may still have to step in and rescue the bank.