Federal Reserve and SEC Jointly Announce Enforcement Actions Against the PNC Financial Services Group, Inc.
July 18, 2002
The Board of Governors of the Federal Reserve System and the U.S. Securities and Exchange Commission on Thursday jointly announced the issuance of administrative actions addressing bank supervisory and securities law-related matters against The PNC Financial Services Group, Inc., Pittsburgh, Pennsylvania, a bank holding company
The SEC action was taken came with respect to accounting improprieties by The PNC Financial Services Group, Inc., a Pittsburgh, Pennsylvania, bank holding company, resulting from transactions with special purpose entities.
The Commission issued a settled Cease-and-Desist Order against PNC. This case is the Commission's first enforcement action resulting from a company's misuse of special purpose entities. The Commission's Order found that, in violation of Generally Accepted Accounting Principles, PNC transferred from its financial statements approximately $762 million of volatile, troubled or under-performing loans and venture capital assets sold to three special purpose entities created by a third party financial institution in the second, third, and fourth quarters of 2001, which resulted in material overstatements of earnings, among other things. The Order stated that PNC should have consolidated these special purpose entities into its financial statements. The Order also found that PNC made materially false or misleading disclosures and statements about these transactions and the consequences of those transactions.
The Board of Governors of the Federal Reserve System (Board) today announced that PNC had entered into a Written Agreementwith the Federal Reserve Bank of Cleveland to address bank supervisory matters. Today's actions by the Commission and the Board are the result of successful coordination between the two agencies, and the Commission acknowledges the substantial cooperation provided by the Board.
The SEC's administrative Order found that in 2001, PNC endeavored to remove approximately $762 million of volatile, troubled or underperforming loans and venture capital investments from its financial statements by transferring them to three special purpose entities that were specially created to receive these assets and in which PNC held a substantial interest. PNC failed to consolidate the special purpose entities on its second and third quarter financial statements filed with the Commission even though the entities failed to meet the requirements under generally accepted accounting principles (GAAP) for non-consolidation. In connection with its improper accounting for its interest in the three special purpose entities, PNC also made materially false and misleading disclosures in certain press releases and in quarterly reports filed with the Commission for the second and third quarters of 2001 about its financial condition, earnings and exposure to the risks of its commercial lending activities.
Among other things, PNC overstated its third quarter 2001 earnings per share by 21.4in its Form 10-Q filed with the Commission for that quarter, and in that Form 10-Q and in its Form 10-Q for the second quarter of 2001, PNC materially overstated the extent to which it was reducing its exposure to commercial lending. These Forms 10-Q were incorporated by reference into registration statements filed with the Commission by PNC in the fall of 2001, in connection with offerings of securities that PNC made, which resulted in the offerings being made with materially improper financial reporting and materially inaccurate disclosure. Further, on January 17, 2002, PNC issued a materially false and misleading press release that, among other things, overstated its 2001 full year earnings per share by 52%. This press release also presented balance sheet information, such as nonperforming assets, that did not include the assets sold to the special purpose entities, even though GAAP required consolidation of those sold assets. In addition, the press release indicated that nonperforming assets sold to the special purpose entities would be consolidated on PNC's bank holding company regulatory reports, without any explanation why they would not be consolidated for GAAP purposes.
"Today's action demonstrates that the Commission will closely scrutinize transactions with special purpose entities," said Stephen M. Cutler, Director of the Commission's Division of Enforcement. "Public companies engaged in transactions with special purpose entities not only must rigorously comply with GAAP, but also must assure that they accurately portray the material elements of the economic risks and realities that they face as a result of these transactions."
PNC consented to the entry of the Order, without admitting or denying the Commission's findings, requiring that it cease and desist from committing or causing any future violations of the anti-fraud provisions of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 and, Sections 10(b), of the Exchange Act of 1934 and Rule 10b-5 thereunder. In addition, PNC is ordered to Cease and Desist from violating Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder.
Source: The Securities and Exchange Commission