NY-area bank sued for allegedly hiding risky real estate loan information
Smithtown Bancorp, one of the largest independent banks in the New York area with $2.7 billion in assets, is facing a class action suit by shareholders for allegedly hiding information about risky construction and real estate loans that eventually led to intervention by federal and state bank regulators.
The bank was forced at the end of January to sign agreements, called consent orders, with the Federal Deposit Insurance Corp. and the New York State Banking Department, to reduce the amount of commercial loans and improve its loan underwriting policies or face further regulatory action, including potential seizure of its assets.
The complaint, filed in U.S. District Court for the Eastern District of New York, alleges that the bank provided false and misleading information about the performance of its lending business and real estate assets, causing company stock to soar on the NASDAQ markets. The complaint referenced press releases and other statements where the bank claimed to be outperforming rival banks during the real estate boom and even after the capital markets collapsed in September 2008.
“Defendants’ false and misleading statements had the intended effect and caused SBI common stock to trade at artificially high levels throughout the class period, trading as high as $24.50 per share on Sept. 29, 2008,” the plaintiffs alleged.
By Feb. 2, 2010, the bank’s stock price fell as low as $4.16 a share.
The lead plaintiff in the case, filed in U.S. District Court in Long Island, was the Waterford Township Police and Fire Retirement System, which owned stock in the Hauppauge, L.I.-based bank holding company. Lawyers for the plaintiffs say they expect thousands of investors to join the class.
The bank’s troubles have had an impact on Manhattan real estate. The bank loaned $7.9 million for an Upper East Side townhouse owned by Grant Grieve, a South African hedge fund manager, according to the Wall Street Journal, in its Feb. 19 edition. His fund, Finvest Asset Management, guaranteed the loan.
Grieve was sued last year by the Securities and Exchange Commission, however, for allegedly defrauding customers of $80 million. Government officials told the Journal that he is believed to have fled the U.S. for Israel.
The Journal said the bank reported $130 million in nonperforming loans in 2009 and had its first quarterly loss since 1990, when bank chairman and chief executive Brad Rock first took over.
Rock was once a leading voice in the lending industry, serving as chairman of the American Banking Association from October 2007 to November 2008.
“Notwithstanding our fourth-quarter loss and the consent agreement, we believe we have made the decisions necessary to provide the company with the foundation to return to profitability,” said Rock, in a statement issued with the Feb. 1 earnings report.
After raising $28 million in a public stock offering in May 2009, the company’s main subsidiary, Bank of Smithtown, continued a rapid expansion in Long Island, opening branches in West Hempstead, Great Neck, Deer Park, Babylon and other locations. In December, the bank announced that Tom Stevens, one of the loan officers responsible for construction lending, had resigned.
Samuel Rudman, the attorney for the plaintiffs, was not immediately available for comment and nor were Smithtown Bancorp officials.