A Virginia developer pleaded guilty late last week to engaging in a $41 million bank fraud that contributed to the failure of the Bank of Commonwealth.
Eric Menden confessed to conspiracy to commit wire fraud, making false statements and conspiracy to commit bank fraud, said the Office of the Special Inspector General for the Troubled Asset Relief Program.
Starting in January 2008 through August 2011, Menden admitted that he and a business partner, George Hranowskyj, conspired with Bank of Commonwealth insiders to purchase underperforming bank-owned properties in exchange for preferential lending treatment.
For example, the insiders would advance loan proceeds to the two men to facilitate the purchases of these nonperforming REO assets, which the Bank would later write off at significant losses.
During a foreclosure auction, both Menden and Hranowskyj placed bids up to a certain price on the REO properties so the bank could pay off the underlying loan for these assets. In one case, the bank funded more than $900,000 to facilitate this type of transaction, but found out that the building had no “useful life,” causing the bank to charge off more than $500,000 of this loan as a loss.
Additionally, Menden said he also purchased properties owned by a bank insider through loans created by other insiders involved in this scheme to complete the transactions. In these instances, the bank employee was either no longer liable for large loans or made a profit on the sale.
Similar to the other loans given to Menden and Hranowskyj, the bank eventually was required to charge off these loans at a considerable loss.
“Menden’s scheme helped insiders at the Bank of Commonwealth fraudulently conceal the extent of the bank’s nonperforming assets, contributed to the bank’s eventual collapse and ultimately had an impact on everyone in the community who relied on the bank,” said Christy Romero, special inspector general of SIGTARP.
According to Romero, Menden and his business partner owed the bank about $41 million at the time of its failure on Sept. 23, 2011.
In November 2008, Bank of Commonwealth requested approximately $28 million from the TARP. But Bank of Commonwealth withdrew its application because the Federal Reserve had concerns about the overall health of the bank.
Bank of Commonwealth reached an agreement with the Federal Reserve in July 2010 that prohibited it from extending, renewing or restructuring any loans to specific troubled borrowers, including Menden and Hranowskyj. Despite this agreement, bank insiders continued to sell nonperforming REO properties to the developers.
Brian MacBride, U.S. attorney for the Eastern District of Virginia, said Menden used his relationship with Bank of Commonwealth insiders to use the bank as his own personal ATM.
“He raked in millions telling lies to get loans, secure funding from investors and defraud state and federal tax authorities,” MacBride added.
