While much of the global financial crisis was driven by turmoil in the U.S. subprime housing market, today the U.S. Securities and Exchange Commission (SEC) settled charges with Capital One Financial Corp., and two former executives, over allegations that it understated millions of dollars in auto loan losses.
The SEC said its investigation found that Capital One failed to properly account for losses in its auto finance business in the second and third quarters of 2007 when they became higher than originally forecasted. It says that as credit markets began to deteriorate, Capital One’s internal loss forecasting tool found that the declining credit environment had a significant impact on its loan loss expense. However, it says the firm failed to properly incorporate these internal assessments into its financial reporting, and understated its loan loss expense by approximately 18% in the second quarter and 9% in the third quarter.
Capital One agreed to pay $3.5 million to settle the SEC’s charges. Former chief risk officer, Peter Schnall, and former divisional credit officer, David LaGassa, also agreed to settle the charges against them relating to oversight failures. Schnall agreed to pay an $85,000 penalty and LaGassa agreed to pay a $50,000 penalty to settle the charges. They neither admitted, nor denied, the findings in consenting to the SEC’s order, which also requires them to cease and desist from any violations of federal securities laws.
“Accurate financial reporting is a fundamental obligation for any public company, particularly a bank’s accounting for its provision for loan losses during a time of severe financial distress,” said George Canellos, co-Director of the SEC’S division of enforcement. “Capital One failed in this responsibility by underreporting expenses relating to its loan losses even as its own internal forecasting tool had signaled an increase in incurred losses due to the impending financial crisis.”