The U.S. Securities and Exchange Commission today charged four individuals with securities fraud for perpetrating a decade-long scheme to defraud savings banks and their depositors in connection with the banks’ conversion from mutual to stock ownership.

The SEC’s complaint alleges that Bert Fingerhut, who worked on Wall Street from 1965 to 1983, spearheaded a sophisticated scheme to circumvent federal and state banking regulations in order to make lucrative stock purchases in bank conversions. It claims that from January 1997 through January 2007, the scheme generated a total of more than US$12 million in fraudulent profits from secondary market sales of bank stock illegally obtained in 65 public offerings.

The other three defendants were nominees for Fingerhut who knowingly played active roles in implementing the scheme and profited from their efforts. The SEC’s complaint alleges that the defendants made numerous misrepresentations in stock subscription agreements and order forms to carry out their fraudulent scheme. The complaint also alleges that two of the defendants acted as undisclosed nominees and used phony identification cards and other documents in order to deceive the banks. All four of the defendants have agreed to settle the SEC charges.

The United States Attorney’s Office for the District of New Jersey has filed criminal charges against Fingerhut for the same conduct. Earlier today, he pled guilty to the criminal charges and, in connection with his guilty plea, agreed to pay a total of US$11 million in forfeiture, representing his own illegal profits from the scheme.

All four of the defendants in the civil case have agreed to settle the SEC charges by consenting, without admitting or denying the complaint’s allegations, to the entry of permanent antifraud injunctions. In addition, they will disgorge their ill-gotten gains, and pay civil penalties of US$270,000. Because Fingerhut has already agreed to forfeit an amount equivalent to his ill-gotten gains in conjunction with his guilty plea in the parallel criminal case, the consent judgment in the SEC case does not require disgorgement of those same ill-gotten gains. The commission’s claims for civil penalties against Fingerhut and one other defendant remains pending.

Mark Schonfeld, director of the commission’s New York Regional Office, said, “When banks convert from mutual ownership by their depositors to stock ownership by shareholders, the depositors are supposed to get first priority to purchase stock. Here, the defendants defrauded banks and depositors around the country and, in effect, jumped ahead of that line. As a result, they lined their pockets with money that should have gone to legitimate depositors. Spanning 10 years and 65 stock offerings, this is the most extensive bank conversion fraud we have ever seen.”

David Rosenfeld, associate regional director of the New York Regional Office, said, “The conduct in this case was particularly egregious. The defendants ran this scheme as a shrewdly calculated business enterprise, serially defrauding banks and reaping millions in illegal profits at the expense of innocent depositors.”