Derivatives Expert Opines on Banking Violations

This case involves a class of shareholders of a large commercial bank, who sought economic damages and alleged that the actions of the defendant, “the Bank”, were not in regulatory compliance. The shareholders maintained that the defendant engaged in derivatives transactions without properly recording their losses, a violation of the banking industry regulations, and was therefore liable for damages. Specifically, the Bank’s accountants (CPA) failed to report on their financial statements multiple derivative’s contracts entered into that ultimately cost the bank hundreds of millions of dollars. The day after news broke that the Bank’s quarterly reports would reflect the substantial losses, their share price plummeted by more than $30, reflecting the market’s panic.

Question(s) For Expert Witness

What regulations are in place to prevent such instances from occurring and what options, if any, are available to the Bank’s shareholders?

Expert Witness Response

Improper reporting on financial statements is taken very seriously by the SEC and the FDIC. Derivatives trading, in particular, has come under much scrutiny after the 2008 financial collapse and is becoming more and more regulated. As such, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was passed to remedy the collapse and provide significant changes to financial regulation in the United States. Some of the reporting requirements in place include rules for when and how derivatives contracts are to be reported by a party and their counterparty. In this case, it appears as though the Bank failed to accurately report its losses from the multiple derivatives contracts where they lost a substantial amount of money, thus attempting to inflate their reported earnings. Information and data needs to be recorded and provided to the appropriate regulatory body (either the SEC or CFTC). Additionally, banks have internal auditing committees that are responsible for catching errors such as this, so more information is needed to determine if any misinformation was intentional. Regarding the shareholders, they can bring a suit against the bank if they are able to demonstrate that the drop in the stock price is connected to the news of improper accounting practices rather than typical market fluctuation. I have over 30 years working in this industry, with 22 years at a large investment bank and 10 years working with the SEC.