EagleBank was penalized $23M for unethical lending and disclosure practices

Approximately $90 million was improperly lent to family trusts managed by the bank's former chief executive officer over the course of three years, and the bank and its holding company, based in Maryland, agreed to pay nearly $23 million in penalties as a result. Additionally, the bank misled investors about the loans.

The Federal Reserve Board fined Eagle Bancorp, the parent company of EagleBank, $9.5 million on Tuesday for breaking the board's rules against insider lending. The bank agreed to pay the Securities and Exchange Commission an additional $13.4 million to resolve the accusations (SEC).

When EagleBank failed to inform investors of the existence of the loans, the SEC claimed that it had violated the federal securities laws' negligence-based antifraud, proxy, reporting, books and records, and internal accounting controls requirements. The government added that the bank misrepresented the loans after its unethical lending practices were revealed by a short seller.

The Fed also took two enforcement actions against EagleBank and permanently prohibited former EagleBank CEO Ronald Paul from working in the banking sector. He consented to a two-year suspension from his duties as an officer or director in addition to paying a total of almost $521,000 in fines and penalties.

The Southern District of New York U.S. District Court still needs to approve the terms of the SEC's settlement with Paul. Paul, EagleBank, and Eagle Bancorp did not concur with or refute the findings of the agency.

Laurence Bensignor, the former general counsel of EagleBank, was prohibited from banking by the Fed in November 2021 as a result of his involvement in EagleBank's "unsafe and unsound lending practices."

Eagle Bank "had deficient internal controls over insider lending practices" between 2015 and 2018, the Fed said in a press release. This "allowed the bank to extend credit totaling nearly $100 million to entities that Paul owned or controlled, including certain family trusts, without making appropriate disclosures to, or obtaining required approvals from, a majority of the bank's board of directors."

The Fed claimed that these failings extended to the bank's lending personnel, who allowed Paul to take part in activities in which he had a conflict of interest. The board also criticized the bank for failing to adequately oversee contracts between it and a local government official due to shortcomings in third-party risk management.

When a short seller accused EagleBank and Paul of unfairly profiting from bank loans at shareholders' cost, it brought to light the improper loans in 2017. In remarks and interviews with the media, EagleBank and Paul reacted by denying the charges.

According to the SEC, EagleBank neglected to disclose the related party loan balances in its annual reports and proxy statements filed with the agency for the years 2015 through 2018. According to the SEC's lawsuit against Paul, the loans were substantial under SEC rules and generally accepted accounting principles (GAAP).

Until March 2019, when it submitted its 2018 annual report, the bank failed not disclose the loans to the SEC. The SEC noted that the audit also revealed "other, previously undisclosed related party loans to Eagle directors and their families."

The SEC claimed that Paul was negligent in failing to disclose these related party loans in filings and statements, and that Eagle's internal controls were insufficient in that they were unable to stop such a disclosure failure.

Susan Riel, CEO of EagleBank, said in a statement, "We are pleased that the SEC and [Federal Reserve Board] have approved the settlements, and we can now put these legacy matters behind us and continue our focus on running one of the most profitable community banks in the Washington, D.C. region."

By fLEXI tEAM