Former EagleBank CEO Ron Paul Banned From Banking, Fined Over Improper Real Estate Loans
Bethesda-based EagleBank was fined $9.5M by the Federal Reserve Board after an investigation found it violated banking regulations by giving real estate loans to its founder and former CEO, Ron Paul, the central bank announced Tuesday.
In a concurrent release, the U.S. Securities and Exchange Commission announced it has charged both EagleBank and Paul with making false and misleading statements with regards to the loans, omitting them from the bank's listed of related party transactions in its annual report.
Paul and EagleBank settled the charges with both agencies, and Paul has agreed to be permanently barred from the banking industry, restricted for two years from holding any board or officer positions with SEC-registered companies and ordered to pay $521K in fines. He didn't accept or deny the charges as part of the settlement.
The investigations were kicked off in 2017 when short seller Aurelius Value released a report accusing EagleBank of an insider loan scheme.
“Adequate disclosures of related party transactions are essential to enable investors to evaluate an issuer’s corporate governance,” Sanjay Wadhwa, the deputy director of the SEC’s Enforcement Division, said in a statement. “Here, faced with a short seller’s report alleging undisclosed related party loans by the bank, both Eagle and Paul failed to respond truthfully and accurately.”
In total, EagleBank has agreed to pay $22.9M as a result of the violations — $9.5M to the FRB and $13.4M to the SEC. It didn't admit or deny wrongdoing in the SEC of Federal Reserve settlements.
“We are pleased that the SEC and FRB 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, DC region,” EagleBank CEO Susan Riel said in a statement.
The FRB determined that EagleBank didn't have sufficient internal controls when it provided loans to two family trusts and a real estate development company owned by Paul. Paul was also the president of Ronald D. Paul Cos., a development firm with a number of apartment and office projects around the D.C. area, a handful of which were financed with loans from EagleBank.
In its order of assessment, signed by EagleBank Chief Legal Officer Paul Saltzman, the Fed found that the bank extend $99M in credit to Paul’s firms between 2015 and 2018 without approval from a majority of the bank’s directors, violating Regulation O of federal banking law.
"EagleBank suffered from internal control deficiencies, including deficiencies related to the supervision of lending staff, which permitted the Bank’s then-CEO to engage in conflicts of interest," a release from the Federal Reserve Board stated.
EagleBank's stock was $66.15 the day the Aurelius Value report was released, and dropped 24% by the time markets closed.
While the bank's stock has recovered, reaching a three-year high of $63.84 in January, it has never surpassed its pre-report valuation. It has continued to run as a profitable enterprise; its net income was $25.2M in the second quarter, a total that includes the SEC fine.
After the short seller report, EagleBank General Counsel Laurence Bensignor vigorously denied the Aurelius claims, calling it “a multipronged attack with a purpose of making money on the drop in stock in an interview with Bisnow.
An analyst said at the time it kept its "buy" rating on the bank's stock because conversations with the bank's executives assured him that the allegations that the bank was improperly lending to Paul's companies were false.
"Eagle and Paul falsely stated in press releases, news articles, and meetings with investors that the trust loans were not related party loans and that Eagle was in compliance with all related party loan requirements," the SEC's release said.
Bensignor retired and was barred last year from working in the banking industry after the Federal Reserve Board found he had participated in insider lending while in his position at EagleBank. Paul stepped down from the bank he founded in March 2019, citing health reasons, only for the bank to admit it was facing ongoing government investigations later that year.
Former Chief Operating Officer Riel stepped in as CEO following Paul's departure, and remains in the position today. On the financial institution's earnings call on July 21, she acknowledged the SEC fine and said Eagle Bancorp had also been in advanced discussions with the FRB.
"We are pleased to have reached an agreement in principle with the SEC," Riel said on the call. "While this negatively impacted our earnings this past quarter, it represents a major step for us moving past a legal issue."
The SEC and FRB said in their releases that EagleBank fully cooperated with the investigations.