Two former executives of Franklin Bank Corp., a now-defunct lender started by the mortgage bond pioneer Lewis Ranieri, have been accused of hiding losses during the final days of the company.
In a complaint filed Thursday in US District Court in Texas, the Securities and Exchange Commission accused Anthony J. Nocella, Franklin’s former chief executive, and J. Russell McCann, the bank’s former chief financial officer, of misstating the health of their company during the financial crisis, when a series of mortgage loans on the bank’s books went sour and it struggled to stay afloat.
According to the SEC’s complaint, the two executives “engaged in a disclosure and accounting fraud that misled investors about Franklin’s financial condition and concealed the extent of its exposure to loan delinquencies.’’ Franklin, which was based in Houston, declared bankruptcy in 2008.
Loan modification programs were at the center of the SEC’s complaint.
“Nocella and McCann used the loan modification scheme like a magic wand to change nonperforming loans into performing assets,’’ Robert Khuzami, the agency’s enforcement director, said in a statement accompanying the charges. Khuzami added that the executives had “misled investors into believing that Franklin was outperforming other banks during the height of the financial crisis.’’
Barrett H. Reasoner, a lawyer for McCann, said his client believed the claims against him “don’t have any merit.’’ Reasoner said the evidence in the case was “contrary to what the SEC has pled.’’
In an e-mailed statement, James G. Munisteri, a lawyer for Nocella, said the SEC had “made a seriously wrong decision in alleging this claim, and we believe confidently that Nocella will be vindicated.’’
The SEC says McCann and Nocella used the modification programs - with names like “Fresh Start’’ and “Great New’’ - to falsely classify delinquent loans as healthy in 2007.
At one point, Ranieri, who then was chairman of Franklin, spoke with Nocella and another executive to discuss a “$6 million shortfall in loan modifications,’’ according to the SEC. The agency said Ranieri, who was not charged with wrongdoing, was “furious’’ that the modifications had been overstated.