Wilmington Trust headquarters in Delaware. Photo Credit: Photo: RevelationDirect via Wikimedia Commons

The long-awaited Wilmington Trust criminal trial is finally underway in a Delaware federal court, as federal prosecutors last week made their case that four of the bank's former top executives orchestrated a scheme to hide hundreds of millions of dollars in bad loans from regulators and investors.

Meanwhile, a group of Delaware's most high-profile defense lawyers maintain that prosecutors are unable to prove a central charge underlying the case: that former president Robert V.A. Harra, CFO David Gibson, chief credit officer William North and Kevyn N. Rakowski, the bank's controller, engaged in a conspiracy to defraud the United States and make false statements to regulators.

In a May 2015 indictment, attorneys with the U.S. Attorney's Office for the District of Delaware accused the four of concealing the amount of past due loans on its books between October 2009 and November 2010. According to the indictment, Wilmington Trust avoided mandatory disclosures to the U.S. Securities and Exchange Commission and the Federal Reserve Bank by “waiving” matured loans from the reporting requirements for past due loans.

Prosecutors said that by the end of 2009, the bank reported just $10.8 million of the $344.2 million in commercial real estate loans that were past due by 90 days or more, giving investors and regulators a false impression of the Delaware financial institution's health. Under pressure to eliminate the past due and matured loans, the executives hatched a plan to “mass-extend” more than 800 commercial loans worth around $1.3 billion.

Once the public learned the scope of the toxic loans, Wilmington Trust was purchased in a fire sale by M&T Bank in November 2010 for just $3.84 per share—about $9.41 per share less than its value when the bank raised $273.9 million in a public offering nine months prior, according to the indictment.

Wilmington Trust's former chairman and CEO Ted Cecala was never charged, but the bank itself became the first financial institution to face criminal charges in connection with the federal government's Troubled Asset Relief program.

Wilmington Trust reached a $60 million settlement with prosecutors last October, just as the trial before U.S. District Judge Richard G. Andrews of the District of Delaware was set to begin.

The individual defendants maintained their innocence and deny that a conspiracy ever existed. The defense team, which includes Bartholomew J. Dalton and McCarter & English chairman Michael P. Kelly, argues that the loan waiver practice was common in the industry and no secret to regulators.

In order to prove conspiracy, prosecutors will have to show that the defendants agreed to interfere with government oversight of the bank and committed overt acts to further the scheme.

Prosecutors point in court documents to a series of emails from the executives detailing the bank's practice of extending matured loans, instead of marking them as past due, and their desire to keep it hidden.

On March 15, prosecutors asked Andrews for permission to introduce additional evidence that senior management “pushed back” against recommendations to downgrade the bank's ratings for commercial loans, after the defense opened a line of questioning with a witness about interactions with the defendants and federal regulators.

According to court documents, Martin Infanti, who was hired in 2008 to oversee Wilmington Trust's commercial credit review department, responded that “Harra never discouraged” him from performing his job with integrity. The testimony, prosecutors said, had given the jury the false impression that the defendants “did not interfere with the integrity of the loan review function.”

“The government now seeks to correct that misimpression by providing the jury with evidence that defendant Harra compromised the independence of the loan review function,” they said in a court filing. “Based on Mr. Infanti's prior sworn testimony, the government expects that he will testify that defendant Harra “pushed back” on risk rating and nonaccrual decisions to a level where Mr. lnfanti felt compelled to inform federal regulators.”

Kelly, who represents the executives, responded that the questioning had nothing to do with the supposed “push back” against recommended ratings' downgrades of commercial loans. The issue, Kelly said, had already been decided in the pretrial phase, and could not be revisited.

“The government is again seeking to impermissibly 'backdoor' irrelevant and unfairly prejudicial evidence about a 'bad bank' run by 'bad' people with a propensity to engage in
wrongdoing,” he wrote.

“This door was sealed shut pretrial and cannot be reopened now.”