Maureen Milford

The News Journal

A former top level executive at Wilmington Trust admitted Monday in federal court that he conspired with other bank officials to hide the bank's true financial condition from federal regulators, including failing to report loans as past due and extending credit to borrowers so they could make loan interest payments.

Brian D. Bailey, 51, who was the bank's Delaware market manager overseeing lending in the state, pleaded guilty to one count of conspiracy to causing a bank to make a false entry in a report to deceive both the Federal Deposit Insurance Corp. and the Federal Reserve, according to a criminal filing released Monday.

Bailey is the second Wilmington Trust official to plead guilty to a conspiracy at the bank. Joseph Terranova, who headed the Delaware commercial real estate division, pleaded guilty last year to conspiracy to commit bank fraud.

A top executive, Bailey reported directly to the bank's former president, Robert V.A. Harra Jr.

As part of his plea deal, Bailey has agreed to cooperate with the government, including testifying before a grand jury and at a trial.

According to prosecutors, Bailey and others had a practice of not reporting when matured loans were past due to the Federal Reserve. A matured loan is one in which the principal payment is past due and must be repaid in full to the lender unless the bank extends it through a new agreement, the filing says.

Bailey and others at the bank, including Terranova, would cause matured loans to be waived if the loans were current on the interest payment and considered to be in the process of extension, the information alleges. This led to Wilmington Trust not reporting to the Federal Reserve and others the full extent of the past due loans, prosecutors allege.

When asked by U.S. District Judge Richard Andrews about the conspiracy, Bailey said "everyone" in his area was working to extend the maturity of past due loans, including people working "above" and "below" him.

By the end of December 2009, the total amount of matured loans not reported to the Federal Reserve as past due or nonaccrual status because they were listed as "waived" was more than $373 million, prosecutors claim. Of that amount, approximately, $330 million in loans were at least 90 days past due with some up to 1,280 days past due, according to the filing.

Wilmington Trust, a bank founded by du Pont family members in 1903, for most of its history was known for its integrity and soundness, surviving both the Great Depression, several recessions and other banking crises.

But during the residential building boom of the last decade, the bank adopted a disastrous growth strategy that led to significant lending for real estate construction. When the severe economic downturn hit in 2008, the bank was brought to its knees. By October 2010, Wilmington Trust agreed to be taken over by M&T Bank Corp. of Buffalo at a deep discount. It resulted in losses for shareholders, employee job cuts and the end to Wilmington Trust as an independent institution.

U.S. Attorney Charles M. Oberly III said Bailey's guilty plea is "another step forward in bringing to justice individuals whose criminal conduct contributed to the failure of Wilmington Trust."

Christy Romero, special inspector general for the Troubled Asset Relief Program, said Bailey admitted that during the time the bank held taxpayer bailout money, he and others engaged in "criminal 'extend and pretend' and 'delay and pray' schemes to hide hundreds of millions of dollars in non-performing, past-due commercial real estate loans from federal bank examiners in order to conceal the true financial condition of the bank."

In a separate civil action in federal court, investors have accused officers and directors of conspiring to fraudulently conceal hundreds of millions of dollars' worth of past-due and non-performing loans at the bank. According to the lawsuit, top officers at Wilmington Trust knew past-due loans were being misrepresented.

By no later than October 2009, the lack of reporting of past-due loans had become so egregious it had the full attention of the bank's most senior officers, including Harra and former chief executive Ted Cecala, the shareholder lawsuit claims.

The bank and its senior officers then devised a "mass extension" scheme that made 1,250 past due loans "go away," according to the lawsuit. The "mass extension" scheme deliberately excluded more than 800 troubled loans from being reported in the 2009 financial statements, the lawsuit alleges.

According to the shareholders, the bank wanted to "erase delinquent loans" from its year-end financial statements, which the bank then used to raise $274 million from "unsuspecting investors" in the February 2010 stock offering.

Shareholders are asking for their losses to be covered.

Bailey also pleaded guilty to a conspiracy count related to an indictment in February. In that case, prosecutors accused Bailey of scheming with another former bank executive, James A. Ladio, to authorize multiple favorable loans to each other from their separate banks in a reciprocal lending arrangement. Ladio was a founder of MidCoast Community Bank. He pleaded guilty to bank fraud and money laundering in December.

Bailey told Andrews the "gift" to him in that conspiracy was "flexible lending terms" not available to others.

Both conspiracy charges carry a maximum prison term of five years.

Contact Maureen Milfordat (302) 324-2881 or mmilford@delawareonline.com.