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Yet Another Non-FCPA, FCPA Enforcement Action


Thus far this year, the SEC has brought three Foreign Corrupt Practices Act enforcement actions involving alleged foreign bribery.

In the last approximate two months, the SEC has brought at least four FCPA enforcement actions not involving foreign bribery.

Confused? Don’t be.

The FCPA has always been a law much broader than its name suggests. Sure, the FCPA contains anti-bribery provisions which concern foreign bribery. Sure, the FCPA’s books and records and internal controls provisions can be implicated in foreign bribery schemes.

However, the fact remains that most FCPA enforcement actions (that is enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions) have nothing to do with foreign bribery. For lack of a better term, the name non-FCPA, FCPA enforcement actions has long been used on this site.

The latest example is this recent enforcement action against the Bancorp, Inc. (“Bancorp”) “related to misleading disclosures, record-keeping, and internal accounting controls failures concerning Bancorp’s valuations of certain commercial real estate securities.

In summary fashion, this administrative order finds:

“This matter concerns violations of reporting, record-keeping, and internal accounting controls provisions of the Exchange Act by Bancorp. Beginning in the first quarter of 2017 and continuing through the first quarter of 2019 (“Relevant Period”), Bancorp made filings with the Commission in which it reported gains that it received from the sales of loans included in five commercial real estate securitizations (“CRE Transactions”). The CRE Transactions involved the securitization by Bancorp of floating-rate, short-term, transitional commercial real estate (“CRE”) loans. In connection with each of the CRE Transactions, Bancorp obtained a tranche of certificates classified as debt securities (“CRE certificates”) that included two components: principal-andinterest and interest-only (“IO”) components. Bancorp’s reported gain was based on the value that Bancorp assigned to the certificates that it received and, in particular, the IO component of the certificates.

During the Relevant Period, generally accepted accounting principles (“GAAP”) governed the valuation of the CRE certificates and required that they be measured at fair value. Because the initial valuation of each CRE certificate and, specifically, the IO components required the use of what GAAP characterized as “unobservable inputs,” the certificates were categorized as assets measured using level 3 inputs that are significant to the overall measurement (“Level 3” assets). One significant unobservable input was the prepayment rate assumption for the loans that provided the collateral for the CRE Transactions. Bancorp failed to maintain adequate books and records and did not sufficiently incorporate all reasonably available market data in support of these valuations. Bancorp also lacked policies and procedures applicable to its initial valuations of the CRE certificates that were reasonably designed to ensure that those valuations conformed with certain GAAP requirements. Bancorp further omitted and misstated material information related to the certificates and the assumptions that it had used in valuing those certificates in certain of its quarterly and annual financial statements filed with the Commission from the first quarter of 2017 through the first quarter of 2019.”

Based on the above, the SEC found that Bancorp violated, among other things, the FCPA’s books and records and internal controls provisions. Without admitting or denying the SEC’s findings, Bancorp agreed to pay approximately $1.75 million civil penalty.

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