bank of oswego sign
The former top two executives of the Bank of Oswego were indicted in June on 27 criminal counts related to their time at the small Lake Oswego bank. Prosecutors contend the pair conspired to hide the true nature of the bank's finances from board directors, shareholders and examiners.
(Randy L. Rasmussen/The Oregonian)
By MOLLY YOUNG and JEFF MANNING
Oregon's staid banking community was rocked last week by the unprecedented criminal indictments of two former top Bank of Oswego officials.
Dan Heine
The case against Dan Heine and Diana Yates appears to be the first in state history to target such senior bank executives. Heine was the Lake Oswego bank's chief executive officer; Yates its chief financial officer.
"It's an anomaly, an aberration," said David Tatman, Oregon's top banking regulator, referring to the charges.
Diana Yates
"Were there some bad loans made (elsewhere)? Sure. But that's a far cry from people engaging in fraudulent loans and subverting the process to achieve their own goals," as Heine and Yates are accused of doing.
As the proceedings against them play out in federal court, many questions remain unanswered about what happened inside their affluent Lake Oswego bank. Also unknown is whether the criminal charges will stop at Heine and Yates.
The 15-page indictment contends the pair conspired for years to hide bad debts from the institution's directors, shareholders, auditors and examiners. Heine and Yates each face one count of conspiracy to commit bank fraud and 26 counts of making false entries in federal reports.
A third former bank officer is also facing federal charges. As it stands, that case is tied to deals that allegedly took place outside the bank.
Among the questions that are still unanswered:
Where were financial regulators?
The Bank of Oswego has stood out from its peers for years. When other local banks pulled back during the recession, it loaned out all the more.
Executives insisted the strategy was a success. They reported low default rates in federal reports and touted a comfortable cash cushion in updates to shareholders.
In the midst of a brutal recession that killed off six Oregon banks, the Bank of Oswego's problem loan numbers from 2008 through 2011 in retrospect seem ridiculously low. But it was September 2013 before federal and state regulators moved against the bank.
The indictment goes on at some length about the Bank of Oswego's "Texas ratio" and how dramatically it contrasted to other Oregon banks.
The ratio measures bad loans against on-hand equity. It indicates the amount of stress a bank is under: the higher the percentage, the greater the financial pressure.
Not surprisingly, the measure skyrocketed at many institutions after 2008. In 2010, the Oregon average was 53.7%, according to the federal indictment. The Bank of Oswego wasn't even in the same realm. Court documents show the bank's nonperforming assets-to-equity ratio never climbed above 6.8 percent between March and December 2010.
READ: Small bank, big problems: Bank of Oswego's bid to outsmart the recession brings in the feds
Regulators did apparently question the Bank of Oswego on a number of occasions. In January 2011, federal examiners raised questions about the bank's accounting standards. At issue was a pair of homes that the bank reacquired from struggling borrowers, then sold to someone else who put no money down. The transactions apparently violated troubled asset reporting rules.
Yet it wasn't until more than two years later that the bank came under more public scrutiny. That's when the Federal Deposit Insurance Corp. and state Department of Finance and Corporate Securities issued a consent decree that required the bank to tighten its internal accounting standards and evaluate its management structure.
Neither the state DFCS nor the FDIC have taken further actions against the bank or any person connected to it.
Does the board of directors face liability?
Bank directors are ultimately responsible for the management and oversight of the bank. Boards can be held liable when banks place shareholder equity at risk. For instance in 2013, the FDIC sued four people who were directors of the failed Columbia River Bank in The Dalles.
It's unclear whether that will happen in this case. The indictment states repeatedly that Bank of Oswego's top management misled its own board of directors.
The bank is overseen by a small board of directors, including two who have served since the institution opened in 2004. That includes current board chair and Oil Can Henry's owner Chris Shepanek and real estate investor Michael Diamond.
Two other directors, Jeffrey Firstenburg and Robert Davison, represent the bank's largest collective shareholder, the Firstenburg family of Vancouver. The bank's new chief executive Steve Andrews is the fifth and final board member.
Heine previously sat on the board, and Yates served as board secretary.
The federal indictment contends Heine and Yates took specific care to hide the bank's real financial picture from the board. Prosecutors appear to place the blame with the executives who prepared the reports.
"The board of directors relied upon the information in these reports regarding the bank's financial condition," the indictment said.
Will other insiders be indicted?
The 27-count indictment makes it clear that other people had a role in the alleged conspiracy -- including a bank employee who made an alleged straw-man purchase and a borrower whose bank loans went to help float other customers.
So far, no other charges have been filed in the case.
Where does this leave Geoff Walsh?
Geoff Walsh
Walsh was a highly productive mortgage officer who booked reams of new loans for the Bank of Oswego after he was hired in 2009. But he was fired in 2012 after the bank uncovered "internal irregularities."
Walsh was later indicted on fraud charges connected to a series of outside deals. The case was stalled for months.
That's not unusual. Federal criminal cases often drag out as defendants negotiate with prosecutors. But this case developed slowly even by federal standards. Nearly two years have elapsed since the initial charges against Walsh.
He has not changed his plea and come to an agreement with prosecutors.
His trial is scheduled for July 28.
What's next?
Unlike Walsh, it's unclear when Heine and Yates will appear again in court.
First, Heine must travel to Oregon from Florida. He moved to the southern coastal town of Naples after he retired from the Bank of Oswego in 2014.
He was arraigned Friday in Florida. Though he was paid more than a quarter-million dollars annually by the bank, Heine was represented by a taxpayer-funded public defender at the hearing. He was released after he and his wife agreed to pay $100,000 if he breaks court rules, including that he must report to Oregon.
A Naples condo Heine owns was listed for sale May 23, according to the real estate listings website RedFin.
The criminal charges aren't the only matter Heine is facing in Oregon. American Express Bank filed a $4,200 contract suit against him May 7 in Clackamas County Circuit Court.
No Oregon attorney is representing Heine in that case or in the federal criminal matter.
Prominent Portland defense attorney Janet Hoffman is representing Yates. Property records show Hoffman recorded a $70,000 lien on Yates' Sherwood estate last year.
The charges against them each carry a maximum sentence of 30 years in prison, according to the Justice Department.
-- Molly Young
myoung@oregonian.com
503-412-7056
@mollykyoung
-- Jeff Manning
jmanning@oregonian.com
503-294-7606
@jeffmanningore