Claims that Orrstown Bank leaders misled investors are false, officials say

officials are vowing to “vigorously defend” against a federal class-action lawsuit filed by one of the nation’s largest public transit systems.

The Southeastern Pennsylvania Transportation Authority is claiming bank officials lied about the Shippensburg-based bank’s soundness to encourage SEPTA and other investors to buy Orrstown stock, which has plummeted in value.

Thomas QuinnView full sizeOrrstown Bank CEO Thomas R. Quinn Jr.

Those allegedly misleading statements violated the federal Securities Exchange Act, SEPTA contends in the suit filed in U.S. Middle District Court in Harrisburg.

“We believe the allegations in this complaint are without merit,” Orrstown Bank Marketing Director Mark Bayer said Friday. He said he couldn’t discuss the case further.

The legal battle with SEPTA, the transit agency for Philadelphia and Bucks, Chester, Delaware and Montgomery counties, comes while

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In March, the Fed issued an enforcement order requiring, among other things, an in-depth review of Orrstown’s lending processes, particularly its procedures for vetting commercial loans.

Fed regulators have been working with the bank for more than a year.

The enforcement order came months after the bank reported $32 million in losses for 2011, a year in which it had to write-off millions of dollars in bad commercial loans.

The 2011 losses contrasted sharply with the $16 million profit the bank reported for 2010. The bank reported an $8.2 million loss for the first quarter of this year.

In an interview with The Patriot-News last month, Orrstown Bank President Thomas R. Quinn Jr. insisted the bank is sound and that officials are working with Fed regulators with the aim of “making us a better bank.”

Quinn said a lethargic economy and the near collapse of property values in far southern Pennsylvania and northern Maryland forced his bank to make significant commercial loan write-offs in 2011.

He did not rule out the possibility that the bank will have to continue making such write-offs. He said he expects it will continue to be focused on regulatory concerns over the next 18 months.

Customers won’t see major impacts from the Fed involvement, which has been ongoing for a year, Quinn said. Orrstown intends to remain independent, he said.

The impact of SEPTA’s suit, which seeks to join all the investors in more than 8 million shares of Orrstown’s stock, remains to be seen.

SEPTA doesn’t specify the amount of financial damages it seeks, nor does the suit state the amount of loss the agency claims to have suffered from the drop in value of Orrstown stock.

Kimberly Donaldson Smith, whose Haverford law firm, Chimicles & Tikellis, is representing SEPTA, couldn’t be reached for comment.

In the suit, SEPTA notes that the price of Orrstown stock, which sold for $27 a share in March 2010, has fallen precipitously as bad news about the bank’s status emerged. It was trading at around $7.60 a share on the NASDAQ exchange Friday.

SEPTA’s complaint focuses on what it claims were “misleading” statements by Quinn and other bank leaders before, during and after the March 2010 stock offering.

By making those statements touting the 93-year-old bank’s supposed soundness and disciplined lending policies, Orrstown officials were able to “artificially inflate” the stock’s value, raising $37.5 million in capital, SEPTA contends.

It claims that repeated assertions by Orrstown officials that the bank was being run with fiscal discipline were a “sham” and that bank leaders knew the foundation was shaky.

Investors learned that only by piecing together bad news as it trickled out, the agency contends.

SEPTA cites not only the Fed enforcement order, but also the Fed’s decision last fall to bar Orrstown from paying a dividend to stockholders.

Also on SEPTA’s list of bad tidings is the mid-2011 write-off of an $8.6 million loan to the bankrupt Yorktown Funding Inc., a financier for residential developers. SEPTA claims the bank kept giving Yorktown credit extensions even after other banks had stopped making such loans in the faltering real estate market.

While the Fed didn’t officially begin probing Orrstown Bank until March 2011, SEPTA claims “a reasonable inference can be drawn that the regulators had put the company on notice as early as July 2010 that the company’s management and banking practices raised concerns.”

Yet “the company continued to falsely portray itself throughout 2010 and 2011 as a conservative lender, diligent in assessing loan quality,” SEPTA contends.

Orrstown Bank’s holding company, Orrstown Financial Services Inc., is also named as a defendant in the suit, as are Quinn, the bank’s former president, Kenneth Shoemaker, and members of its board of directors.

Those directors include chairman Joel Zullinger, a Chambersburg attorney; state Rep. Mark Keller, R-New Bloomfield; ex-state Rep. Jeff Coy; and Anthony Ceddia, former president of Shippensburg University.

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