Accounting & Tax

Bank Job at Troubled Franklin Goes to Ranieri

Former CA chairman and Salomon Bros. trader named interim Franklin Bank CEO amid federal and state reviews of improper accounting.
Stephen Taub and Roy HarrisMay 20, 2008

Franklin Bank Corp. said that an internal review determined that Franklin had engaged in improper accounting in a number of mortgage-lending areas. It also put board chairman Lewis S. Ranieri in the additional role of interim CEO.

The Houston-based concern also said that the Securities and Exchange Commission had launched an informal inquiry into “the disclosure, accounting, and other issues that were investigated,” and said that Franklin has been in communication with the Federal Deposit Insurance Corp. and Texas regulators about the investigation and related matters.

Franklin said that chief executive Anthony J. Nocella will accelerate his plan to retire, although he will remain a director. Further, board member Alan E. Master will become president of Franklin until a new CEO is hired, and will resign his memberships on the board’s audit, compensation, nominating, and corporate governance committees.

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Ranieri is the former chairman and lead independent director of software giant CA Inc., and is the founder of hedge funds Hyperion Partners L.P. and Hyperion Partners II L.P. A former Salomon Brothers mortgage-bond trader, he was also a major figure in the 1980s best-selling book by Michael Lewis, Liar’s Poker. Ranieri left the chairmanship of CA last June, and retired as a CA director in December.

In a detailed press release, the bank said that it will establish a formal disclosure committee to review and approve all public statements of Franklin. In connection with establishing the disclosure committee, the board will conduct a review of the charters of its standing committees, to determine if any revisions are warranted to strengthen its internal governance processes.

In addition, the executive committee, in cooperation with the audit committee, will launch a thorough review of the operations, processes and systems of Franklin, including data intake, personnel qualifications and staffing levels, technology, internal procedures for the verification of policy compliance and internal procedures governing the interaction of management with independent accountants, internal auditors, and regulatory bodies.

“The purpose of this review, to be completed within 60 days, will be to identify those areas, if any, in which internal controls over financial reporting, and disclosure controls and procedures, should be further strengthened,” the bank said in its release, which also disclosed the communications with the federal and state regulatory agencies.

Franklin said that its internal review had determined that it did not properly account for certain single family mortgage loan modification programs developed and implemented as part of an effort to reduce delinquencies and mitigate foreclosure losses. It also did not charge off certain uncollectable single-family second lien loans. In addition, Franklin said that it did not record, and in some instances did not write-down, certain real-estate-owned and in-substance foreclosures in its single family mortgage portfolio.

Also, it did not properly record certain mark-to-market write-downs on loans transferred from “held for sale” to “held for investment.”

“Franklin’s board of directors fully accepts the findings of the independent review,” said Ranieri.

Franklin said that its audit committee had been assisted in its investigation by Baker Botts L.L.P., an independent legal counsel that had retained an independent accounting firm to advise on accounting matters.

In addition to discussing the SEC’s informal inquiry and the communications with the FDIC, Franklin said that it also had had communications with the Texas Department of Savings and Mortgage Lending about the investigation and related matters. Franklin said it will continue to cooperate with the SEC, FDIC, and the state department, and other agencies.

The bank currently has a market capitalization of $25 million, down from $425 less than a year ago.