A federal court has given preliminary approval for one of Puerto Rico’s largest financial institutions to settle a class-action lawsuit alleging it had improperly accounted for mortgage loans. First BanCorp, a bank holding company based in San Juan, Puerto Rico, plans to pay off the $74.25 million settlement in two installments.
The U.S. District Court in Puerto Rico issued its preliminary order to approve the settlement agreement between the company and its shareholders last week. First BanCorp will put $61 million in a settlement fund within a couple of weeks and pay off the rest of the settlement by the end of the year. The court is scheduled to give its final approval of the agreement on October 15.
First BanCorp set aside the $74 million in 2005 in anticipation of a possible settlement. That year, various shareholders who owned the company’s common stock between March 31, 2003, and October 24, 2005, filed a complaint against the firm, alleging that misleading financial statements and press releases about the status of its mortgage loans presented an untrue picture of the company’s operations.
In August 2005, the bank admitted it was the subject of an informal Securities and Exchange Commission inquiry into its accounting for mortgage loans purchased from two financial institutions between 2000 and 2004. It also disclosed that its audit committee was investigating the matter. The review concentrated on whether First BanCorp should have recorded the transactions as loans rather than purchases under SFAS No. 140.
Soon after, the company’s troubled image continued when CEO Angel Alvarez Perez and CFO Annie Astor Carbonell resigned, and the SEC upped its investigation to a formal review. Last year, First BanCorp restated five years’ worth of financials from 2000 to 2004 by reclassifying how it had treated mortgage-related transactions and interest rate swaps. The restatement decreased the company’s earnings and legal surplus by approximately $17.1 million.
First BanCorp believes the settlement with shareholders will not affect its earnings. It expects to recover approximately $14.75 million from insurance companies and former executives; however, those agreement discussions are ongoing, the company said.
In addition, the company considers the court’s preliminary order of a settlement a “major milestone,” according to CEO Luis Beauchamp. The company is now “that much closer to eliminating the potential risk of a long, expensive, and protracted litigation with the financial risks associated with litigation,” he said.