Federal prosecutors in Philadelphia unsealed an indictment late Friday afternoon charging both the CEO and onetime chairman of the board of Nova Bank with defrauding the U.S. Department of Treasury's Troubled Asset Relief Program (TARP) of $13.5 million.
Prosecutors allege Nova CEO Brian Hartline and board Chairman Barry Bekkedam concocted a scheme of circular transactions to make it appear that the bank had the funding requirements to qualify for TARP — a program devised to stabilize the financial services sector after the stock market crashed in September 2008. Treasury eventually rescinded its investment to Nova. The bank failed a little more than two years ago.
Both men were charged with conspiracy to defraud the U.S. government and TARP, making false statements to the government, and bank fraud. Bekkedam was also charged with two counts of wire fraud.
Hartline's lawyer, Patrick Egan of Fox Rothschild, said his client "denies any and all allegations of wrongdoing in relation to his role at Nova Bank. In direct contrast to the baseless allegations brought by the government, Brian and Nova Bank followed all applicable banking rules and regulations and practiced good corporate governance at all times under the guidance and supervision of NOVA's legal counsel and its Board of Directors. Brian is innocent. He will defend this case and his reputation vigorously and expects to be fully exonerated.
"Brian is shocked that the government has decided to bring these baseless allegations almost five years after it terminated the TARP program, particularly when Nova Bank never received any TARP funding. He believes this is a perfect example of how small bankers are repeatedly penalized despite their best efforts to weather the financial crisis, while the large financial institutions that engineered the crisis and caused hundreds of millions of dollars in damages and losses go unpunished for their actions."
Bekkedam's lawyer, Ellen Brotman of Montgomery McCracken Walker & Rhoads, said both Hartline and Bekkedam "are innocent and they will be exonerated and vindicated at trial. This indictment should not have been brought and I am shocked that the government chose to go forward with these charges, in reckless disregard of the reputations they are damaging in the process. This prosecution is a misguided attempt to salvage an investigation that should never have gone this far."
Bekkedam, a former Villanova University basketball player who now lives in Florida, and Hartline formed Nova in 2002 with other investors when they bought USABancShares.com.
In addition to serving as the bank parent company's chairman until 2007, Bekkedam also ran a Radnor-based investment advisory firm called Ballamor Capital Management for high-net-worth individuals and advised his Ballamor clients to invest in Nova. He closed Ballamor in 2010 after investing $30 million of client money into a $1.2 billion Ponzi scheme run by Florida lawyer Scott Rothstein, who is now serving time in federal prison for selling false judgments and legal claims.
But prosecutors allege when the Nova Bank ran into financial difficulties after the stock market crashed because of bad investments into collateral debt obligations, it faced a risk of failure due to under capitalization and applied for $13.5 million in TARP money. But it needed to raise $15 million to qualify.
Under the TARP program, Treasury gave banks cash infusions in exchange for equity stakes that the institutions could buy back with interest to exit the program. TARP was designed for healthy banks and Nova was anything but healthy in 2009.
So prosecutors allege Bekkedam and Hartline came up with a plan to filter existing Nova capital through a third party in Florida, named in the indictment only as G.L., who is George Levin, the owner of Banyon Investment Fund. Levin fed millions of dollars worth of client money into Rothstein's scheme. Both Bekkedam and Levin were charged by the SEC in a civil case last May with improperly advising clients to invest about $100 million into the scheme.
Prosecutors allege that Bekkedam met Levin in March 2009 and the two soon reached an agreement where Bekkedam directed Ballamor clients to invest what wound up being about $30 million in Banyon. In return, prosecutors allege Levin paid Bekkedam roughly $1.2 million, agreed to invest in Ballamor and provide it with a $5 million line of credit, assume about $10 million of Bekkedam's outstanding debt to Ballamor investors and agreed to invest $18 million in Nova.
Between May 2009 and January 2010, prosecutors allege Bekkedam and Hartline devised a scheme that made it appear that Levin and others were investing new capital in Nova by arranging circular transactions. This was done, prosecutors said, to make Nova qualify for TARP.
Nova would loan $5 million and prosecutors allege Levin would immediately transfer those funds to Nova's parent company, making it seem as if an outside investor put new capital into the bank.
Prosecutors said Hartline knew Levin was unwilling to invest in Nova unless someone else put up the money so he attempted to procure a $9 million loan from another bank so that Levin would also invest. In June 2009, prosecutors said Hartline instructed four Nova employees to tell state and federal bank regulators that Nova raised $5 million from Levin's investment. Prosecutors also said that Bekkedam told Ballamor clients the same.
Treasury told Nova, according to prosecutors, that the bank had until Oct. 21, 2009, to raise the money needed to be eligible for the $13.5 million TARP investment. It had not reached that level until Bekkedam solicited Ballamor clients to become part of the scheme, prosecutors allege. For example, prosecutors allege he persuaded one client to invest $4.5 million in Nova and Banyon and that he would direct Nova to loan the client the money to make the investments. Prosecutors allege after Nova made the loan to the client, that money was then transferred to Banyon ($2 million) and Nova ($2.5 million).
Prosecutors allege through the scheme, Bekkedam and Hartline made it seem as if Nova was more financially sound than it was, thus convincing Treasury officials to give the bank the $13.5 million investment.
In late October 2012, the Pennsylvania Department of Banking and Securities closed Nova and appointed the Federal Deposit Insurance Corp as receiver. Unlike most of the failed local banks since the recession, the FDIC was unable to find a buyer for Nova.
Nova had $483 million at the time of its failure as well as a toxic mix of poor asset quality (6.8 percent of all assets were non-performing) and not enough of a buffer ($7.5 million in capital and $6.6 million in reserve) to stave off problems. The bank had 13 branches in Southeastern Pennsylvania and South Jersey.
On top of that, Chief Lending Officer Thomas J. Patterson was arrested earlier in 2012 for misappropriating customer funds after an investigation by police and the FBI. He pleaded guilty and was barred from working for another financial institution.
The FDIC estimated Nova's failure cost the Deposit Insurance fund $91.2 million.
Bekkedam has seen his share of legal issues in recent years. In August, forgery charges brought by two former Ballamor clients against him were dropped.
In 2012, all claims against Bekkedam from Rothstein investors were dismissed and Bekkedam said in a statement at that time that he hoped that would allow him to restore his reputation, claiming he was also deceived by Rothstein.