A Connecticut man's admission last week that he bought shares of NewAlliance Bancshares Inc. illegally when it went public last year illustrates the lengths to which some will go to get in on thrift conversions.
It also prompted this stern warning from federal banking regulators to depositors at converting mutual thrifts: Steer clear of outside investors who offer loans to buy shares, or face prosecution.
It is timely advice, since this is shaping up as one of the busiest years ever for mutual-to-stock conversions. By midyear, 17 thrifts had completed conversions, and at least seven more, including the $5.5 billion-asset Investors Bancorp Inc. of Short Hills, N.J., are planning offerings.
Laws governing thrift conversions have long frustrated bank investors. Technically, investors are eligible to buy shares in converting thrifts, but only after the institution's depositors, and then residents in its market area, place their orders.
In practice the depositors almost always buy up all the stock, said Theodore P. Kovaleff, an analyst with Sky Capital LLC in New York. That was certainly the case with NewAlliance - more than 23,000 depositors bought a total of $1.02 billion worth of its stock.
So to get their hands on thrift shares, investors will sometimes resort to trickery.
A common scheme involves investors' lending money to depositors to help them buy stock during the public offering and then sharing in the proceeds when the stock is sold - typically on the first day of trading, when gains are highest.
Such deals are illegal, and the Federal Deposit Insurance Corp. and the Office of Thrift Supervision said in their warning last week that before receiving shares, purchasers must certify that they have made no agreements to sell or transfer their stock.
The FDIC and the OTS joined the Securities and Exchange Commission in a press conference Tuesday at which the SEC announced it had filed civil charges against Robert Ross, a Fairfield County attorney, and four others, alleging that they had illegally participated in the public offering of New Haven Savings Bank (which was renamed NewAlliance after it went public in April 2004). The SEC said the five men collected $1.75 million in the scheme.
Mr. Ross was also brought up on criminal charges. Just hours before the joint news conference, he pleaded guilty to securities fraud in New Haven Superior Court. Mr. Ross, 60, admitted that he had provided loans to help several NewAlliance depositors buy shares and then split the profits after the shares were sold. He would face up to four years in prison if convicted.
Kevin Kelcourse, a senior counsel in the SEC's Boston district office, said Wednesday that the NewAlliance case is not the first time the agency has filed civil fraud charges against an investor for illegally buying shares in a converting thrift. But he said Mr. Ross appears to be the first investor to be hit with criminal charges as well.
The SEC said that as a result of the scheme allegedly orchestrated by Mr. Ross, Chance Vought, George Kundrat, John Lucareli, and Felix Raila, about 2,100 NewAlliance depositors were not able to buy all the shares they wanted.
Walter Ricciardi, the district administrator of the SEC's Boston office, said in a press release issued Tuesday, "This action is a message to all those who would seek to deprive mutual bank depositors of their rightful opportunity to participate in their bank's IPO."
Shares of converting mutual thrifts are highly sought after because they typically have an increase in value, or "pop," on the first day of trading, which allows participants in the offering to sell all or part of their stakes for a substantial profit. NewAlliance priced its shares at $10, and after the first day of trading they had appreciated by about 50%.
Mr. Kovaleff said that in the weeks leading up to NewAlliance's conversion, he heard rumors that outside investors had gone to churches and synagogues to buttonhole depositors. He said Mr. Ross and his associates were probably not the only ones to profit illegally from NewAlliance's conversion, and SEC officials said their investigation is continuing.
The regulatory warning from the FDIC and the OTS was delivered in the form of a two-page special alert addressed to bank chief executives, who are expected to pass the information on to the public. Though the SEC case focuses on outside investors, the regulators' warning said that depositors who cooperate with them could be prosecuted as well.
"The bottom line for investors is always to remember that if an opportunity sounds too good to be true, it probably is too good to be true," the warning stated.
Charlotte Bahin, the senior vice president for regulatory affairs at America's Community's Bankers in Washington, said she fears that the NewAlliance case might lead to calls for tighter regulation of conversions.
Mutual thrifts generally do a good job on their own of keeping nondepositors from buying stock in their public offerings, Ms. Bahin said. Indeed, after the OTS said in 1994 that mutual thrifts could refuse nonlocal deposits, many of them set policies prohibiting anyone who lives outside their market areas from opening accounts.
"Conversions are governed by strict, firm regulations, and they get appropriate oversight," Ms. Bahin said.
