WASHINGTON - In a decision that could affect all publicly held banks, a judge has ruled that a financial institution must warn investors of loan troubles even if its overall financial health is good.
Brenda P. Murray, chief administrative law judge for the Securities and Exchange Commission, found last Friday that Bank of Boston Corp. violated securities laws by not telling investors in 1989 that problem loans would hurt the company's future performance.
Bill Kuehnle, the SEC's assistant chief litigation counsel, said all bankers should take notice. The judge's decision prohibits them from using strong economic performance to hide problem loan portfolios.
"If they see a deterioration in their loans that is not yet reflected in their numbers, they should be describing that to their investors," Mr. Kuehnle said.
Judge Murray rejected Bank of Boston's argument that it disclosed all it knew about problem loans in its Aug. 10, 1989, quarterly filing.
She said Bank of Boston "knew or should have known" that is quarterly financial statements were "misleading."
She said plenty of evidence exists to show the bank knew prior to Aug. 10, 1989, that the quality of its loan portfolio was deteriorating significantly.
But she said the bank instead prepared an "overall very optimistic and upbeat" report of its second-quarter performance.
She said Bank of Boston was obligated to notify investors that the deteriorating real estate market was going to hit the bank hard, even though it hadn't yet affected its financial performance.
The judge ordered the bank to comply with federal securities laws in the future.
Bank of Boston spokeswoman Karen Schwartzman disputed the findings, saying the judge misinterpreted the SEC's rules.
"Bank of Boston reported fully, based on the information that was available to us at the time," Ms. Schwartzman said. "We were the first major New England bank to report real estate loan problems in October 1989, and we are proud that our industry-leading quick actions in dealing with a deteriorating real estate environment led to our being the first major bank to put these problems behind us."
The judge conducted a 10-day trial in May 1994, receiving testimony from former Bank of Boston chairman Ira Stepanian and examiners from the Office of the Comptroller of the Currency.