Nara Bancorp Inc. in Los Angeles had cast its former chief executive officer as the bad guy in an accounting scandal there two years ago, but Benjamin Hong said he feels vindicated, now that an arbitration panel has ruled in his favor in a lawsuit the $2.2 billion-asset company filed against him.
"This decision finally clarifies my innocence in the financial matters of the bank and has restored my reputation," Mr. Hong said in an interview Friday. He has been the CEO of Saehan Bancorp, another Korean-American banking company in Los Angeles, since February of last year.
Nara, which had sought $55 million of damages from Mr. Hong, would not discuss the ruling. Related Links
But in a ruling issued last week, a panel of the American Arbitration Association rejected all of Nara's claims against Mr. Hong, including breach of contract and breach of fiduciary duty.
Other banking companies are likely to take heed of Nara's experience, said Brett Rabatin, an analyst at First Horizon National Corp.'s FTN Midwest Securities Research Corp. in Nashville.
"I think you'll see executive compensation committees being very careful in making sure all of the i's are dotted and t's are crossed, so they don't get into the same situation where they have to do something like Nara did," Mr. Rabatin said.
The suit accused Mr. Hong of failing to disclose an October 2002 letter detailing a reimbursement arrangement he had with the company's former chairman. Nara said it learned from the letter that Mr. Hong had volunteered to forgo a portion of his bonus for 2002 to "smooth the earnings." The letter entitled him to recoup the money (about $600,000) by having it added to his compensation later.
According to Nara, it first heard about the arrangement in March 2005, just weeks after Mr. Hong retired as its CEO. He was asked to give up the board seat he had retained after his retirement, and soon after, on the advice of independent auditors, Nara restated its 2002 earnings to reflect his full compensation.
The restatement caused Nara "enormous damage," according to its claim; its stock plunged 18% the day it announced it would restate.
In its ruling, the panel said it was clear that Nara's board and senior management had been aware of the 2002 arrangement, even if they had not seen the letter. The panel also said that the letter did not create a legal obligation for Nara to report the arrangement on its financial statements.
In addition, Mr. Hong won a countersuit in which he accused the company of failing to pay him a promised bonus of $742,201 for 2004. The arbitors awarded him that amount, plus interest and legal fees.
Nara said in a Securities and Exchange Commission filing Friday that it had already accounted for the bonus payment during fiscal 2005.
Nara also restated its 2003 earnings, and both restatements triggered a memorandum of understanding with regulators in the summer of 2005. It was prohibited from appointing directors, changing its CEO's duties, or paying dividends without the regulators' blessing. Restrictions on paying dividends and issuing trust-preferred securities were lifted in February, and the order was removed in May.
Aaron Deer, an analyst at Sandler O'Neill & Partners LP in San Francisco, speculated that Nara sued Mr. Hong because its board at the time wanted to separate itself from any perception of impropriety.
"With some time having passed since the infamous 2002 memo was first brought to light — and with the current board and management of Nara having largely regained the respect of Wall Street — I think the suit is less relevant now," Mr. Deer said.
Mr. Hong had taken over as Nara's CEO in 1994, when it was on the brink of failure, and within three years it was one of California's most profitable banks. But the accounting scandal had cast a shadow over the turnaround he engineered.
"When Nara restated its 2002 earnings, it was widely perceived by the public it was because of something that I did wrong," he said. He is grateful the "ordeal" is over.
