The Securities and Exchange Commission charged Fifth Third Bank’s holding company, Fifth Third Bancorp, and its former chief financial officer, on Wednesday with improper accounting of commercial real estate loans during the financial crisis.

The company has agreed to pay $6.5 million to settle the SEC’s charges, while former CFO Daniel Poston has agreed to a $100,000 penalty and to be suspended from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC.

Fifth Third experienced a substantial increase in “non-performing assets” as the real estate market tumbled in 2007 and 2008 and borrowers failed to repay their loans. The bank decided in the third quarter of 2008 to sell large pools of the troubled loans. 

Once Fifth Third decided to sell the loans, U.S. GAAP rules required the bank to classify them as “held for sale” and mark them at fair value, increasing Fifth Third’s pretax loss for the quarter by 132 percent. Instead, the bank continued to classify the loans as “held for investment,” incorrectly suggesting that it had not made the decision to sell the loans.

“Improper accounting by Fifth Third and Poston misled investors during a time of significant upheaval and financial distress for the company,” said George S. Canellos, co-director of the SEC’s Division of Enforcement, in a statement. “It is important for investors to know the financial consequences of decisions made by management, so accounting rules that depend on management’s intent must be scrupulously observed.”

According to the SEC’s order, Poston was familiar with the bank’s loan sale efforts, which included entering into agreements with brokers during the third quarter of 2008 to market and sell loans. Despite understanding the relevant accounting rules, Poston failed to direct Fifth Third to classify and value the loans as required, according to the SEC. He also allegedly made inaccurate statements to Fifth Third’s auditors about the bank’s loan classifications, and certified its inaccurate financial results for the third quarter of 2008.

Fifth Third and Poston have agreed to the entry of an SEC order finding that they violated or caused violations of the federal securities laws. Without admitting or denying the findings, they have agreed to cease and desist from committing or causing any violations and any future violations. Poston has also been suspended from appearing or practicing before the SEC as an accountant, with the right to apply for reinstatement after a year.

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