Doral Bank Decision

[Jeffrey]

Thought we could use a change of pace with this one.

http://www.bloomberg.com/news/2014-10-1 ... efund.html

First some background taken right off Google Finance:

Doral Financial Corporation (Doral Financial) is a bank holding company. Doral Financial is engaged in retail banking activities in Puerto Rico and the United States through its banking subsidiary. Doral Financial has three wholly owned subsidiaries, which are Doral Bank (Doral Bank), Doral Insurance Agency, Inc. (Doral Insurance Agency) and Doral Properties, Inc. (Doral Properties). Doral Bank has three wholly owned subsidiaries in operation, Doral Mortgage, LLC (Doral Mortgage), Doral Money, Inc. (Doral Money), principally engaged in commercial lending in the New York metropolitan area, and CB, LLC, an entity incorporated to dispose of a real estate project.

Necessary info for understanding this. In 2006, Doral settled a case with the SEC due to them fudging the books in order to inflate earnings between 2000 and 2004 by $1 billion dollars. People went to jail etc.

http://www.sec.gov/litigation/litreleas ... r19837.htm
http://www.prnewswire.com/news-releases ... 54294.html

Now here's the thing. In the years following that, Doral made the novel decision of trying to argue that the loss of those previous fraudulent earnings represented a deffer ed tax asset and attempted to use those tax credits. When that failed they tried to argue that they were entitled to a $231 million cash tax refund.

However, if you go and look at the 10-K's the filed for the years in question. The total amount of income tax they paid was about $135 million yet they were given a tax refund for nearly double that amount.

http://www.sec.gov/Archives/edgar/data/ ... 3_ex13.htm
http://www.sec.gov/Archives/edgar/data/ ... 3e10vk.htm

Now you may ask yourself how do you get the Treasury Department to rubber stamp a tax refund on taxes you didn't pay on money you didn't earn? Well in an astronomical coincidence, the Secretary of the Treasury that signed the tax refund in March 2012, quit as Secretary in November and went to work for the Bank in December 2012.

http://newsismybusiness.com/ex-puerto-r ... e-banking/
http://www.elnuevodia.com/mendezllegaad ... 02485.html
http://www.elnuevodia.com/mendezpasadeh ... 02321.html

I have done a cursory search and as far as I can tell not only is converting deferred tax assets into tax refunds not allowed under Puerto Rico Tax Code, it isn't done under Federal Tax Codes or any other country. The rationale for such a prohibition is perfectly sound, otherwise a business could do nothing, incur $100 million in losses and ask for a tax refunds on those losses without ever producing anything of value.

This current judges decision appears to have legalized a new level of corporate corruption.

[Judge Roy Bean]

Thought we could use a change of pace with this one.
...
This current judges decision appears to have legalized a new level of corporate corruption.

Not exactly a new level. As I've noted over the years, there is a protected class.

[Jeffrey]

Some extra context:

Over inflating earnings by $1 billion allowed the relatively small banks stock price to skyrocket 1,100% over the 4 years (2000 to 2004) during which the fraud went on.

https://www.google.com/finance?q=NYSE%3 ... 9AaA5YDIAQ

Once the SEC exposed the fraud, the stock lost 99% of it's value in less than a year. $4 billion in investor money was destroyed. Given that stocks and dividends from local banks were tax-exempt for PR residents, the majority of those that got wiped out were local families and investors.

And in a rather startling coincidence, Puerto Rico's current 8 year recession started in 2006, right around the start of the bank collapse.

http://www.washingtonpost.com/business/ ... story.html

Edit:

And if you're wondering why you'd want to inflate earnings, the 1,100% stock price increase allowed for the CEO to justify being paid over $18 million for the years during which the accounting fraud took place; which does not include stock options or stock sales that may have occurred during those years.

http://www.forbes.com/static/pvp2005/LIRGV15.html

[.]

Some extra context:Once the SEC exposed the fraud, the stock lost 99% of it's value in less than a year.

Actually, DRL lost about 80% in one year, but the longer-term result was much worse -- a 99.99% loss in about 9.5 years. From 20,000 (adjusted for multiple reverse-splits) to 2.00. It now sells around 6.00. A mere -99.97% from the top. Woe be to any shareholder, in PR or wherever. Got about 50-60 mill? You can buy the whole thing, lock, stock and barrel.

http://bigcharts.marketwatch.com/quickc ... w=&time=20

They maintain (if only barely) a listing on the NYSE. If they don't make any money soon, they could be de-listed if the share price sees the underside of a dollar once again for any length of time. Yet another reverse-split, anyone?

And in a rather startling coincidence, Puerto Rico's current 8 year recession started in 2006, right around the start of the bank collapse.

I don't know about you, but I didn't notice any "bank collapse" in the U.S. Not even in PR. People have been and are fleeing PR in droves for decades for good reason -- the PR government spends too much and has no reliable revenue stream. So it has been for 50+ years. What else is new?

PR's problems really have nothing to do with any given corrupt bank or banker. Those guys are a dime a dozen. Corrupt politicians are much more expensive.

[Jeffrey]

I don't know about you, but I didn't notice any "bank collapse" in the U.S. Not even in PR.

I have to strongly disagree.

The failures represented a challenge for the FDIC, which has had to deal with more than 200 bank failures since the beginning of 2008. The three banks hold about $21 billion in assets, about a quarter of the assets of the 10 banks headquartered on the island, and almost 30% of the island's deposits. Not since the savings and loan crisis in the 1990s had the agency dealt with such a big problem in one banking market.

http://online.wsj.com/articles/SB100014 ... 0101267860

That does not include the Doral crash in 2006 nor does it include First Bank, which coincidentally also has lost 99.5% of it's value since crashing at the end of 2004.

https://www.google.com/finance?q=fbp&ei ... 8wa7lYGACg

First Bank of course coincidentally nailed for accounting fraud by the SEC in 2007, again, before the Subprime crash.

http://www.sec.gov/news/press/2007/2007-161.htm

[.]

There was no "bank collapse" in PR.

The FDIC got hammered for a billion or two, every depositor got paid, and all of the costs got passed on to other (mostly non-PR) banks via increased insurance premiums and then on to their customers in whatever form.

Just as they did in the US, banks in PR made crappy sub-prime loans at the behest of the federal government. (See HUD, Fannie and Freddie.) Probably even more fraud than usual.

So, what? The FDIC deals with insolvent banks who get sideways all the time. They get shut down and sold. We taxpayers will have to bend over when the FDIC runs out of money. That will be unpleasant, but it hasn't happened yet.

[Jeffrey]

I don't know how the failure of 3 banks representing 30% of all deposits on the island does not constitute a "bank collapse".

And while FDIC did cover deposits, the real problem was the destruction of tens of billions in investor funds.

Just as they did in the US, banks in PR made crappy sub-prime loans at the behest of the federal government. (See HUD, Fannie and Freddie.) Probably even more fraud than usual.

That's a total distortion of the situation. In the case of Doral and First Bancorp, those banks did not fail due to subprime lending but due to overt accounting fraud. It was more of an Enron situation than a Fannie and Freddie situation. And here's the key, Enron was never given cash tax refunds as a reward for their fraud.

The fact that $231 million of state taxpayer funds is being given as a reward for fraud, taxes paid by the very people that Doral defrauded for years, is the problem.

And perhaps more importantly, Jesus Mendez, who rubber stamped the refund, his salary right now comes directly from the $231 tax refund that he okayed a few months before joining the bank. The question is why is he not in jail.

[The Observer]

This topic really has nothing to do with tax protestors and or other nonsensical de-tax scams. Moving it to a more appropriate place.

[Jeffrey]

Going back, if anyone wants to engage in some juicy speculation:

http://www.reuters.com/article/2014/01/ ... NV20140113
http://www.reuters.com/article/2013/06/ ... FJ20130618

Maurice Spagnoletti, 56, was shot multiple times while driving home from work to the fashionable Condado beachfront district in rush-hour traffic in June 2011. Authorities have described the shooting as an apparent contract killing, but have made no arrests.

Now in the lawsuit filed by his widow, she lists among possible motivations for the killing that Maurice had knowledge of accounting fraud being committed by Doral Bank. Here's the thing, there wasn't any accounting fraud that we were aware of in 2011 at that time.

HOWEVER, the Tax Refund deal was being negotiated in 2011 and wasn't finalized until about six months after Spagnoletti's murder.

I would guarantee that the FBI was not aware that the tax refund deal the bank was negotiating at the time is "allegedly" fraudulent and thus did not look into that angle. And without a motive for the killing the investigation fizzled out.

So if in fact the allegations by his widow were correct and he had information that would jeopardize the $231 tax refund deal, or get the bank busted for tax fraud. Whoever did order the killing, probably had strong incentive to ensure the tax deal went through and the executives involved would not be jailed for the deal.

[Jeffrey]

I think I'm not that far off base. Doral is now suing an ex-employee that testified them in court claiming testifying against the bank was a violation of non-disclosure agreements and slander:

http://www.elnuevodia.com/doraldemandaa ... 78883.html

[Jeffrey]

Robert Shapiro chimes in at Roll Call arguing:

the governor must ask himself why anyone would lend Puerto Rico that kind of money when its government renounces its contracts and questions the rule of law.

http://www.rollcall.com/news/puerto_ric ... 326-1.html

[Jeffrey]

http://www.elnuevodia.com/doraldemandaa ... 87265.html

Situation appears to be escalating quickly. The bank is now suing the state Legislature arguing they lack jurisdiction to investigate the tax deal or to subpoena documents.

[Jeffrey]

Like clockwork, FBI just raided the Bank's headquarters.

http://dealbook.nytimes.com/2014/12/23/ ... s-offices/
http://www.elnuevodia.com/agentesdelfbi ... 15861.html

[Jeffrey]

http://elvocero.com/fbi-efectua-dos-arr ... oral-bank/
http://www.elnuevodia.com/noticias/segu ... o-2011149/

Feds just arrested an executive that funneled $2.35 million to a cleaning company.

Speculation on a tie to the 2011 murder given that the guy who got paid off had been previously accused of murder and the time frame fits. They paid the guy off the same month the executive was murdered execution style in June 2011.