Washington Trust describes ‘external fraud’ in filings with SEC and federal court

Washington Trust describes ‘external fraud’ in filings with SEC and federal court

WESTERLY — The Washington Trust Company has filed a claim, as part of a civil proceeding in U.S. District Court in Providence, to recover nearly $900,000 involved in a check-alteration scheme.

The bank reimbursed two customers — Rhode Island construction companies — who each wrote a check that was falsified. The bank’s parent corporation also took a $570,000 charge as a non-interest expense, a fact it reported Oct. 23 in a press release accompanying its third-quarter earnings statement. 

Chief Financial Officer David Devault, who is also Washington Trust’s vice chair and secretary, stressed in an interview Wednesday that no customer or employee of the bank was involved in what the company initially described only as “an isolated external fraud matter.”

In a subsequent conference call with securities analysts on Oct. 24, Devault and Joseph MarcAurele, the chairman and CEO, elaborated somewhat on that report, and said they were trying to recover the funds, but they did not provide details of the fraud. In an exchange with Mark Fitzgibbon, principal and director of research at Sandler O’Neill + Partners LP, Devault characterized the matter as “something to do with a fraud perpetrated to the banking system.”

Fitzgibbon asked, “Were there other institutions affected by it?”

Devault responded: “No, the answer is no.”

As it turns out, however, another bank was snared in the scheme, and that bank was Wells Fargo, which filed an “interpleader action” with the court in July, seeking to resolve adverse claims to deposited funds. Devault said Washngton Trust has submitted a claim with the court for the $570,000, and for $325,961 that Wells Fargo deposited on Sept. 20 in the registry of court.

On Tuesday, the corporation also posted a Fair Disclosure statement to the Securities and Exchange Commission. Here is the text of the statement:

“Earlier in 2017, a customer of The Washington Trust Company, of Westerly (the bank), a wholly-owned subsidiary of the corporation, reported that two checks that were mailed by the customer to a vendor were altered to change the payee on the checks and increase the amount of one of the checks. The checks were diverted and deposited by an unknown party at another bank. The altered checks then passed through the banking system in a routine manner and were charged against the customer's account at the bank.

“The bank has reimbursed its customer for the amount inappropriately charged against the customer’s account. Despite demand by us, the other bank has refused to return the funds since we notified them of the event several months ago. The bank is currently pursuing legal action against the other bank to recover the lost funds, which represents the $570,000 expense amount reported in the press release. At this time, the bank is unable to determine the eventual outcome of this action. No employee or customer of the bank was involved in the fraudulent activity.”

The SEC adopted its Fair Disclosure rule in 2000 as a way to assure a level field among securities professionals and the investing public, and to help prevent instances of “selective disclosure,” whether intentional or non-intentional. Issuers of stock have some discretion in how they disseminate the information, but in general the idea it to make it widely available, whether as an 8-K item, as the bank did this week, or through a press release or other means. Devault called it “a proactive filing to provide additional information.” He said this type of check fraud happens from time to time in the industry, but this case was unusual in the amount of money involved, and also in the fact that the bank has not been reimbursed.

How $63,870 became $863,870

The two companies who wrote the checks, Bacon Construction Co. Inc., of Rumford, and Agostini Construction Company Inc., East Providence, have told the court that they have no objection to Washington Trust withdrawing the interpleader funds, since the bank had already satisfied its obligations.

According to the court filings, Bacon issued a $45,752 check to a millwork company in Ontario in November 2016, and early the next month Agostini issued a check to the same subcontractor for $18,118. The Canadian firm never got the money. Instead, the payee for both checks was changed to Berkshire Lloyd Capital Holdings LLC, and the amount of the Agostini check was changed to $818,118. Neither company had ever done business with Berkshire, which was named as a defendant by Wells Fargo. Since Berkshire, a New Jersey company, never responded to the litigation, a default judgment was entered against it in September.

Washington Trust quickly trasnmitted “adjustment requests” to Wells Fargo as soon as Bacon and Agostini alerted the bank to the fraud in January. The bank filed for a default judgment last month, saying that “Wells Fargo makes no claim to the funds.” The case has been assigned to Magistrate Judge Patricia A. Sullivan and she was scheduled to talk to the lawyers later this month to arrange a settlement conference.

Quotations from the company’s Oct. 24 earnings call were provided in a transcript from the Seeking Alpha website.



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