PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 425 Lexington Avenue, 30th Floor New York, NY 10017
MEMORANDUM
FROM: Jasmine Thornton, Lead Associate, Calderwood & Harkness LLP
TO: Victoria Chambers, Partner, Calderwood & Harkness LLP
CC: Howard Quinn, Partner; Liam Donahue, Associate
DATE: October 14, 2023
RE: Analysis of SEC Formal Order of Investigation No. EN-2023-0947 — Belmont Ridge Bank National Association (SEC File No. HO-14287)
MATTER NO.: SC-MAT-2023-4172
CLASSIFICATION: Attorney-Client Privileged / Attorney Work Product — Prepared in Anticipation of Litigation
This memorandum has been prepared by attorneys at Calderwood & Harkness LLP in connection with the firm's representation of Belmont Ridge Bank National Association. It constitutes attorney work product prepared in anticipation of litigation and is protected from disclosure by the attorney-client privilege and the work-product doctrine. This memorandum should not be disclosed to any person or entity without the prior written approval of Calderwood & Harkness LLP.
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I. Executive Summary
On October 12, 2023, the Division of Enforcement of the United States Securities and Exchange Commission ("SEC" or the "Commission") issued Formal Order of Investigation No. EN-2023-0947 in connection with File No. HO-14287 (the "Formal Order"), thereby escalating the preliminary inquiry that began with the September 18, 2023 voluntary request letter directed to Belmont Ridge Bank National Association ("BRB" or the "Bank"; Nasdaq: BRDG; OCC Charter No. 24891). The issuance of the Formal Order marks a significant procedural development in this matter, as it vests the Staff with compulsory process authority that was not available during the voluntary request phase.
Specifically, the Formal Order authorizes the Staff of the Division of Enforcement to issue subpoenas for testimony and the production of documents, to administer oaths, and to compel the production of books, records, papers, and other data. Consistent with this expanded authority, the Staff wasted little time in exercising its new powers: a document subpoena bearing the designation SEC Subpoena No. HO-14287-001 was issued on October 15, 2023 — just one business day after the entry of the Order.
The purpose of this memorandum is fivefold:
1. To analyze the scope and language of the Formal Order in detail, including the statutory provisions referenced and the breadth of the authorization granted;
2. To identify the categories of documents and the custodians likely to be implicated by the investigation and the accompanying document subpoena;
3. To identify potential witnesses — both internal to BRB and external — whom the Staff may seek to compel to testify;
4. To assess whether the Formal Order signals a broader inquiry beyond the allowance for credit losses ("ACL") disclosure issues that were identified during the voluntary request phase; and
5. To recommend immediate and near-term next steps for the investigation defense team.
Key Conclusion. The Formal Order's language is broad in certain respects but remains fundamentally consistent with a focused investigation into BRB's ACL disclosures related to the BridgeFin digital lending portfolio. The statutory provisions cited are limited to periodic-reporting and books-and-records requirements; critically, no antifraud provisions (Section 10(b) of the Securities Exchange Act of 1934 or Rule 10b-5 thereunder) are referenced. This is a favorable indicator at this stage. However, certain "catch-all" provisions within the Order — including the standard reservation of authority to investigate violations of "such other provisions as may be relevant" — could permit Staff expansion into related areas, including internal controls over financial reporting, books-and-records violations under a strict-liability theory, and the sufficiency of CEO and CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The investigation team should prepare for these contingencies while pursuing a cooperative posture with the Staff.
II. Background
A. BRB and the BridgeFin Division
Belmont Ridge Bank National Association is a publicly traded national banking association organized under the laws of the United States and headquartered at 200 Park Avenue South, 38th Floor, New York, New York 10003. The Bank's common stock is listed on the Nasdaq Global Select Market under the ticker symbol "BRDG." BRB holds OCC Charter No. 24891 and is subject to primary prudential supervision by the Office of the Comptroller of the Currency.
As of December 31, 2022, BRB reported total consolidated assets of approximately $38.2 billion, total deposits of approximately $29.6 billion, and total shareholders' equity of approximately $4.03 billion. For the fiscal year ended December 31, 2022 ("FY 2022"), the Bank reported pre-tax income of $612 million, net income of $471.2 million, and diluted earnings per share of $6.14, calculated on the basis of approximately 76.7 million diluted shares outstanding. BRB is a significant regional banking institution with a diversified business model spanning commercial lending, retail banking, wealth management, and — most relevant to this investigation — digital consumer lending.
BridgeFin is an internal division of BRB (not a separately incorporated legal entity) that was launched in the third quarter of 2020. The division is headed by Naveen Chakravarti, Senior Vice President and Division Head, and operates a proprietary digital lending platform that originates unsecured personal loans and small-business microloans through an AI-driven underwriting model. The average unsecured personal loan originated through the BridgeFin platform is approximately $18,400, and the average small-business microloan is approximately $42,000. These loan sizes, while modest on an individual basis, aggregate to a substantial portfolio: BridgeFin FY 2022 gross originations totaled approximately $2.87 billion, and the outstanding BridgeFin loan balance as of December 31, 2022, was approximately $4.1 billion, representing roughly 10.7% of BRB's total consolidated assets.
The BridgeFin platform was conceived as a strategic initiative to position BRB competitively against fintech lenders and digital-first banking platforms. The division's rapid growth since its 2020 launch has been a prominent feature of BRB's investor narrative, and BridgeFin's performance has been discussed prominently in the Bank's quarterly earnings calls, investor presentations, and SEC filings throughout the relevant period.
BRB adopted the current expected credit losses ("CECL") methodology, codified in Accounting Standards Codification Topic 326 ("ASC 326"), effective January 1, 2020 — the mandatory adoption date for SEC-reporting entities. The CECL model requires BRB to estimate expected credit losses over the full contractual life of its financial assets at each reporting date, incorporating historical loss experience, current conditions, and reasonable and supportable forecasts of future economic conditions. The BridgeFin portfolio, given its unsecured nature and relatively short operating history, presents particular challenges for CECL estimation, as the historical data set available for vintage-cohort loss modeling is limited compared to BRB's more established lending portfolios.
B. Procedural History of the SEC Inquiry
The following timeline summarizes the key events leading up to the issuance of the Formal Order:
September 18, 2023. The SEC Division of Enforcement, operating out of the Home Office in Washington, D.C., issued a voluntary request letter to BRB. The letter was addressed to BRB's General Counsel, Derek Sung, and identified concerns about the Bank's ACL disclosures in three specific filings: BRB's FY 2022 Annual Report on Form 10-K (filed with the Commission on February 28, 2023), BRB's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023 ("Q1 2023") (filed on May 10, 2023), and BRB's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2023 ("Q2 2023") (filed on August 9, 2023). The voluntary request letter sought specified categories of documents and was signed by Senior Staff Attorney Andrea Felton.
September 20, 2023. Calderwood & Harkness LLP was retained by BRB to represent the Bank in connection with the SEC inquiry. The engagement letter was executed on this date by Derek Sung on behalf of BRB and by Victoria Chambers on behalf of Calderwood & Harkness LLP.
September 29, 2023. Calderwood & Harkness LLP entered its appearance in the matter via letter to Senior Staff Attorney Andrea Felton. The letter confirmed BRB's cooperative posture with respect to the inquiry and requested a meet-and-confer to discuss the scope of the voluntary request and the logistics of any document production.
October 2, 2023. An Audit Committee briefing memorandum was transmitted to Gwendolyn Prescott, Chair of the Audit Committee of the BRB Board of Directors, and to Derek Sung. The memorandum summarized the voluntary request, the scope of the inquiry, and the firm's preliminary assessment.
October 5, 2023. A directors' and officers' liability insurance tender letter was sent to Northcastle Mutual Assurance Company ("Northcastle Mutual") under D&O Insurance Policy No. NMA-DO-2023-11847. The tender letter was transmitted by Ridgeline Governance Advisors LLC, the Bank's D&O insurance broker, and requested acknowledgment of coverage and advancement of defense costs in accordance with the policy terms.
October 10, 2023. Brindoval Analytic Partners LLC was retained as a forensic accounting consultant under the Kovel doctrine and the attorney work-product doctrine. The engagement is directed by and through Calderwood & Harkness LLP for the purpose of providing accounting analysis and expert advisory services in connection with the SEC investigation. The engagement partner is Dr. Franklin Osei, CPA, CFF. The engagement letter, executed on this date, expressly states that Brindoval is retained by Calderwood & Harkness LLP at the direction of counsel in anticipation of litigation, and that all communications between Brindoval and C&H are intended to be protected by the attorney-client privilege and the work-product doctrine.
October 12, 2023. The Commission issued Formal Order of Investigation No. EN-2023-0947, authorizing the Staff to use compulsory process in connection with File No. HO-14287.
October 15, 2023. The Staff issued a document subpoena bearing the designation SEC Subpoena No. HO-14287-001, directed to BRB and requiring the production of specified categories of documents and data.
The rapidity with which the investigation escalated from voluntary request to Formal Order — a span of fewer than twenty-five days — is noteworthy. While not unprecedented, this pace suggests that the Staff had already conducted substantial preliminary analysis prior to issuing the voluntary request letter, and that the voluntary request phase may have been intended from the outset as a stepping stone to formal proceedings.
C. The Core Disclosure Issue
The central issue under investigation concerns the adequacy of BRB's reported allowance for credit losses as applied to the BridgeFin digital lending portfolio. The facts surrounding this issue are as follows:
As of December 31, 2022, BRB reported an ACL of $143.5 million applicable to the BridgeFin portfolio, representing a coverage ratio of approximately 3.50% of the $4.1 billion outstanding BridgeFin loan balance. Based on information communicated informally by the Staff during the voluntary request phase, the SEC Staff's preliminary view is that the ACL should have been approximately $180.8 million — a coverage ratio of approximately 4.41% of outstanding loans. This represents a potential understatement of $37.3 million.
This alleged understatement is significant not only in absolute terms but also in relation to BRB's own materiality threshold. BRB's internal materiality benchmark, as documented in the Bank's financial reporting policies, is set at 5% of pre-tax income. For FY 2022, with pre-tax income of $612 million, this threshold equals $30.6 million. The alleged understatement of $37.3 million exceeds BRB's own materiality threshold by $6.7 million — a fact that will not be lost on the Staff and that complicates any argument that the difference is immaterial.
The key disputed item driving the ACL discrepancy relates to BRB's treatment of re-aged and modified loans within the BridgeFin portfolio. Specifically, BRB's CECL model treated 12,847 re-aged or modified BridgeFin loans, carrying an aggregate outstanding balance of $236.4 million, as "current" after modification. In effect, BRB reset the delinquency clocks on these loans upon modification, causing them to be reclassified from delinquent buckets to current status within the vintage-cohort model used to estimate expected credit losses.
The SEC Staff contends that this treatment was improper and that the re-aged loans should have remained in their original vintage delinquency buckets for purposes of loss-rate estimation. The practical impact of this disagreement is significant. Under BRB's as-reported methodology, the net charge-off rate for the BridgeFin portfolio was 2.14%, and the 90-plus-day delinquency rate was 1.72%. Under the Staff's view — which reclassifies the re-aged loans into their original delinquency buckets — the net charge-off rate increases to approximately 3.05%, and the 90-plus-day delinquency rate increases to approximately 2.38%. These revised metrics are materially different from the figures reported by BRB and would have painted a meaningfully less favorable picture of BridgeFin's credit quality.
The re-aging issue thus sits at the intersection of accounting methodology, credit risk management, and financial disclosure — and it is the fulcrum upon which the investigation is likely to turn.
III. Analysis of the Formal Order's Scope
A. Text and Structure of the Order
The Formal Order of Investigation No. EN-2023-0947 follows the standard format prescribed by the Commission's Rules of Practice and the Division of Enforcement's internal procedures. It identifies BRB by its full legal name — Belmont Ridge Bank National Association — and references BRB's Nasdaq-listed common stock (ticker symbol: BRDG). The Order is captioned "In the Matter of Belmont Ridge Bank National Association" and bears the SEC File Number HO-14287.
The Order's prefatory recitals set forth the factual predicate for the investigation, stating that the Commission has information tending to show that BRB may have made inaccurate or misleading statements in certain periodic reports filed with the Commission and that the Commission deems it appropriate to conduct an investigation to determine whether any violations of the federal securities laws have occurred. The recitals do not identify specific misstatements or provide a detailed factual narrative; they are characteristic of the general, conclusory language typically used in formal orders.
The Order recites the Commission's authority under Sections 19(b) and 21(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78s(b) and 78u(a), to investigate potential violations of the federal securities laws. Section 21(a) is the principal statutory provision authorizing the Commission to investigate whether any person has violated, is violating, or is about to violate any provision of the Exchange Act or any rule or regulation thereunder, and to subpoena witnesses, compel attendance, take evidence, and require the production of records.
The operative paragraphs of the Order authorize the designated officers of the Commission to investigate whether BRB "and/or any person or entity" has engaged in acts or practices constituting violations of, or aiding and abetting violations of, specified provisions of the federal securities laws. This language is important for several reasons. First, the reference to "any person or entity" extends beyond BRB itself and could encompass officers, directors, employees, auditors, and other third parties. Second, the inclusion of "aiding and abetting" liability creates a potential basis for individual charges against persons who knowingly or recklessly provided substantial assistance to a primary violation.
Notably, the Formal Order does not name any individual officer or director as a subject or target of the investigation. It references only BRB as the entity under investigation. However, this should not be taken as a guarantee that individual charges will not follow. It is standard practice for the Commission to issue formal orders naming only the entity at the outset of an investigation and to designate individuals as subjects or targets later, after the investigation has progressed. The Order's silence on individual liability is therefore procedurally neutral, not exculpatory.
B. Statutory Provisions Referenced
The Formal Order references the following specific provisions of the federal securities laws:
Section 13(a) of the Exchange Act (15 U.S.C. § 78m(a)). This provision requires issuers of securities registered under Section 12 of the Exchange Act to file with the Commission such annual, quarterly, and other periodic reports as the Commission may prescribe. The reports must be accurate and complete in all material respects. Section 13(a) is the foundational statutory authority for the Commission's periodic reporting requirements, and a violation occurs when an issuer files a report that contains a material misstatement or omission. No showing of scienter is required for a Section 13(a) violation; negligence is sufficient. This provision is directly relevant to the ACL disclosures in BRB's Form 10-K and Forms 10-Q at issue.
Section 13(b)(2)(A) of the Exchange Act (15 U.S.C. § 78m(b)(2)(A)). This is the "books and records" provision, which requires every issuer of securities registered under Section 12 to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. The "reasonable detail" standard is defined in the statute as the level of detail "as would satisfy prudent officials in the conduct of their own affairs." This provision operates under a strict-liability standard — no showing of scienter or even negligence is required. The inclusion of this provision in the Formal Order is significant because it opens the door to inquiry into how BRB recorded re-aged and modified loans in its internal systems and whether the loan-level records accurately reflected the true delinquency status of the modified loans. If BRB's internal records characterized re-aged loans as "current" when they were in fact delinquent by any reasonable standard, a books-and-records violation could be established without any showing of intent.
Rule 13a-1 thereunder (17 C.F.R. § 240.13a-1). This rule implements Section 13(a) with respect to the annual report filing requirement and requires issuers to file annual reports on Form 10-K in conformity with the Commission's rules and regulations.
Rule 12b-20 thereunder (17 C.F.R. § 240.12b-20). This rule is a general anti-omission provision that requires reports filed with the Commission to contain such further material information as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading. Rule 12b-20 is frequently invoked in reporting-violation cases to support the theory that an issuer's filings, while containing the specifically required disclosures, nonetheless omitted information necessary to prevent the overall presentation from being misleading.
What Is Not Referenced. Equally important as the provisions included in the Formal Order are the provisions that are conspicuously absent. The Order does not reference:
• Section 10(b) of the Exchange Act or Rule 10b-5 thereunder — the general antifraud provisions. A claim under these provisions would require the Staff to establish scienter — that is, that BRB (or its officers) acted with the intent to deceive, manipulate, or defraud, or with severe recklessness amounting thereto.
• Section 13(b)(2)(B) of the Exchange Act — the internal controls provision, which requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP.
• Section 13(b)(5) of the Exchange Act — which prohibits any person from knowingly circumventing or knowingly failing to implement a system of internal accounting controls, or knowingly falsifying any book, record, or account.
The absence of these provisions is a significant and favorable indicator. It suggests that the Staff's current theory is focused on reporting violations (i.e., that BRB's filings were materially inaccurate) rather than on fraud (i.e., that BRB knowingly or recklessly misrepresented its financial condition). The distinction is critical because reporting violations under Sections 13(a) and 13(b)(2)(A) and the related rules carry lower scienter thresholds (negligence or strict liability) but also generally result in lesser penalties — typically cease-and-desist orders, civil monetary penalties, and remedial undertakings, rather than the injunctions, officer-and-director bars, and disgorgement remedies associated with fraud charges.
However, the Order's general authorization language — specifically, the phrase "and such other provisions as may be relevant" — is broad enough to permit the Staff to expand the investigation to include antifraud and internal-controls charges at a later date if the evidence warrants. This is standard boilerplate language, but it has real legal effect and should not be dismissed.
C. Temporal Scope
The Formal Order references BRB's "periodic reports filed with the Commission for fiscal year 2022 and the first two quarters of fiscal year 2023." Based on this language, the investigation expressly encompasses the following filings:
While the Formal Order specifically identifies these three filings, it does not explicitly limit the investigation to these filing periods. The Order's authorization language encompasses "any and all relevant periods," which is a standard but significant phrase. As a practical matter, this language could extend the temporal scope of the investigation in at least two directions:
Backward. The Staff could extend the inquiry into FY 2021 filings — the first full fiscal year of BridgeFin operations after its Q3 2020 launch. If the re-aging practices at issue existed in FY 2021 (which they likely did, given that re-aging is typically a programmatic policy rather than an ad hoc decision), the Staff could seek documents and testimony relating to the FY 2021 Form 10-K and the accompanying Forms 10-Q. Indeed, if the Staff's theory is that BRB adopted an improper re-aging methodology from the inception of the BridgeFin program, the historical practices from FY 2021 forward would be highly relevant.
Forward. The Q3 2023 Form 10-Q, covering the period ended September 30, 2023, has not yet been filed as of the date of this memorandum (the filing deadline is November 9, 2023). The Staff will almost certainly review this filing when it becomes available, and any changes (or lack of changes) to BRB's ACL methodology or BridgeFin disclosures in the Q3 2023 filing will receive heightened scrutiny.
D. Subject-Matter Scope — Potential for Broader Inquiry
The Formal Order's core focus is clearly on ACL disclosures and the methodology underlying BRB's allowance for credit losses for the BridgeFin consumer loan portfolio. The recitals, the specific filings identified, and the statutory provisions cited all converge on this central issue. However, several aspects of the Order could support a broader inquiry beyond the narrow re-aging question:
Books and Records (Section 13(b)(2)(A)). The inclusion of this provision opens a distinct line of inquiry into how BRB recorded re-aged and modified loans in its internal systems. The question is not merely whether the ACL disclosures in BRB's SEC filings were accurate, but whether the Bank's underlying books and records — its loan-level data, delinquency tracking systems, CECL model inputs, and modification logs — accurately reflected the true status and risk profile of the modified loans. If the Staff determines that BRB's internal records classified loans as "current" when they should have been classified as delinquent, a books-and-records violation could be established independently of any reporting violation, and without any showing of intent.
Management's Discussion and Analysis (MD&A) Disclosures. The Formal Order references "known trends and uncertainties" language that is characteristic of Item 303 of Regulation S-K. This suggests the Staff may examine whether BRB's MD&A — a narrative disclosure requirement in Forms 10-K and 10-Q — adequately disclosed deteriorating credit-quality trends in the BridgeFin vintage cohorts originated after the second quarter of 2021. If BRB was aware of increasing delinquency rates, elevated modification volumes, or accelerating charge-offs in certain vintage cohorts but did not disclose these trends as "known trends or uncertainties" that were reasonably likely to have a material effect on the Bank's financial condition or results of operations, an MD&A violation could be asserted. MD&A disclosure obligations are independent of the financial-statement requirements and present a separate source of potential liability.
Officer Certifications. Although the Formal Order does not specifically reference Sections 302 or 906 of the Sarbanes-Oxley Act of 2002, the CEO and CFO certifications required by those provisions are implicitly at risk if the underlying filings are found to be materially inaccurate. Marcus R. Ellingham, as Chief Executive Officer, and Patricia Navarrete, as Chief Financial Officer, each certified the accuracy of BRB's financial statements and the effectiveness of the Bank's disclosure controls and procedures in each of the filings at issue. If the Staff concludes that the ACL disclosures were materially inaccurate, it could assert that the certifications were false — a conclusion that could, in turn, support charges against Ellingham and Navarrete individually.
"Other Provisions as May Be Relevant." As noted above, this standard boilerplate reservation of authority has real legal effect and permits the Staff to expand the investigation to include any federal securities law provision without the need to obtain a new or amended formal order.
Overall Assessment. At present, the Formal Order does not signal a fishing expedition into BRB's broader banking operations. The focus remains squarely on ACL disclosures for the BridgeFin portfolio. The absence of antifraud provisions is encouraging. However, we should prepare for the possibility that the Staff may expand its inquiry into the following areas: (i) internal controls over financial reporting, particularly the controls governing BRB's CECL model inputs and the re-aging classification process; (ii) communications between BRB management and Whitfield Keane LLP, the Bank's independent auditor (PCAOB Registration No. 2847; engagement partner Lorraine Dupont), regarding the ACL estimate, any proposed audit adjustments, and the auditor's assessment of the re-aging treatment; and (iii) OCC examination-related documents, which will implicate the bank-examination privilege and require careful handling (discussed further in Section VI below).
IV. Identification of Document Categories
A. Categories Expected to Be Sought Under the Subpoena
Based on our analysis of the Formal Order's scope and a preliminary review of the document subpoena (SEC Subpoena No. HO-14287-001) issued on October 15, 2023, we anticipate that the following categories of documents will be sought by the Staff. While the subpoena itself contains its own specific language and definitions, the categories below represent our assessment of the substantive areas that the production will cover.
1. SEC Filings and Drafts. All drafts, comments, tracked-change versions, and final versions of the FY 2022 Form 10-K, Q1 2023 Form 10-Q, and Q2 2023 Form 10-Q, together with any related correspondence, memoranda, or communications reflecting the review and preparation process for these filings. This category will necessarily implicate documents in the possession of Caldwell Pratt & Stein LLP ("CPS"), BRB's securities reporting counsel (lead partner: Martin Caldwell; office address: 51 West 52nd Street, 24th Floor, New York, New York 10019), which assisted with the preparation and review of the filings at issue. Documents reflecting CPS's legal advice regarding disclosure obligations will be subject to attorney-client privilege analysis (discussed in Section VI below), but drafts reflecting factual changes, financial data insertions, and business-side comments may be producible.
2. CECL Model Documentation. BRB's CECL methodology documentation, including the Bank's model governance policies and procedures, model validation reports (whether prepared internally or by third-party model validation vendors), vintage-cohort loss-rate assumptions and supporting data, qualitative overlay analyses and the documentation supporting management's qualitative adjustments to model-derived estimates, quarterly model-output summaries and variance analyses, and any presentations or memoranda prepared for the ACL estimation committee or senior management regarding the CECL model's performance, calibration, or results. This category is likely to be voluminous and highly technical, and the production will benefit significantly from the forensic accounting analysis being performed by Brindoval Analytic Partners.
3. BridgeFin Loan-Level Data. Loan-level data for the BridgeFin portfolio, including origination records, borrower-level underwriting data, modification and re-aging records for the 12,847 modified loans (aggregate outstanding balance: $236.4 million), delinquency tracking records and status histories, charge-off records and recovery data, and any loan-level data feeds or extracts used as inputs to the CECL model. The production of loan-level data will require coordination with BRB's information technology and data management teams, as the data resides in the Bank's core banking system and may need to be extracted in a format suitable for regulatory review. We should also consider whether the production of borrower-level data implicates any customer privacy obligations, although such obligations generally yield to valid subpoenas issued by federal regulators.
4. ACL Committee and Credit Risk Committee Materials. Minutes, agendas, presentations, supporting analyses, and related correspondence from BRB's internal ACL estimation committee (or equivalent body) and any credit-risk governance committees or bodies that reviewed or approved the ACL estimate for the BridgeFin portfolio. These materials will likely reflect the participation of Chief Risk Officer Annette Kowalski and Chief Accounting Officer Raymond Hu, both of whom are expected to be among the primary custodians (discussed in Section IV.B below). These documents may provide the Staff with insight into the deliberative process by which BRB established its ACL, including any debates or disagreements regarding the re-aging treatment.
5. Communications with External Auditor. Correspondence and communications between BRB management and Whitfield Keane LLP regarding the ACL estimate, any proposed audit adjustments (whether recorded or unrecorded), management representation letters, and the auditor's assessment of BRB's CECL methodology and the re-aging treatment. The primary BRB contacts in these communications are expected to be Patricia Navarrete (CFO), Raymond Hu (Chief Accounting Officer), and Annette Kowalski (Chief Risk Officer). We note that auditor communications are not protected by the attorney-client privilege unless they were channeled through counsel for the purpose of obtaining legal advice. A privilege analysis should be conducted for each auditor communication to determine whether any portion is protected.
6. Board and Audit Committee Materials. Minutes and materials from meetings of the BRB Board of Directors and the Audit Committee of the Board at which ACL methodology, BridgeFin credit quality, or SEC filing disclosures were discussed. The Audit Committee is chaired by Gwendolyn Prescott, who is an independent director and is expected to be designated as a custodian for purposes of board-level document collection. Board and Audit Committee materials frequently contain frank assessments of risk and management performance, and they may include presentations by management, the external auditor, or internal audit that bear directly on the re-aging issue.
7. Internal Audit Reports. Any internal audit reports, findings, workpapers, or follow-up memoranda relating to BridgeFin credit quality, ACL methodology, loan-modification practices, or the re-aging of delinquent loans. Internal audit reports can be particularly significant in SEC investigations because they may identify control deficiencies, process weaknesses, or departures from policy that management was aware of — information that could bear on the question of whether BRB's disclosures were negligently or knowingly inaccurate.
8. Regulatory Correspondence. Communications with the OCC regarding BRB's ACL methodology, credit-quality examinations, supervisory findings, matters requiring attention ("MRAs"), or any other supervisory matters related to the BridgeFin portfolio. This category presents a sensitive privilege issue, as such communications and examination materials are protected by the bank-examination privilege (discussed in detail in Section VI.C below). The bank-examination privilege is a qualified privilege, and its applicability vis-à-vis an SEC subpoena may require negotiation with the Staff or, if necessary, a formal motion to quash.
9. Analyst and Investor Communications. Earnings call transcripts, investor day presentations, analyst question-and-answer sessions, and other communications in which BRB management discussed BridgeFin credit quality, the ACL, or related metrics with investors, analysts, or the financial markets. These materials are typically public or semi-public, but the Staff may also seek internal preparatory materials, talking points, and scripts used in connection with earnings calls and investor presentations — materials that would reveal management's state of mind and the level of detail at which BridgeFin credit quality was being monitored and discussed.
10. Personal Communications of Key Custodians. Emails, text messages, instant messages (including through platforms such as Vireo Software, Northgate Data Systems, or Meridian Solutions, if used), and other electronic communications of identified custodians that reference or relate to the ACL, BridgeFin credit quality, re-aging, loan modifications, charge-offs, delinquency metrics, or the SEC inquiry itself. The production of personal communications is frequently the most time-consuming and discovery-intensive aspect of an SEC investigation, and the scope of this category will need to be carefully negotiated with the Staff in terms of date ranges, search terms, and custodian limitations.
B. Custodian Identification
Based on the foregoing analysis, we recommend the following individuals as the primary custodians for purposes of document collection and production:
Primary Custodians:
1. Patricia "Trish" Navarrete, Chief Financial Officer. As CFO, Navarrete has ultimate oversight responsibility for BRB's financial reporting, including the ACL disclosures at issue. She is a co-signatory to the CEO/CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act. Her files, emails, and communications are expected to contain critical documents bearing on the ACL estimation process and the preparation of BRB's SEC filings.
2. Raymond Hu, Chief Accounting Officer. Hu is the officer primarily responsible for the mechanics of the CECL model, the quarterly ACL true-up process, qualitative overlay analyses, and the preparation of the journal entries recording the ACL. He is also a primary contact for communications with Whitfield Keane LLP regarding audit-related matters.
3. Naveen Chakravarti, SVP & Division Head, BridgeFin. Chakravarti is the operational leader of the BridgeFin division and has direct knowledge of the loan-modification and re-aging policies, credit-quality trends, the AI-driven underwriting model, and the vintage-cohort data underlying the BridgeFin portfolio.
4. Annette Kowalski, Chief Risk Officer. Kowalski oversees the credit-risk governance framework, including the ACL estimation committee and the risk-appetite framework for BridgeFin. Her files are expected to contain risk reports, credit-quality analyses, and committee materials bearing on the ACL.
5. Derek Sung, General Counsel / Chief Legal Officer. Sung's files may contain relevant documents regarding the legal review of SEC filings, disclosure controls and procedures, and communications with the OCC. However, a significant portion of Sung's files will be subject to attorney-client privilege, and the inclusion of Sung as a custodian will require particularly careful privilege review.
6. Marcus R. Ellingham, Chief Executive Officer. As CEO, Ellingham is a co-signatory to the Sarbanes-Oxley certifications and has general oversight responsibility for BRB's operations and reporting. However, we anticipate that the volume of relevant documents in Ellingham's files will be limited compared to the other primary custodians, and we recommend proposing Ellingham as a limited custodian — subject to collection for specific document types (e.g., Board materials, Sarbanes-Oxley certification files, and communications specifically addressing BridgeFin credit quality or the ACL) rather than a full-scope email collection.
7. Gwendolyn Prescott, Audit Committee Chair. As Chair of the Audit Committee, Prescott's files will contain Board-level and committee-level materials relating to the ACL, financial reporting, and oversight of the external audit. We recommend proposing Prescott as a custodian limited to Board and committee materials, rather than a full email collection.
Possible Additional Custodians:
In addition to the seven primary custodians identified above, the Staff may seek to designate the following individuals or categories of individuals:
• Members of the BridgeFin credit-risk analytics team who were responsible for preparing the vintage-cohort data and implementing the re-aging classifications in BRB's systems;
• Members of the ACL model governance team responsible for model validation and performance monitoring;
• Personnel at Caldwell Pratt & Stein LLP who were involved in the preparation and review of the SEC filings at issue (to the extent CPS is willing to produce non-privileged communications voluntarily, or to the extent the Staff issues a separate subpoena to CPS).
Recommendation. We recommend proposing an initial custodian list of eight to ten individuals to the Staff and negotiating the scope of collection for each custodian. The negotiation should prioritize keeping the custodian count manageable, with Navarrete, Hu, and Chakravarti as the core custodians for full-scope collection, and the remaining custodians subject to document-type or date-range limitations where possible.
V. Identification of Potential Witnesses
A. Current BRB Officers and Employees
The following current BRB officers and employees are likely to be sought as witnesses by the SEC Staff, either through investigative testimony subpoenas (formal testimony under oath before Staff attorneys) or through informal interviews:
B. External Witnesses
The following external individuals and their associated entities are likely to be the subjects of testimony requests or third-party subpoenas:
C. Witness Priority Assessment
Based on our assessment of the investigation's focus, we believe the Staff is most likely to prioritize testimony from the following three individuals, in the following order:
1. Naveen Chakravarti — as the individual with the most direct operational knowledge of the BridgeFin re-aging practices and the underlying credit-quality trends;
2. Raymond Hu — as the individual primarily responsible for the CECL model mechanics and the accounting treatment of the re-aged loans; and
3. Patricia Navarrete — as the senior financial officer with oversight responsibility for the ACL estimate and signatory to the Sarbanes-Oxley certifications.
We anticipate that testimony subpoenas could be issued within four to eight weeks of the commencement of document production, consistent with the Staff's standard practice of reviewing a threshold set of key documents before scheduling testimony. In some cases, the Staff may schedule testimony on a rolling basis, beginning with lower-level witnesses who have direct operational knowledge and working up to senior management.
Recommendation. We recommend commencing internal preliminary interviews with all six internal witnesses identified in Section V.A above immediately. These interviews should be conducted in accordance with the firm's Corporate Representation Advisory Memorandum and should include appropriate Upjohn warnings to each witness — i.e., clearly informing each individual that Calderwood & Harkness LLP represents BRB as the entity, not the individual witness in his or her personal capacity; that the privilege for the interview belongs to BRB, not the individual; and that BRB may choose to waive the privilege and disclose the contents of the interview to the SEC or other parties. Each witness should be advised to consult with personal counsel if he or she desires individual representation.
With respect to external witnesses, Calderwood & Harkness LLP would not prepare or represent Lorraine Dupont or Martin Caldwell in connection with their respective testimony. However, we should establish a coordination protocol with their respective counsel as soon as practicable. Whitfield Keane LLP's external counsel for regulatory matters is Hargrove & Millstein LLP, with Samuel Hargrove as the lead partner (1700 K Street NW, Suite 900, Washington, D.C. 20006). Caldwell Pratt & Stein may elect to retain separate counsel for purposes of this investigation; we should inquire of Martin Caldwell regarding his plans and the identity of any retained counsel.
VI. Privilege and Protective Considerations
A. Attorney-Client Privilege
The attorney-client privilege protects confidential communications between BRB and its attorneys made for the purpose of obtaining or providing legal advice. In the context of this investigation, the privilege protects the following categories of communications:
• Communications between BRB personnel and attorneys at Caldwell Pratt & Stein LLP regarding legal advice on SEC disclosure obligations, the adequacy of specific disclosures, and the interpretation of applicable accounting standards and SEC rules as they relate to disclosure requirements. These communications are squarely within the scope of the privilege, provided they were made in confidence and for the purpose of obtaining legal advice (as opposed to business or accounting advice).
• Communications between BRB personnel and attorneys at Calderwood & Harkness LLP made in connection with the SEC investigation, including all investigative memoranda, legal analyses, witness interview notes, and strategic discussions. These communications are privileged both as attorney-client communications and as attorney work product.
• Communications between Derek Sung, in his capacity as BRB's General Counsel, and other BRB officers and directors, to the extent such communications involve the provision of legal advice. However, we note that Sung wears multiple hats as a member of the senior management team, and communications in which Sung provides business (as opposed to legal) advice may not be privileged. A careful, document-by-document privilege review will be necessary for Sung's custodial files.
It is important to emphasize that factual documents, business records, and pre-existing data are not privileged merely because they were later shared with counsel. For example, the CECL model documentation, loan-level data, Board minutes, and internal audit reports are pre-existing business records that do not become privileged by virtue of having been provided to Calderwood & Harkness LLP or Brindoval Analytic Partners LLC in connection with the investigation. The privilege protects communications, not the underlying facts.
B. Work-Product Doctrine
The work-product doctrine, codified in Federal Rule of Civil Procedure 26(b)(3) and applicable by analogy to SEC investigations, protects documents and tangible things prepared by or for a party in anticipation of litigation. In this matter, the work-product doctrine protects the following:
• All memoranda, analyses, legal research, interview notes, and strategic communications prepared by attorneys and staff at Calderwood & Harkness LLP in connection with the SEC investigation;
• All forensic accounting analyses, reports, and communications prepared by Brindoval Analytic Partners LLC at the direction of Calderwood & Harkness LLP in connection with the investigation; and
• All documents reflecting the mental impressions, conclusions, opinions, or legal theories of C&H attorneys (opinion work product), which receives near-absolute protection.
Brindoval's engagement has been carefully structured to preserve work-product protection. The engagement letter, executed on October 10, 2023, expressly states that Brindoval Analytic Partners LLC is retained by Calderwood & Harkness LLP at the direction of counsel for the purpose of assisting counsel in rendering legal advice to BRB in connection with the SEC investigation. All communications between Brindoval and C&H are directed through C&H attorneys, and Brindoval's work product is delivered to C&H rather than directly to BRB. This structure is consistent with the framework established by the Second Circuit in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961), under which communications with non-attorney agents retained by counsel to assist in providing legal services are protected by the attorney-client privilege.
C. Bank-Examination Privilege
The bank-examination privilege is a qualified privilege that protects confidential communications between banks and their federal and state banking regulators from disclosure to third parties. The privilege has been recognized by numerous federal courts and is grounded in the strong public policy of encouraging candid and open communication between banks and their supervisory agencies.
In BRB's case, the bank-examination privilege potentially covers the following categories of documents:
• OCC examination reports and ratings, including BRB's CAMELS composite rating (currently rated 2 — Satisfactory) and the component ratings underlying the composite;
• Reports of Examination ("ROEs") and related attachments;
• Matters Requiring Attention ("MRAs"), Matters Requiring Immediate Attention ("MRIAs"), and other supervisory findings or directives issued by the OCC in connection with its examination of BRB;
• BRB's responses to examination findings and MRAs;
• Confidential supervisory information ("CSI") shared between BRB and the OCC in the context of the examination process.
The interplay between the SEC's subpoena authority and the bank-examination privilege is a well-recognized area of tension. The SEC may argue that the bank-examination privilege does not apply to SEC subpoenas, or that the privilege is overcome by the SEC's legitimate regulatory interest in the documents. The OCC, for its part, has historically been protective of examination materials and may object to production to the SEC absent its consent or a specific interagency protocol.
Recommendation. We should flag this issue immediately with Derek Sung and determine the scope of OCC examination materials that may be responsive to the subpoena. If such materials exist, we should develop a privilege-assertion strategy that may include: (i) asserting the bank-examination privilege in the privilege log accompanying the document production; (ii) seeking the OCC's guidance on the assertion of the privilege; and (iii) if the Staff challenges the assertion, negotiating a resolution that may involve production of non-privileged summaries or descriptions rather than the examination materials themselves. If negotiation is unsuccessful, we should be prepared to file a motion to quash the subpoena to the extent it seeks privileged bank-examination materials.
D. FRE 502(d) Protections
Given the anticipated volume of the document production — potentially encompassing several hundred thousand documents across multiple custodians and data sources — the risk of inadvertent privilege waiver is substantial. Federal Rule of Evidence 502(d) provides that a federal court may order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court.
Although this investigation is not pending in court, the SEC Staff has in recent years become increasingly willing to enter into stipulations regarding inadvertent disclosure that are modeled on FRE 502(d). Such stipulations typically provide that the inadvertent production of privileged or work-product-protected documents does not constitute a waiver of the privilege or protection, and that the producing party may "claw back" inadvertently produced privileged documents upon discovery of the error.
Recommendation. As outlined in the firm's Privilege Protocol & Document Preservation Memorandum, we should seek an FRE 502(d) clawback stipulation with the Staff at the earliest opportunity, ideally as part of the initial meet-and-confer regarding the document production logistics. If the Staff declines to enter into such a stipulation, we should consider whether to seek a 502(d) order from a federal court in connection with any ancillary proceedings (e.g., a motion to quash or a motion to compel).
VII. Assessment: Broader Inquiry Risk
A. Factors Suggesting a Focused Investigation
Several features of the Formal Order and the investigation as a whole suggest that the Staff's inquiry is focused on the specific ACL disclosure issue and is not, at present, a wide-ranging fraud investigation:
• Specificity of the Order's recitals. The Formal Order's recitals are specific to ACL disclosures and periodic reporting for the identified filing periods. There is no suggestion in the Order that the Staff is investigating BRB's broader banking operations, its commercial lending practices, its wealth management business, or any other line of business.
• Limited statutory provisions. Only Sections 13(a) and 13(b)(2)(A) of the Exchange Act, Rule 13a-1, and Rule 12b-20 are cited. These are reporting and books-and-records provisions. Critically, no antifraud provisions — including Section 10(b) and Rule 10b-5 — are referenced. The omission of antifraud provisions strongly suggests that the Staff's current theory does not include a scienter-based claim.
• Staff team composition. The Staff team assigned to the investigation consists of Senior Staff Attorney Andrea Felton, Staff Attorney Christopher Yuen, and Staff Accountant Diane Milosevic, supervised by Branch Chief Renata Moss and Assistant Director Gregory Bonham of the Financial Fraud Unit. While the assignment to the Financial Fraud Unit warrants attention (discussed in Section VII.B below), the team's composition — a senior staff attorney, a staff attorney, and a staff accountant — is consistent with a mid-level financial-reporting investigation rather than a large-scale fraud case, which would typically involve a larger team including a senior accountant or economists.
• No parallel criminal referral indicators. There is no indication at this time that the SEC has made a referral to the U.S. Department of Justice or that any parallel criminal investigation is underway. No DOJ contact has been reported, and neither BRB nor any of its officers has received a target letter or a request for voluntary interview from any DOJ component. While the absence of a known criminal referral is not dispositive (referrals can be made quietly and may not be communicated to the subject), it is a favorable data point.
B. Factors Suggesting Potential Expansion
Notwithstanding the indicators of a focused investigation, several features of the Formal Order and the surrounding circumstances create the possibility of expansion:
Assignment to the Financial Fraud Unit. The investigation is assigned to Assistant Director Gregory Bonham's unit within the Division of Enforcement, which is designated as the Financial Fraud Unit. This unit handles both routine financial-reporting matters and complex financial-fraud cases. The assignment is not necessarily alarming in itself — the Financial Fraud Unit handles a broad range of matters, and the expertise of its staff in accounting and disclosure issues makes it a natural home for an ACL investigation. However, if in the course of the investigation the Staff discovers evidence suggesting intentional or reckless misstatement (i.e., scienter), the matter could be upgraded to include antifraud charges under Section 10(b) and Rule 10b-5. The institutional infrastructure for such an upgrade is already in place by virtue of the Financial Fraud Unit assignment.
Strict-liability potential of Section 13(b)(2)(A). The books-and-records provision of the Exchange Act operates under a strict-liability standard. The Commission need not prove that BRB acted with scienter or even negligence; it need only prove that the Bank's books and records did not, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets. This is a low threshold that the Staff could pursue aggressively based solely on the re-aging classification issue, without confronting the more demanding proof requirements of a fraud charge. The inclusion of Section 13(b)(2)(A) in the Formal Order suggests that the Staff is aware of this enforcement-friendly theory and may pursue it as a standalone or alternative basis for liability.
Potential re-aging intent issue. The most significant risk factor for expansion relates to the re-aging practices themselves. If the Staff's document review reveals evidence that BRB personnel understood that the re-aging treatment would have the effect of reducing reported delinquency rates and the ACL requirement — and that the classification decision was made with the purpose of achieving those results rather than as a good-faith exercise of credit-modification judgment — the scienter analysis changes materially. Evidence of a purpose to mask deteriorating credit quality could transform the investigation from a reporting-violation matter into a fraud case. This is the primary risk vector that we must assess through internal interviews before the document production commences.
Internal-controls expansion. If the Staff concludes that BRB's internal controls over financial reporting were insufficient to prevent or detect the ACL misstatement — for example, if the CECL model lacked adequate governance controls, if the re-aging classifications were not subject to independent verification, or if the qualitative overlay process was informal or undocumented — the investigation could expand to encompass internal-controls violations under Section 13(b)(2)(B) of the Exchange Act. Internal-controls violations, like books-and-records violations, do not require a showing of scienter.
Individual liability. If the investigation expands to include antifraud charges, internal-controls charges, or certification-related charges, the risk of individual liability for BRB's officers increases substantially. Patricia Navarrete and Marcus Ellingham, as the signatories to the Sarbanes-Oxley certifications, would face the most direct exposure. Naveen Chakravarti and Raymond Hu could face aiding-and-abetting liability if the Staff determines that they provided substantial assistance to a primary violation with the requisite mental state.
"Other provisions" language. As discussed in Section III.B, the Formal Order's standard reservation — authorizing investigation of violations of "such other provisions as may be relevant" — is a real, not merely formal, reservation of authority that permits expansion without the need for a new or amended order.
C. Overall Assessment
Based on the totality of the information available as of the date of this memorandum, the current posture of the investigation is that of a focused financial-reporting inquiry centered on BRB's ACL disclosures for the BridgeFin digital lending portfolio. The probability of expansion into antifraud territory is assessed as low-to-moderate at this stage. This assessment is contingent, however, on what the document production reveals.
The primary risk vector for expansion — and the single most important factual issue in the investigation — is the re-aging question. If internal documents demonstrate that BRB personnel were aware that the re-aging treatment would reduce reported delinquency rates and ACL requirements, and that the classification decisions were motivated by a desire to achieve these reporting outcomes rather than by legitimate credit-modification considerations, the investigation will take on a fundamentally different character. Conversely, if internal documents show that the re-aging decisions were made in accordance with BRB's established modification policies, were consistent with industry practice, and were implemented without regard to their impact on reported credit metrics, the defense posture is strong.
Recommendation. We strongly recommend conducting targeted internal interviews of Naveen Chakravarti and members of the BridgeFin credit operations team to assess the factual record on re-aging decision-making before any documents are produced to the SEC Staff. Understanding the basis for the re-aging decisions — and whether any contemporaneous communications reflect awareness of the reporting impact — is essential for calibrating our production strategy and our engagement with the Staff.
VIII. Recommended Next Steps
Based on the foregoing analysis, we recommend that the investigation defense team take the following actions, listed in order of priority:
1. Document Subpoena Response. Immediately commence planning for the response to SEC Subpoena No. HO-14287-001 (issued October 15, 2023). We will prepare and circulate a separate Document Production Protocol letter to the SEC Staff, which we propose to deliver no later than October 20, 2023. The protocol letter will: (a) propose a search methodology, including the identification of custodians, date ranges, and keyword search terms; (b) specify the production format (TIFF images with extracted text and metadata, bearing Bates numbers in the format BRB-SEC-000001 et seq.); (c) identify any categories of documents for which we intend to assert privilege or request protective treatment; and (d) request confidential treatment for BRB's proprietary BridgeFin underwriting models and related algorithmic trade secrets under SEC Rule 83 (17 C.F.R. § 200.83). We should also request an extension of the initial production deadline if the subpoena sets an unreasonably short compliance period, and should seek to negotiate a rolling production schedule.
2. Privilege Review. Implement the privilege review protocol (fir