interim-status-memo-audit-committee.docx

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PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT NOT TO BE DISCLOSED WITHOUT PRIOR AUTHORIZATION OF CALDERWOOD & HARKNESS LLP

February 22, 2024

CALDERWOOD & HARKNESS LLP 425 Lexington Avenue, 30th Floor New York, New York 10017

MEMORANDUM

TO: Gwendolyn Prescott, Chair, Audit Committee of the Board of Directors, Belmont Ridge Bank National Association

Derek Sung, General Counsel & Chief Legal Officer, Belmont Ridge Bank National Association

FROM: Victoria Chambers, Partner, Calderwood & Harkness LLP Jasmine Thornton, Lead Associate, Calderwood & Harkness LLP

RE: SEC Division of Enforcement Investigation — File No. HO-14287; Interim Status Update

MATTER NO.: SC-MAT-2023-4172

This memorandum is protected by the attorney-client privilege and the attorney work-product doctrine. It was prepared by Calderwood & Harkness LLP at the request of, and for the benefit of, Belmont Ridge Bank National Association and its Audit Committee in connection with the provision of legal advice regarding the above-referenced investigation. This memorandum and its contents may not be disclosed to any third party without the prior written authorization of Calderwood & Harkness LLP. Any inadvertent disclosure does not constitute a waiver of any applicable privilege or protection.

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I. Executive Summary

The purpose of this memorandum is to provide the Audit Committee of the Board of Directors of Belmont Ridge Bank National Association ("BRB" or the "Bank") with a comprehensive interim update on the status of the investigation being conducted by the Division of Enforcement (the "Staff") of the U.S. Securities and Exchange Commission (the "SEC" or the "Commission") into BRB's public disclosures regarding the allowance for credit losses ("ACL") related to the Bank's BridgeFin digital lending platform (the "Investigation"). This memorandum covers material developments since Calderwood & Harkness's initial Audit Committee briefing on October 2, 2023 and is intended to provide the Committee with sufficient information to evaluate the current posture of the Investigation and to make informed decisions regarding recommended next steps.

The Investigation was initiated via a voluntary request letter from Senior Staff Attorney Andrea Felton dated September 18, 2023, and was subsequently formalized by the Commission's issuance of Formal Order of Investigation No. EN-2023-0947 on October 12, 2023, which authorized the Staff to compel the production of documents and the testimony of witnesses through the subpoena power of the Commission.

Since the initial Audit Committee briefing, the Investigation has progressed through several significant milestones. Document production to the SEC Staff is now substantially complete, with five of six scheduled rolling productions having been delivered and the sixth and final production scheduled for March 1, 2024. Additionally, three witnesses — Patricia Navarrete (Chief Financial Officer), Naveen Chakravarti (Senior Vice President & Division Head, BridgeFin), and Raymond Hu (Chief Accounting Officer) — have provided testimony before the Staff, with Ms. Navarrete and Mr. Chakravarti testifying pursuant to subpoena and Mr. Hu testifying voluntarily as part of BRB's cooperative posture.

The Staff's apparent investigative focus remains centered on whether BRB's reported ACL of $143.5 million — representing 3.50% of the $4.1 billion BridgeFin outstanding loan portfolio as of December 31, 2022 — materially understated expected credit losses. The Staff's preliminary analysis, as reflected in testimony questioning, suggests the Staff's view is that the ACL should have been approximately $180.8 million (4.41% of the BridgeFin portfolio), resulting in a potential understatement of approximately $37.3 million. The core dispute concerns the treatment of approximately 12,847 re-aged or modified BridgeFin consumer personal loans with an aggregate outstanding balance of $236.4 million, and specifically whether resetting delinquency clocks upon loan modification inappropriately suppressed the loss-rate estimates incorporated into BRB's current expected credit loss ("CECL") model.

Based on our assessment of the trajectory of the Investigation to date, including the level of Staff resources devoted to the matter, the nature and focus of testimony questioning, the involvement of the Financial Fraud Unit, and the quantum of the alleged understatement relative to BRB's internal materiality threshold, Calderwood & Harkness assesses that there is a meaningful possibility — which we estimate in the range of 40–55% — that the Staff will issue a Wells notice to BRB. This memorandum sets forth the basis for that assessment, outlines BRB's available defenses, and recommends preparatory steps that the Audit Committee should consider authorizing.

We emphasize that, notwithstanding the foregoing, we do not currently assess a significant risk that the Staff will pursue scienter-based charges (i.e., charges grounded in Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, or Section 17(a) of the Securities Act of 1933), which would require proof of intent to deceive. The statutory provisions referenced in the subpoenas and during testimony are limited to non-scienter reporting and books-and-records provisions. This distinction is significant because it limits the potential scope of any enforcement action and the severity of potential sanctions.

II. Background and Procedural History

A. Origin of the Investigation

The Investigation originated from the SEC Staff's review of BRB's periodic filings with the Commission, specifically the following public reports:

• BRB's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Commission on February 28, 2023 (the "FY 2022 10-K");

• BRB's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023, filed with the Commission on May 10, 2023 (the "Q1 2023 10-Q"); and

• BRB's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023, filed with the Commission on August 9, 2023 (the "Q2 2023 10-Q").

Based on our interactions with the Staff and the scope of the Staff's document requests and testimony questioning, we understand that the Staff's review of BRB's filings raised concerns regarding the adequacy of BRB's ACL disclosures as they related to the BridgeFin consumer personal-loan sub-segment. This sub-segment represents a significant and growing component of BRB's overall loan portfolio, having originated approximately $4.1 billion in outstanding consumer personal loans through BRB's AI-driven digital lending platform as of December 31, 2022.

On September 18, 2023, Senior Staff Attorney Andrea Felton of the SEC's Division of Enforcement transmitted a voluntary request letter to BRB's General Counsel, Derek Sung, requesting the voluntary production of specified categories of documents relating to BRB's ACL estimation process, BridgeFin loan origination and credit-quality metrics, and the Bank's SEC reporting and disclosure procedures. The voluntary request letter indicated that the Staff was conducting an inquiry into BRB's disclosures and compliance with the federal securities laws.

Upon receipt of the voluntary request letter, Mr. Sung promptly notified the Audit Committee Chair, Gwendolyn Prescott, and engaged Calderwood & Harkness LLP to represent BRB in connection with the inquiry. Calderwood & Harkness was formally retained on September 20, 2023. On September 29, 2023, this firm entered its appearance via letter to Senior Staff Attorney Felton, confirming that Calderwood & Harkness LLP was authorized to act on behalf of BRB and to accept service of process and communications from the Staff in connection with the inquiry. The appearance letter also confirmed BRB's cooperative posture and its commitment to working with the Staff to provide responsive information in a timely manner.

B. Formal Order and Subpoenas

On October 12, 2023, the Commission issued Formal Order of Investigation No. EN-2023-0947 (the "Formal Order"), designating the matter as a formal investigation and authorizing the Staff to exercise the Commission's compulsory process authority under Section 21 of the Exchange Act. The issuance of a Formal Order is a procedural step that enables the Staff to compel the production of documents and the attendance and testimony of witnesses through the issuance of subpoenas; it does not constitute a determination by the Commission that any violation of the securities laws has occurred.

Following the issuance of the Formal Order, the Staff served the following subpoenas:

• Document Subpoena No. HO-14287-001, issued October 15, 2023, requiring BRB to produce specified categories of documents and communications relating to the BridgeFin ACL, the Bank's CECL model, loan modification and re-aging practices, credit-quality reporting, internal controls, and communications with auditors and regulators. The subpoena incorporated a schedule of 47 document requests.

• Testimony Subpoena for Patricia Navarrete (CFO), issued November 22, 2023, compelling Ms. Navarrete's appearance for investigative testimony before the Staff. Testimony was subsequently scheduled for, and conducted on, January 18, 2024.

• Testimony Subpoena for Naveen Chakravarti (SVP & Division Head, BridgeFin), issued December 5, 2023, compelling Mr. Chakravarti's appearance for investigative testimony. Testimony was scheduled for, and conducted on, January 30, 2024.

In addition to the subpoenaed testimony, Raymond Hu, BRB's Chief Accounting Officer, testified voluntarily before the Staff on February 14, 2024. No subpoena was issued for Mr. Hu; rather, Calderwood & Harkness proactively offered to make Mr. Hu available for testimony as part of BRB's cooperative approach to the Investigation. The Staff accepted the offer and scheduled Mr. Hu's testimony accordingly.

C. Staffing on the SEC Side

The Investigation is being conducted by the following members of the SEC Staff:

• Senior Staff Attorney: Andrea Felton — Ms. Felton is the lead attorney on the Investigation and has conducted the primary examination of all witnesses.

• Staff Attorney: Christopher Yuen — Mr. Yuen has participated in all witness examinations and has been the primary point of contact for document production negotiations and custodian identification discussions.

• Staff Accountant: Diane Milosevic — Ms. Milosevic has participated in all witness examinations and has focused her questioning on technical accounting matters, including the mechanics of BRB's CECL model, the sensitivity of ACL estimates to various assumptions, and the treatment of re-aged loans within the vintage-cohort framework.

• Assistant Director, Financial Fraud Unit: Gregory Bonham — Mr. Bonham has not participated directly in witness examinations to date but has been identified as the supervising Assistant Director for the Investigation. His involvement indicates that the matter is being handled within the SEC's Financial Fraud Unit within the Division of Enforcement.

• Branch Chief: Renata Moss — Ms. Moss is the Branch Chief with supervisory authority over the Investigation team.

We note the involvement of the Financial Fraud Unit, which is the SEC's specialized unit responsible for investigating matters involving financial reporting, auditor conduct, and accounting fraud. The Financial Fraud Unit's involvement is consistent with the subject matter of the Investigation — the adequacy of financial reporting disclosures — and does not necessarily indicate that the Staff is pursuing a fraud theory requiring proof of scienter. Indeed, the Financial Fraud Unit handles a significant number of non-scienter reporting and books-and-records cases. However, the unit's involvement does suggest that the Staff views the matter as significant and has assigned it to attorneys and accountants with specialized expertise in financial reporting investigations.

D. Defense Team and Advisors

BRB's defense team and related advisors in connection with the Investigation are as follows:

Calderwood & Harkness LLP (outside defense counsel):

• Victoria Chambers, Partner — Responsible Partner for the engagement.

• Howard Quinn, Partner — Billing Partner.

• Jasmine Thornton, Lead Associate — Day-to-day management of the Investigation, including document production oversight, witness preparation, and SEC Staff communications.

• Liam Donahue, Associate — Working Associate responsible for document review, privilege review, and analytical support.

Brindoval Analytic Partners LLC (forensic accounting consultant):

• Dr. Franklin Osei, CPA, CFF — Engagement Lead. Brindoval was retained as of October 10, 2023, under a Kovel arrangement, meaning that Brindoval's work is performed at the direction of counsel and its work product is protected by the attorney work-product doctrine. Brindoval has conducted a forensic analysis of BRB's CECL model, the treatment of re-aged loans, and the sensitivity of ACL estimates to alternative methodological approaches. Brindoval's analysis is memorialized in a joint work-product memorandum dated December 22, 2023, the conclusions of which are summarized in Section V.C below.

Caldwell Pratt & Stein LLP (securities reporting counsel):

• Martin Caldwell, Lead Partner. CPS served as BRB's outside securities reporting counsel and prepared and reviewed the FY 2022 10-K and the Q1 and Q2 2023 10-Qs at issue in the Investigation. Calderwood & Harkness has coordinated with CPS regarding the disclosure process, including the relevant drafting history, markup iterations, and correspondence between CPS and BRB personnel. CPS is not separately representing BRB in the Investigation and is not a target or subject of the Staff's inquiry.

Whitfield Keane LLP (independent auditor):

• Lorraine Dupont, Audit Engagement Partner; PCAOB Registration No. 2847. Whitfield Keane served as BRB's independent registered public accounting firm and audited BRB's consolidated financial statements for FY 2021 and FY 2022. In connection with the Investigation, Whitfield Keane has retained separate counsel, Hargrove & Millstein LLP (Samuel Hargrove, Lead Partner), to represent the firm's interests. Calderwood & Harkness's coordination with Hargrove & Millstein is described in Section VIII.A below.

III. Document Production — Status and Summary

A. Completion of Rolling Productions

Pursuant to the document production protocol agreed with the SEC Staff on October 20, 2023, BRB has been producing responsive documents on a rolling basis. The production schedule, as negotiated with the Staff, contemplated six rolling productions to be delivered between November 1, 2023 and March 1, 2024. Five of the six rolling productions have been completed as of the date of this memorandum, and the sixth and final production is scheduled for delivery on March 1, 2024. The production schedule and volumes are as follows:

The total production, upon completion, will encompass approximately 284,617 documents comprising approximately 1.42 million pages. All documents have been Bates-numbered sequentially beginning with BRB-SEC-000001, produced in TIFF image format with extracted text and accompanying load files, in accordance with the production protocol agreed with the SEC Staff on October 20, 2023. The production protocol specifies the format, naming conventions, metadata fields, and deduplication standards applicable to the production.

The fifth production, completed on February 15, 2024, largely consisted of supplemental custodian collections and materials responsive to certain follow-up requests made by Staff Attorney Yuen following the January testimonies. The sixth and final production, estimated at approximately 38,912 documents, will consist primarily of the remaining reviewed and processed materials from the final custodian collections, together with any residual responsiveness determinations from the privilege review team.

Upon delivery of the sixth production, Calderwood & Harkness will provide the Staff with a certification that BRB's document production is substantially complete and that BRB has conducted a reasonable and diligent search for responsive materials in accordance with its discovery obligations.

B. Custodians and Scope

The document production encompasses materials collected from the following key custodians, among others:

• Patricia Navarrete, Chief Financial Officer

• Raymond Hu, Chief Accounting Officer

• Naveen Chakravarti, Senior Vice President & Division Head, BridgeFin

• Annette Kowalski, Chief Risk Officer

• Members of BRB's credit risk analytics team, including senior analysts and modelers within the BridgeFin division

• Members of BRB's corporate accounting and financial reporting teams

The applicable date range for the document collection is January 1, 2021 through September 30, 2023, as agreed with the SEC Staff during production protocol negotiations. The broader date range captures the period leading up to BRB's adoption and implementation of ASC 326 (CECL) as well as the relevant reporting periods at issue.

The substantive categories of documents encompassed by the production include, but are not limited to:

• Internal BridgeFin credit analytics reports and dashboards, including vintage-cohort performance data, delinquency migration analyses, and net charge-off tracking;

• CECL model documentation, including model development memoranda, validation reports, back-testing results, and model change logs;

• Quarterly ACL committee meeting materials, including agendas, presentations, minutes, and post-meeting action items;

• Board of Directors and Audit Committee presentations relating to BridgeFin credit quality and ACL adequacy;

• Loan modification and re-aging records, including modification approval forms, hardship documentation, and system records reflecting delinquency clock resets;

• Correspondence, workpapers, and audit-related communications with Whitfield Keane LLP relating to the BridgeFin ACL;

• SEC reporting drafts, including markup iterations of the FY 2022 10-K and Q1–Q2 2023 10-Qs, and related correspondence with Caldwell Pratt & Stein LLP; and

• Internal communications among BRB personnel concerning BridgeFin credit performance, ACL estimation, and disclosure considerations.

C. Privilege Log

Calderwood & Harkness has maintained a cumulative privilege log identifying all documents withheld from production or produced in redacted form on the basis of privilege. As of the date of this memorandum, the privilege log identifies a total of 1,847 documents that have been withheld or redacted. The privilege bases asserted include:

• Attorney-client privilege: Communications between BRB personnel and BRB's legal counsel (both in-house and outside counsel) made for the purpose of seeking or providing legal advice.

• Attorney work-product doctrine: Documents prepared by or at the direction of counsel in anticipation of litigation or in connection with the provision of legal advice, including Calderwood & Harkness work product, Brindoval Analytic Partners work product created under the Kovel arrangement, and litigation-related analyses.

• Bank-examination privilege: Documents constituting or reflecting confidential communications between BRB and its prudential regulators, including the Office of the Comptroller of the Currency ("OCC"), in connection with the OCC's supervisory and examination functions.

As of the date of this memorandum, the SEC Staff has not formally challenged any of BRB's privilege assertions. Staff Attorney Yuen did, however, raise informal questions during a telephone conference on January 22, 2024, regarding two categories of documents logged under the bank-examination privilege. The two categories consisted of (i) internal BRB memoranda prepared in connection with OCC examinations of BRB's credit risk management practices, and (ii) correspondence between BRB and the OCC relating to supervisory feedback on the BridgeFin portfolio. In response to Mr. Yuen's inquiry, Calderwood & Harkness provided supplemental privilege log descriptions with additional detail regarding the nature and basis for privilege for each of the documents at issue. Mr. Yuen has not raised further questions regarding these entries, and we do not anticipate a formal privilege challenge at this time.

The agreed production protocol incorporates FRE 502(d) clawback protections, pursuant to which the inadvertent production of privileged materials does not constitute a waiver of the applicable privilege. This protection is memorialized in a stipulated order entered by the Commission pursuant to its procedural rules. The clawback provision has not been invoked to date.

D. Confidential Treatment

As part of the production protocol letter submitted to the SEC Staff on October 20, 2023, BRB requested confidential treatment of certain categories of proprietary and commercially sensitive documents relating to the BridgeFin digital lending platform. Specifically, BRB sought confidential treatment for documents containing the architecture, feature weights, algorithmic parameters, and proprietary risk-scoring methodologies of BRB's AI-driven underwriting model, as well as related model governance and validation documentation. These materials constitute valuable trade secrets and proprietary business information, the public disclosure of which could cause competitive harm to BRB.

The SEC Staff has not objected to BRB's confidential treatment request. Documents containing the specified proprietary information have been produced subject to confidential treatment designations reflected in the Bates stamp and accompanying metadata. Calderwood & Harkness will continue to monitor the status of the confidential treatment request and will notify the Audit Committee if the Staff raises any objection or if any third party seeks access to the produced materials through the Commission's FOIA process.

IV. Witness Testimony — Summary and Key Takeaways

This section provides a summary of the three witness testimonies that have been conducted to date, together with Calderwood & Harkness's assessment of the significance of each testimony for the overall trajectory of the Investigation. The summaries below are based on the witnesses' testimony as reflected in the official court reporter's transcript (certified copies of which have been obtained by Calderwood & Harkness) as well as notes taken by counsel during the proceedings. All three testimonies were conducted at the SEC's offices in New York.

A. Patricia Navarrete (Chief Financial Officer) — January 18, 2024

Ms. Navarrete testified before Senior Staff Attorney Andrea Felton, Staff Attorney Christopher Yuen, and Staff Accountant Diane Milosevic on January 18, 2024, pursuant to the testimony subpoena issued on November 22, 2023. The testimony lasted approximately six and one-half (6.5) hours on the record, exclusive of breaks. Calderwood & Harkness (Victoria Chambers and Jasmine Thornton) represented Ms. Navarrete at the testimony.

The Staff's examination covered the following principal topics:

• The ACL estimation process at BRB, including the role of the CFO in overseeing and approving the quarterly ACL determination;

• The quarterly CECL model governance framework, including the composition and function of BRB's ACL Committee and the CFO's participation therein;

• Ms. Navarrete's review and certification of the FY 2022 10-K and the Q1 and Q2 2023 10-Qs, including the Sarbanes-Oxley Section 302 certifications;

• BRB's internal controls over financial reporting as they relate to the ACL estimation and disclosure process;

• Communications between Ms. Navarrete and Whitfield Keane LLP regarding the adequacy of the BridgeFin ACL and any audit differences or proposed adjustments identified during the FY 2022 audit; and

• Ms. Navarrete's awareness of and response to internal credit-quality reports reflecting delinquency and loss trends in the BridgeFin portfolio.

The Staff's questioning focused on three areas of particular significance:

First, the Staff devoted substantial time to the treatment of 12,847 re-aged or modified BridgeFin loans with an aggregate outstanding principal balance of $236.4 million. Specifically, the Staff's questions explored whether resetting the delinquency clock upon the granting of a loan modification — such that a previously delinquent loan is reclassified as "current" for purposes of the vintage-cohort loss-rate analysis — inappropriately suppressed the loss-rate estimates that fed into BRB's ACL calculation. Ms. Felton presented Ms. Navarrete with several internal BridgeFin credit analytics reports showing the volume and timing of modifications in Q3 and Q4 2022, and asked Ms. Navarrete to explain the basis for the re-aging treatment and its effect on reported delinquency metrics.

Second, the Staff examined the basis for the qualitative overlay factors that BRB applied within its CECL model. Under ASC 326, a reporting entity's CECL estimate must reflect not only quantitative historical loss data but also qualitative and environmental factors that may affect expected future credit losses. The Staff's questions suggested an interest in whether BRB's qualitative overlays were sufficient to capture the credit deterioration that, in the Staff's view, was being masked by the re-aging treatment.

Third, Staff Accountant Milosevic conducted an extended line of questioning regarding whether Ms. Navarrete was aware of internal reports suggesting higher-than-reported delinquency trends in certain BridgeFin vintage cohorts originated after Q2 2021. These cohorts included loans originated during a period of rapid portfolio growth and loosened credit criteria, and some internal BridgeFin reports indicated elevated early-stage delinquency rates relative to earlier-originated cohorts.

Assessment: Ms. Navarrete testified clearly and consistently with BRB's position throughout the examination. She explained that the re-aging treatment was applied in accordance with BRB's written loan modification policy, which had been in place since 2019, and that the treatment was consistent with the guidance set forth in the OCC's Comptroller's Handbook regarding loan modifications and troubled debt restructurings. She credibly described the quarterly ACL governance process, including the role of the ACL Committee, the inputs provided by the credit risk analytics team, and the independent challenge function performed by the Chief Risk Officer. With respect to Staff Accountant Milosevic's questioning regarding vintage-cohort delinquency trends, Ms. Navarrete acknowledged that she received periodic credit-quality reports from the BridgeFin division but explained that the trends reflected therein were incorporated into the CECL model through both the quantitative vintage-cohort inputs and the qualitative overlay factors. Milosevic pressed on this point but did not appear to establish that Ms. Navarrete had been informed of material credit deterioration that was not adequately reflected in BRB's public disclosures.

B. Naveen Chakravarti (SVP & Division Head, BridgeFin) — January 30, 2024

Mr. Chakravarti testified before Senior Staff Attorney Andrea Felton, Staff Attorney Christopher Yuen, and Staff Accountant Diane Milosevic on January 30, 2024, pursuant to the testimony subpoena issued on December 5, 2023. The testimony lasted approximately five (5) hours on the record. Calderwood & Harkness (Jasmine Thornton and Liam Donahue) represented Mr. Chakravarti at the testimony.

The Staff's examination covered the following principal topics:

• The BridgeFin loan origination and underwriting process, including the role of BRB's AI-driven underwriting model in credit decisioning;

• AI-driven underwriting model governance, including model development, validation, monitoring, and change-management procedures;

• BridgeFin's modification and re-aging policies, including the criteria for granting modifications and the operational procedures for resetting delinquency clocks within BRB's loan servicing systems;

• BridgeFin credit-quality reporting to senior management, the credit risk function, and the ACL Committee.

The Staff's questioning focused on the following areas of particular significance:

First, the Staff examined the criteria for granting loan modifications to BridgeFin borrowers and the specific re-aging protocol, including the system-level mechanics by which a modified loan's delinquency status was reset to "current" in BRB's servicing and reporting systems.

Second, the Staff focused extensively on the volume and timing of loan modifications during the Q3 and Q4 2022 period. The Staff presented Mr. Chakravarti with data showing that approximately 8,400 of the 12,847 modified loans at issue were modified during this six-month period, representing a significant acceleration in modification activity relative to prior quarters. The Staff's questioning explored whether the concentration of modification activity in the period immediately preceding BRB's fiscal year-end was coincidental or whether it reflected a deliberate effort to manage reported delinquency metrics in advance of year-end reporting.

Third, and relatedly, the Staff explored whether the BridgeFin modification program was designed or used, in whole or in part, to manage reported delinquency metrics. This line of questioning was the most pointed during Mr. Chakravarti's testimony and suggested that the Staff is considering whether the modification program served a dual purpose — borrower assistance on the one hand, and delinquency metric management on the other.

Fourth, the Staff examined Mr. Chakravarti's communications with Ms. Navarrete and Mr. Hu regarding BridgeFin credit-quality trends, including the escalation of internal reports reflecting credit deterioration.

Assessment: Mr. Chakravarti explained that modifications were granted based on documented borrower hardship criteria — including involuntary unemployment, medical events, and income disruption — and were not used to manage reported delinquency metrics or to achieve any reporting objective. He acknowledged that the pace of modifications increased in late 2022 as macroeconomic conditions deteriorated (including rising interest rates, elevated inflation, and increasing consumer financial stress indicators), but he maintained that this acceleration was consistent with BRB's borrower-assistance philosophy and the Bank's commitment to responsible lending practices. He testified that the modification criteria were applied consistently regardless of the quarter in which a modification was granted and that no instructions were given to the BridgeFin servicing team to accelerate or increase modification volumes for reporting purposes.

The Staff appeared particularly interested in a November 2022 internal email thread (Bates No. BRB-SEC-047832 through BRB-SEC-047836) in which a BridgeFin credit analyst noted that re-aging "significantly impacts our 90+ day bucket." Calderwood & Harkness had identified this document during witness preparation and devoted significant preparation time to ensuring that Mr. Chakravarti could explain the context of the communication. Mr. Chakravarti testified that the analyst's observation was a factual statement about the mechanical effect of re-aging on delinquency reporting — which is inherent in any modification program that resets the delinquency clock — but that it did not imply that the modification program was being used for the purpose of manipulating reported metrics. He further explained that the analyst's observation was made in the context of a routine credit-quality review meeting, during which the BridgeFin team was analyzing the performance of modified loans for purposes of loss-forecasting and was not suggesting impropriety. On balance, while this email thread is a document the Staff may cite in support of its theory, Mr. Chakravarti's testimony regarding the context and purpose of the communication was credible and consistent.

C. Raymond Hu (Chief Accounting Officer) — February 14, 2024

Mr. Hu testified before Senior Staff Attorney Andrea Felton, Staff Attorney Christopher Yuen, and Staff Accountant Diane Milosevic on February 14, 2024. As noted above, Mr. Hu's testimony was provided voluntarily, without subpoena, as part of BRB's cooperative posture. The testimony lasted approximately seven (7) hours on the record — the longest of the three testimonies — reflecting the technical complexity of the subject matter. Calderwood & Harkness (Victoria Chambers and Jasmine Thornton) represented Mr. Hu at the testimony.

The Staff's examination covered the following principal topics:

• BRB's ACL estimation methodology under ASC 326 (CECL), including the vintage-cohort model design, the selection of model inputs and assumptions, and the estimation of lifetime expected credit losses;

• Vintage-cohort model design, including the construction of vintage pools, the assignment of loans to cohorts based on origination period, and the calculation of historical loss rates by vintage;

• Inputs and assumptions used in the CECL model, including macroeconomic forecast variables, prepayment assumptions, and loss-severity factors;

• Quarterly true-up procedures, including the process by which BRB updated its ACL estimate each quarter to reflect new information;

• Qualitative overlay adjustments applied to the quantitative model output;

• Communications with Whitfield Keane LLP regarding ACL adequacy, the audit procedures performed by WK with respect to the BridgeFin ACL, and any audit differences or proposed adjustments;

• Materiality assessments, including BRB's internal materiality threshold and its application to the ACL estimation process.

The Staff's questioning focused on the following areas of particular significance:

First, the Staff devoted extensive time to the specific mechanics of how BRB's CECL model treated re-aged loans within the vintage-cohort framework. The central question was whether, upon modification and re-aging, a loan was moved to "current" status within its original vintage cohort (thereby reducing the loss rate attributed to that cohort) or whether the loan was retained in its original delinquency bucket within the vintage analysis (thereby preserving the delinquency history). Mr. Hu explained that BRB's model treated re-aged loans as current within the vintage framework upon modification, consistent with BRB's loan modification policy and the system-level delinquency reset. The Staff's position, as reflected in the nature of the questioning, is that this treatment understated the expected loss rate for the affected vintage cohorts.

Second, the Staff explored the sensitivity of the ACL estimate to the re-aging treatment. Staff Accountant Milosevic conducted an extended and technically detailed line of questioning in which she presented Mr. Hu with what she described as the Staff's preliminary analysis showing that, if re-aged loans were retained in their original vintage delinquency buckets rather than reclassified as current, the resulting ACL would increase from $143.5 million to approximately $180.8 million — a difference of $37.3 million.

Third, the Staff questioned Mr. Hu regarding BRB's internal materiality threshold. Mr. Hu confirmed that BRB applies a materiality threshold of 5% of pre-tax income for purposes of evaluating the significance of misstatements or estimation differences. Based on BRB's FY 2022 pre-tax income of $612 million, this threshold equates to $30.6 million. The Staff's questioning emphasized that the alleged $37.3 million understatement exceeds BRB's own materiality threshold by $6.7 million.

Fourth, the Staff asked Mr. Hu whether he believed the difference between BRB's reported ACL of $143.5 million and the Staff's preliminary $180.8 million figure — $37.3 million — constituted a material misstatement. Mr. Hu responded carefully, noting that the materiality of any estimation difference must be evaluated in context, including the range of reasonable estimates under ASC 326, the inherent uncertainty in loss forecasting, and the qualitative factors relevant to materiality under Staff Accounting Bulletin No. 99. He did not concede that the difference constituted a material misstatement.

Assessment: Mr. Hu was the most technically detailed witness and performed well under an extended and demanding examination. His testimony was consistent with BRB's position that the re-aging treatment is one of several reasonable methodological approaches under ASC 326 and that BRB's CECL model, including its qualitative overlay factors, produced an ACL estimate within the range of reasonable estimates. He explained that the qualitative overlays were designed to capture macro-level credit deterioration that the quantitative vintage-cohort model might not fully reflect, including deterioration related to the performance of modified loans.

One significant factual point emerged during Mr. Hu's testimony. In response to Staff Accountant Milosevic's questioning regarding model sensitivity, Mr. Hu disclosed that BRB conducted an internal sensitivity analysis in Q3 2022 that examined the effect of alternative re-aging treatments on the ACL estimate. That sensitivity analysis showed an ACL range of $138 million to $172 million, depending on the assumptions applied to the re-aging treatment. This disclosure is significant for several reasons:

• The upper end of BRB's own internal sensitivity range ($172 million) is below the Staff's preliminary $180.8 million figure by $8.8 million, which suggests that BRB's model, even under more conservative assumptions, produced a lower estimate than the Staff's analysis. This could support BRB's argument that the Staff's methodology is itself aggressive and produces results outside the range of reasonable estimates.

• However, the upper end of the sensitivity range ($172 million) is also $28.5 million above BRB's reported ACL of $143.5 million. The Staff may argue that BRB was aware — through its own internal analysis — that alternative reasonable assumptions could produce a significantly higher ACL, yet chose to report the lower end of the range without adequate disclosure of the estimation uncertainty.

• The lower end of the sensitivity range ($138 million) is below the reported ACL of $143.5 million, indicating that BRB's reported ACL fell within its own modeled range, albeit closer to the lower end.

On balance, the sensitivity analysis data is a double-edged sword. It demonstrates that BRB was engaged in rigorous analytical work and was aware of estimation variability — which can be characterized as evidence of good faith and methodological diligence. At the same time, it provides the Staff with a factual basis for arguing that BRB was on notice that reasonable alternative approaches could produce a meaningfully higher ACL and that BRB's choice to report toward the lower end of the range warrants scrutiny.

D. Cross-Cutting Observations from All Three Testimonies

Based on our review and analysis of all three witness testimonies, Calderwood & Harkness offers the following cross-cutting observations:

The SEC Staff's theory is centered on the re-aging treatment. The consistent theme across all three testimonies is the Staff's focus on the treatment of the 12,847 modified BridgeFin loans ($236.4 million aggregate balance) and the effect of the re-aging treatment on reported delinquency and loss rates. The Staff's position, distilled from its questioning, is that by reclassifying modified loans as "current," BRB's vintage-cohort model understated the expected loss rate for the affected cohorts, resulting in an ACL that was materially lower than it should have been.

The quantitative impact, as framed by the Staff, is significant. The Staff's preliminary analysis, as reflected in its testimony questioning, indicates the following metric-level differences:

No scienter evidence has emerged. Importantly, the Staff has not, to date, indicated that it is pursuing a scienter-based fraud theory. The statutory provisions mentioned in the subpoenas and referenced during testimony are limited to Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder. These are non-scienter provisions — Section 13(a) and Rule 13a-1 impose strict liability for filing inaccurate periodic reports, and Rule 12b-20 requires that filings contain all material information necessary to make required statements not misleading (subject to a negligence standard in certain circumstances). Section 13(b)(2)(A), the books-and-records provision, imposes a strict-liability standard for maintaining accurate books and records. At no point during the three testimonies did the Staff's questioning suggest that it was building a case for scienter — there were no questions about motive, personal financial interest, knowledge of wrongdoing, or intent to deceive investors.

No "smoking gun" has been identified. No testimony produced a "smoking gun" document or admission suggesting intentional manipulation of the ACL or related metrics. While the November 2022 email thread regarding the impact of re-aging on the "90+ day bucket" is the most potentially adverse document identified to date, Mr. Chakravarti's contextual explanation was credible and the email itself reflects a factual observation rather than evidence of a scheme.

V. SEC Staff's Apparent Theories and Potential Charges

A. Statutory Framework

Based on the scope of the subpoenas, the topics addressed during testimony, and the provisions cited in the Staff's process, we believe the Staff is evaluating potential charges under the following provisions of the federal securities laws:

Section 13(a) of the Exchange Act (15 U.S.C. § 78m(a)): Section 13(a) requires issuers of registered securities to file periodic reports with the Commission in accordance with such rules and regulations as the Commission may prescribe. Violations of Section 13(a) are typically charged in conjunction with violations of the specific rules requiring the filing of annual reports (Rule 13a-1) and quarterly reports (Rule 13a-13).

Rule 13a-1 (17 C.F.R. § 240.13a-1): Rule 13a-1 requires every issuer of a security registered under Section 12 of the Exchange Act to file an annual report on Form 10-K. An issuer that files a materially inaccurate 10-K may be charged with violating Rule 13a-1 and, derivatively, Section 13(a).

Rule 12b-20 (17 C.F.R. § 240.12b-20): Rule 12b-20 requires that, in addition to the information expressly required to be included in a filing, the filing must 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. This rule is frequently invoked in cases alleging material omissions from periodic reports.

Section 13(b)(2)(A) of the Exchange Act (15 U.S.C. § 78m(b)(2)(A)): Section 13(b)(2)(A), commonly referred to as the "books-and-records" provision, requires every issuer to make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. This provision is a strict-liability provision — no showing of scienter or even negligence is required.

We emphasize that all of the foregoing provisions are non-scienter provisions. Section 13(a), Rule 13a-1, Rule 12b-20, and Section 13(b)(2)(A) do not require the SEC to prove that BRB or any individual acted with an intent to deceive, manipulate, or defraud. Depending on the specific provision, the applicable standard is strict liability or, at most, negligence. This is a meaningful distinction because it means the Staff's burden of proof is lower than it would be in a fraud case, but it also means that the potential sanctions — which in non-scienter cases typically take the form of a cease-and-desist order and a civil penalty, without the more severe consequences associated with fraud charges (such as officer-and-director bars or disgorgement) — are correspondingly less severe.

B. The Core Allegation

Based on our analysis of the testimony questioning and the trajectory of the Investigation, we believe the core allegation that the Staff is developing can be summarized as follows:

BRB's reported ACL of $143.5 million (3.50% of the $4.1 billion BridgeFin outstanding loan portfolio) as of December 31, 2022, materially understated expected credit losses. The Staff's preliminary view, as reflected in Staff Accountant Milosevic's testimony questioning, is that the ACL should have been approximately $180.8 million (4.41%), yielding a potential understatement of approximately $37.3 million. The difference of $37.3 million exceeds BRB's own internal materiality threshold of $30.6 million (calculated as 5% of FY 2022 pre-tax income of $612 million) by $6.7 million, or approximately 21.9% above the threshold.

The Staff's theory rests on the contention that BRB's treatment of re-aged and modified loans was improper — specifically, that loans that were modified and re-aged should have been retained in their original vintage delinquency buckets for loss-rate estimation purposes, rather than being reclassified as "current" upon modification. The Staff's position is that the reclassification treatment artificially reduced the delinquency and loss rates attributed to the affected vintage cohorts, thereby suppressing the CECL model's estimate of lifetime expected credit losses.

If the Staff's analysis is credited, the effect is to increase both the reported net charge-off rate (from 2.14% to approximately 3.05%) and the reported 90+ day delinquency rate (from 1.72% to approximately 2.38%) for the BridgeFin portfolio as of December 31, 2022. The Staff may argue that these revised metrics, had they been accurately reported, would have been material to investors in evaluating the credit quality of BRB's fastest-growing loan segment.

C. Defense Positions

Calderwood & Harkness, in consultation with Brindoval Analytic Partners, has identified the following principal defense positions:

Reasonableness of BRB's CECL Methodology. ASC 326 (CECL) is inherently an estimation exercise. The standard does not prescribe a single methodology for estimating expected credit losses; rather, it permits reporting entities to use a range of methods, including discounted cash flow, loss-rate, vintage, probability-of-default, and other approaches. The vintage-cohort approach used by BRB is a widely accepted methodology, and the treatment of re-aged loans within that framework involves a judgment that is within the scope of management's reasonable discretion. BRB's approach — reclassifying modified loans as "current" within the vintage analysis — is one of several reasonable approaches and is not inconsistent with the requirements of ASC 326.

Consistency with Loan Modification Policy and OCC Guidance. BRB's re-aging treatment was applied in accordance with its written loan modification policy, which has been in effect since 2019. This policy is consistent with the guidance set forth in the OCC's Comptroller's Handbook, which permits the reclassification of a modified loan's delinquency status upon the granting of a modification, provided that specified criteria are met. BRB's re-aging treatment is not unique or unusual; peer institutions in the consumer lending space apply similar treatments when loans are modified.

Brindoval Analytic Partners' Forensic Analysis. Brindoval Analytic Partners' forensic analysis (joint work-product memorandum dated December 22, 2023) supports the position that BRB's vintage-cohort approach, including the re-aging treatment, produces ACL estimates within a reasonable range. Brindoval's analysis further demonstrates that the Staff's preliminary $180.8 million figure is based on assumptions regarding the re-default rate of modified loans that are themselves subject to significant estimation uncertainty and that may not be well-supported by the available data. Specifically, Brindoval's analysis suggests that the Staff's approach may overstate the re-default rate for modified BridgeFin loans by relying on industry-wide re-default data rather than BridgeFin-specific performance data, which shows a lower re-default rate.

Clean Audit Opinion. BRB's independent auditor, Whitfield Keane LLP, audited BRB's consolidated financial statements for FY 2022 and issued an unqualified (clean) audit opinion. WK did not issue a qualification, modify its opinion, or identify a material misstatement relating to the BridgeFin ACL. While the SEC is not bound by the auditor's opinion and may reach different conclusions regarding materiality, the fact that a PCAOB-registered audit firm examined the same ACL under the same accounting standards and concluded that it was fairly stated is a significant data point that bears on the reasonableness of BRB's methodology and the absence of a clear-cut error.

OCC Supervisory Assessment. BRB's prudential regulator, the OCC, conducts ongoing supervisory assessments of BRB's credit risk management practices, including the ACL estimation methodology, under OCC Charter No. 24891. BRB's most recent composite CAMELS rating is 2 (satisfactory), and the OCC's concurrent supervisory assessment has not identified material deficiencies in the ACL methodology or the treatment of modified loans. While the OCC's supervisory conclusions are made for safety-and-soundness purposes and are not binding on the SEC for securities-law purposes, they provide additional support for the reasonableness of BRB's approach.

Voluntary Disclosure Enhancements. BRB has proactively enhanced its BridgeFin-related disclosures in its Quarterly Report on Form 10-Q for Q3 2023, filed with the Commission on November 9, 2023. The enhanced disclosures include vintage-level delinquency tables, expanded Management's Discussion and Analysis ("MD&A") regarding the performance of modified loans and the re-aging treatment, and additional risk-factor disclosures regarding BridgeFin credit quality. These voluntary enhancements were implemented before the Investigation reached an advanced stage and demonstrate BRB's commitment to transparency and its responsiveness to evolving investor information needs.

VI. Assessment of Likelihood of Wells Notice

A. Factors Suggesting a Wells Notice Is Likely

Calderwood & Harkness has evaluated the trajectory of the Investigation and the available evidence in order to assess the likelihood that the Staff will issue a Wells notice — the pre-enforcement notification that provides the respondent with an opportunity to submit a written response (a "Wells Submission") before the Staff makes a formal recommendation to the Commission regarding the filing of an enforcement action. We have identified the following factors that suggest a Wells notice is likely:

First, the Staff has devoted substantial resources to the Investigation, including three witness testimonies (totaling approximately 18.5 hours of on-the-record testimony), the assignment of a dedicated Staff Accountant (Diane Milosevic), and the active involvement of both the Assistant Director of the Financial Fraud Unit (Gregory Bonham) and the Branch Chief (Renata Moss). This level of resource commitment is generally indicative of a matter that the Staff considers significant and is unlikely to close without some form of resolution.

Second, the alleged understatement of $37.3 million exceeds BRB's own internal materiality threshold of $30.6 million by $6.7 million. The Staff is likely to view BRB's own materiality threshold as a significant benchmark, and the fact that the alleged misstatement exceeds it — even if only by a relatively modest margin — provides the Staff with a quantitative anchor for its materiality argument.

Third, the re-aging issue is factually concrete and susceptible to a relatively straightforward narrative about delinquency metrics being "masked" through the modification and re-aging process. SEC enforcement cases tend to be stronger when they can be distilled into a clear and comprehensible story for a jury or Commission proceedings, and the re-aging theory — while technically complex — can be simplified into a narrative about a bank that reclassified delinquent loans as current in order to suppress reported delinquency rates and lower its reserve.

Fourth, SEC enforcement priorities in the post-CECL adoption environment have included ACL adequacy cases. The Commission's adoption of CECL (ASC 326) represents a significant change in the credit loss estimation framework, and the Division of Enforcement has signaled its intention to scrutinize CECL implementation and the adequacy of ACL estimates. This investigation may be viewed by the Staff, in part, as an opportunity to establish precedent regarding the acceptable boundaries of CECL estimation practices.

B. Factors Suggesting the Staff May Decline to Proceed

Notwithstanding the foregoing, Calderwood & Harkness has also identified meaningful factors that may counsel the Staff against proceeding:

First, there is no evidence of scienter. The Investigation has not produced any evidence of intentional manipulation, knowing misstatement, or reckless disregard for the truth. The case, as currently constituted, would be limited to non-scienter charges under Sections 13(a) and 13(b)(2)(A) and related rules. While the Staff does not need to prove scienter under these provisions, the absence of scienter evidence limits the gravity of the case and may affect the Staff's assessment of whether the matter warrants the expenditure of additional enforcement resources.

Second, BRB's methodology is within a range of reasonable estimates under ASC 326, making this, at its core, a "battle of experts" case. Cases involving disputes over accounting estimates are inherently more difficult for the SEC to prosecute because the respondent can present expert testimony that the chosen methodology was reasonable and within the range of acceptable approaches. The CECL framework expressly contemplates management judgment in the estimation of expected credit losses, and BRB can demonstrate that its judgment was exercised in good faith and in accordance with established policies.

Third, BRB's independent auditor, Whitfield Keane, audited the FY 2022 financial statements and did not flag the BridgeFin ACL as materially misstated. A clean audit opinion is a powerful defense in a reporting-violation case because it demonstrates that an independent expert examined the same financial statements and concluded that they were fairly presented.

Fourth, the OCC has not identified deficiencies in BRB's ACL methodology or the treatment of modified loans. The OCC's concurrent supervisory assessment, while conducted for safety-and-soundness purposes rather than securities-law compliance, provides an additional independent validation of BRB's approach.

Fifth, BRB voluntarily enhanced its BridgeFin disclosures in the Q3 2023 10-Q before the Investigation reached an advanced stage. Voluntary remediation is a factor that the Commission considers in exercising its enforcement discretion, and BRB's proactive disclosure enhancements may weigh against the filing of an action.

Sixth, the internal sensitivity analysis disclosed by Mr. Hu during his testimony complicates the Staff's narrative. The sensitivity range of $138 million to $172 million shows that BRB was aware of estimation variability and conducted rigorous analytical work. The fact that BRB's reported ACL of $143.5 million falls within BRB's own modeled range suggests that BRB made a reasonable judgment within the bounds of its own analysis. While the Staff may attempt to use the upper end of the range ($172 million) to argue that BRB should have reported a higher ACL, BRB can respond that the selection of a point estimate within a reasonable range is precisely the kind of management judgment that CECL contemplates.

C. Calderwood & Harkness's Assessment

Balancing the foregoing factors, Calderwood & Harkness assesses that there is a meaningful probability — which we estimate in the range of 40–55% — that the Staff will issue a Wells notice to BRB. Our assessment reflects the following considerations:

• The level of Staff resources committed to the Investigation and the seniority of the officials involved suggest that the Investigation is unlikely to be closed without a formal resolution.

• The alleged understatement exceeds BRB's own materiality threshold, providing the Staff with a quantitative foundation for its case.

• However, the absence of scienter, the auditor's clean opinion, the OCC's satisfactory rating, the reasonable-range defense, and BRB's voluntary remediation collectively constitute strong mitigating factors that may cause the Staff to exercise its discretion not to proceed, particularly given the resource-intensive nature of litigating estimation disputes.

If a Wells notice is issued, we believe BRB would have strong arguments in a Wells Submission. The principal arguments would include: (1) the reasonableness of BRB's CECL methodology, as supported by Brindoval's forensic analysis; (2) the OCC's concurrent supervisory findings; (3) the auditor's clean opinion; (4) peer-comparison data demonstrating that BRB's ACL coverage ratios and re-aging practices are consistent with industry norms among comparable digital-lending institutions; and (5) BRB's voluntary disclosure enhancements. In our experience, a well-supported Wells Submission that presents strong reasonableness arguments in an estimation-dispute case can be effective in persuading the Staff to close the investigation or to narrow the scope of any enforcement action.

We do not currently assess a significant risk that the Staff will pursue scienter-based (fraud) charges under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, or under Section 17(a) of the Securities Act. The evidentiary record does not support such charges, and the Staff's questioning has not been directed toward establishing the elements of a scienter-based claim.

VII. D&O Insurance Coverage Update

BRB tendered the SEC Investigation as a Claim under its directors' and officers' liability insurance program on October 5, 2023. The relevant policies are as follows:

Primary Layer: Northcastle Mutual Assurance Company, Policy No. NMA-DO-2023-11847. This policy provides a $15 million limit of liability for D&O claims, with an entity retention (self-insured retention) of $2.5 million. The policy period is July 1, 2023 through July 1, 2024. The policy affords coverage for defense costs, judgments, and settlements arising from covered claims, subject to its terms, conditions, and exclusions.

First Excess Layer: Cascade Omnivrel Insurance Group, Policy No. CFIG-XS1-2023-5598. This policy provides $10 million in excess of the $15 million primary layer (aggregate attachment point: $15 million), for a combined tower of $25 million. Cascade Fidelity's coverage follows form to the Northcastle primary policy.

Northcastle Mutual Assurance Company acknowledged receipt of BRB's claim tender and confirmed coverage, subject to a reservation of rights, through its claims counsel, Thornfield & Rowe LLP (Brenda Alvaro, Lead Claims Counsel). The reservation of rights is standard and preserves Northcastle's ability to contest coverage with respect to specific claims or costs that may fall outside the policy's coverage terms. We are not aware of any specific coverage defenses that Northcastle is likely to assert with respect to the Investigation, though we continue to monitor the carrier's position.

Defense costs are being tracked and allocated for purposes of the insurance program. As of January 31, 2024, cumulative defense costs — inclu

PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT NOT TO BE DISCLOSED WITHOUT PRIOR AUTHORIZATION OF CALDERWOOD & HARKNESS LLP
February 22, 2024
CALDERWOOD & HARKNESS LLP 425 Lexington Avenue, 30th Floor New York, New York 10017
MEMORANDUM
TO: Gwendolyn Prescott, Chair, Audit Committee of the Board of Directors, Belmont Ridge Bank National Association
Derek Sung, General Counsel & Chief Legal Officer, Belmont Ridge Bank National Association
FROM: Victoria Chambers, Partner, Calderwood & Harkness LLP Jasmine Thornton, Lead Associate, Calderwood & Harkness LLP
RE: SEC Division of Enforcement Investigation — File No. HO-14287; Interim Status Update
MATTER NO.: SC-MAT-2023-4172
This memorandum is protected by the attorney-client privilege and the attorney work-product doctrine. It was prepared by Calderwood & Harkness LLP at the request of, and for the benefit of, Belmont Ridge Bank National Association and its Audit Committee in connection with the provision of legal advice regarding the above-referenced investigation. This memorandum and its contents may not be disclosed to any third party without the prior written authorization of Calderwood & Harkness LLP. Any inadvertent disclosure does not constitute a waiver of any applicable privilege or protection.
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I. Executive Summary
The purpose of this memorandum is to provide the Audit Committee of the Board of Directors of Belmont Ridge Bank National Association ("BRB" or the "Bank") with a comprehensive interim update on the status of the investigation being conducted by the Division of Enforcement (the "Staff") of the U.S. Securities and Exchange Commission (the "SEC" or the "Commission") into BRB's public disclosures regarding the allowance for credit losses ("ACL") related to the Bank's BridgeFin digital lending platform (the "Investigation"). This memorandum covers material developments since Calderwood & Harkness's initial Audit Committee briefing on October 2, 2023 and is intended to provide the Committee with sufficient information to evaluate the current posture of the Investigation and to make informed decisions regarding recommended next steps.
The Investigation was initiated via a voluntary request letter from Senior Staff Attorney Andrea Felton dated September 18, 2023, and was subsequently formalized by the Commission's issuance of Formal Order of Investigation No. EN-2023-0947 on October 12, 2023, which authorized the Staff to compel the production of documents and the testimony of witnesses through the subpoena power of the Commission.
Since the initial Audit Committee briefing, the Investigation has progressed through several significant milestones. Document production to the SEC Staff is now substantially complete, with five of six scheduled rolling productions having been delivered and the sixth and final production scheduled for March 1, 2024. Additionally, three witnesses — Patricia Navarrete (Chief Financial Officer), Naveen Chakravarti (Senior Vice President & Division Head, BridgeFin), and Raymond Hu (Chief Accounting Officer) — have provided testimony before the Staff, with Ms. Navarrete and Mr. Chakravarti testifying pursuant to subpoena and Mr. Hu testifying voluntarily as part of BRB's cooperative posture.
The Staff's apparent investigative focus remains centered on whether BRB's reported ACL of $143.5 million — representing 3.50% of the $4.1 billion BridgeFin outstanding loan portfolio as of December 31, 2022 — materially understated expected credit losses. The Staff's preliminary analysis, as reflected in testimony questioning, suggests the Staff's view is that the ACL should have been approximately $180.8 million (4.41% of the BridgeFin portfolio), resulting in a potential understatement of approximately $37.3 million. The core dispute concerns the treatment of approximately 12,847 re-aged or modified BridgeFin consumer personal loans with an aggregate outstanding balance of $236.4 million, and specifically whether resetting delinquency clocks upon loan modification inappropriately suppressed the loss-rate estimates incorporated into BRB's current expected credit loss ("CECL") model.
Based on our assessment of the trajectory of the Investigation to date, including the level of Staff resources devoted to the matter, the nature and focus of testimony questioning, the involvement of the Financial Fraud Unit, and the quantum of the alleged understatement relative to BRB's internal materiality threshold, Calderwood & Harkness assesses that there is a meaningful possibility — which we estimate in the range of 40–55% — that the Staff will issue a Wells notice to BRB. This memorandum sets forth the basis for that assessment, outlines BRB's available defenses, and recommends preparatory steps that the Audit Committee should consider authorizing.
We emphasize that, notwithstanding the foregoing, we do not currently assess a significant risk that the Staff will pursue scienter-based charges (i.e., charges grounded in Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, or Section 17(a) of the Securities Act of 1933), which would require proof of intent to deceive. The statutory provisions referenced in the subpoenas and during testimony are limited to non-scienter reporting and books-and-records provisions. This distinction is significant because it limits the potential scope of any enforcement action and the severity of potential sanctions.
II. Background and Procedural History
A. Origin of the Investigation
The Investigation originated from the SEC Staff's review of BRB's periodic filings with the Commission, specifically the following public reports:
• BRB's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Commission on February 28, 2023 (the "FY 2022 10-K");
• BRB's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2023, filed with the Commission on May 10, 2023 (the "Q1 2023 10-Q"); and
• BRB's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023, filed with the Commission on August 9, 2023 (the "Q2 2023 10-Q").
Based on our interactions with the Staff and the scope of the Staff's document requests and testimony questioning, we understand that the Staff's review of BRB's filings raised concerns regarding the adequacy of BRB's ACL disclosures as they related to the BridgeFin consumer personal-loan sub-segment. This sub-segment represents a significant and growing component of BRB's overall loan portfolio, having originated approximately $4.1 billion in outstanding consumer personal loans through BRB's AI-driven digital lending platform as of December 31, 2022.
On September 18, 2023, Senior Staff Attorney Andrea Felton of the SEC's Division of Enforcement transmitted a voluntary request letter to BRB's General Counsel, Derek Sung, requesting the voluntary production of specified categories of documents relating to BRB's ACL estimation process, BridgeFin loan origination and credit-quality metrics, and the Bank's SEC reporting and disclosure procedures. The voluntary request letter indicated that the Staff was conducting an inquiry into BRB's disclosures and compliance with the federal securities laws.
Upon receipt of the voluntary request letter, Mr. Sung promptly notified the Audit Committee Chair, Gwendolyn Prescott, and engaged Calderwood & Harkness LLP to represent BRB in connection with the inquiry. Calderwood & Harkness was formally retained on September 20, 2023. On September 29, 2023, this firm entered its appearance via letter to Senior Staff Attorney Felton, confirming that Calderwood & Harkness LLP was authorized to act on behalf of BRB and to accept service of process and communications from the Staff in connection with the inquiry. The appearance letter also confirmed BRB's cooperative posture and its commitment to working with the Staff to provide responsive information in a timely manner.
B. Formal Order and Subpoenas
On October 12, 2023, the Commission issued Formal Order of Investigation No. EN-2023-0947 (the "Formal Order"), designating the matter as a formal investigation and authorizing the Staff to exercise the Commission's compulsory process authority under Section 21 of the Exchange Act. The issuance of a Formal Order is a procedural step that enables the Staff to compel the production of documents and the attendance and testimony of witnesses through the issuance of subpoenas; it does not constitute a determination by the Commission that any violation of the securities laws has occurred.
Following the issuance of the Formal Order, the Staff served the following subpoenas:
• Document Subpoena No. HO-14287-001, issued October 15, 2023, requiring BRB to produce specified categories of documents and communications relating to the BridgeFin ACL, the Bank's CECL model, loan modification and re-aging practices, credit-quality reporting, internal controls, and communications with auditors and regulators. The subpoena incorporated a schedule of 47 document requests.
• Testimony Subpoena for Patricia Navarrete (CFO), issued November 22, 2023, compelling Ms. Navarrete's appearance for investigative testimony before the Staff. Testimony was subsequently scheduled for, and conducted on, January 18, 2024.
• Testimony Subpoena for Naveen Chakravarti (SVP & Division Head, BridgeFin), issued December 5, 2023, compelling Mr. Chakravarti's appearance for investigative testimony. Testimony was scheduled for, and conducted on, January 30, 2024.
In addition to the subpoenaed testimony, Raymond Hu, BRB's Chief Accounting Officer, testified voluntarily before the Staff on February 14, 2024. No subpoena was issued for Mr. Hu; rather, Calderwood & Harkness proactively offered to make Mr. Hu available for testimony as part of BRB's cooperative approach to the Investigation. The Staff accepted the offer and scheduled Mr. Hu's testimony accordingly.
C. Staffing on the SEC Side
The Investigation is being conducted by the following members of the SEC Staff:
• Senior Staff Attorney: Andrea Felton — Ms. Felton is the lead attorney on the Investigation and has conducted the primary examination of all witnesses.
• Staff Attorney: Christopher Yuen — Mr. Yuen has participated in all witness examinations and has been the primary point of contact for document production negotiations and custodian identification discussions.
• Staff Accountant: Diane Milosevic — Ms. Milosevic has participated in all witness examinations and has focused her questioning on technical accounting matters, including the mechanics of BRB's CECL model, the sensitivity of ACL estimates to various assumptions, and the treatment of re-aged loans within the vintage-cohort framework.
• Assistant Director, Financial Fraud Unit: Gregory Bonham — Mr. Bonham has not participated directly in witness examinations to date but has been identified as the supervising Assistant Director for the Investigation. His involvement indicates that the matter is being handled within the SEC's Financial Fraud Unit within the Division of Enforcement.
• Branch Chief: Renata Moss — Ms. Moss is the Branch Chief with supervisory authority over the Investigation team.
We note the involvement of the Financial Fraud Unit, which is the SEC's specialized unit responsible for investigating matters involving financial reporting, auditor conduct, and accounting fraud. The Financial Fraud Unit's involvement is consistent with the subject matter of the Investigation — the adequacy of financial reporting disclosures — and does not necessarily indicate that the Staff is pursuing a fraud theory requiring proof of scienter. Indeed, the Financial Fraud Unit handles a significant number of non-scienter reporting and books-and-records cases. However, the unit's involvement does suggest that the Staff views the matter as significant and has assigned it to attorneys and accountants with specialized expertise in financial reporting investigations.
D. Defense Team and Advisors
BRB's defense team and related advisors in connection with the Investigation are as follows:
Calderwood & Harkness LLP (outside defense counsel):
• Victoria Chambers, Partner — Responsible Partner for the engagement.
• Howard Quinn, Partner — Billing Partner.
• Jasmine Thornton, Lead Associate — Day-to-day management of the Investigation, including document production oversight, witness preparation, and SEC Staff communications.
• Liam Donahue, Associate — Working Associate responsible for document review, privilege review, and analytical support.
Brindoval Analytic Partners LLC (forensic accounting consultant):
• Dr. Franklin Osei, CPA, CFF — Engagement Lead. Brindoval was retained as of October 10, 2023, under a Kovel arrangement, meaning that Brindoval's work is performed at the direction of counsel and its work product is protected by the attorney work-product doctrine. Brindoval has conducted a forensic analysis of BRB's CECL model, the treatment of re-aged loans, and the sensitivity of ACL estimates to alternative methodological approaches. Brindoval's analysis is memorialized in a joint work-product memorandum dated December 22, 2023, the conclusions of which are summarized in Section V.C below.
Caldwell Pratt & Stein LLP (securities reporting counsel):
• Martin Caldwell, Lead Partner. CPS served as BRB's outside securities reporting counsel and prepared and reviewed the FY 2022 10-K and the Q1 and Q2 2023 10-Qs at issue in the Investigation. Calderwood & Harkness has coordinated with CPS regarding the disclosure process, including the relevant drafting history, markup iterations, and correspondence between CPS and BRB personnel. CPS is not separately representing BRB in the Investigation and is not a target or subject of the Staff's inquiry.
Whitfield Keane LLP (independent auditor):
• Lorraine Dupont, Audit Engagement Partner; PCAOB Registration No. 2847. Whitfield Keane served as BRB's independent registered public accounting firm and audited BRB's consolidated financial statements for FY 2021 and FY 2022. In connection with the Investigation, Whitfield Keane has retained separate counsel, Hargrove & Millstein LLP (Samuel Hargrove, Lead Partner), to represent the firm's interests. Calderwood & Harkness's coordination with Hargrove & Millstein is described in Section VIII.A below.
III. Document Production — Status and Summary
A. Completion of Rolling Productions
Pursuant to the document production protocol agreed with the SEC Staff on October 20, 2023, BRB has been producing responsive documents on a rolling basis. The production schedule, as negotiated with the Staff, contemplated six rolling productions to be delivered between November 1, 2023 and March 1, 2024. Five of the six rolling productions have been completed as of the date of this memorandum, and the sixth and final production is scheduled for delivery on March 1, 2024. The production schedule and volumes are as follows:
The total production, upon completion, will encompass approximately 284,617 documents comprising approximately 1.42 million pages. All documents have been Bates-numbered sequentially beginning with BRB-SEC-000001, produced in TIFF image format with extracted text and accompanying load files, in accordance with the production protocol agreed with the SEC Staff on October 20, 2023. The production protocol specifies the format, naming conventions, metadata fields, and deduplication standards applicable to the production.
The fifth production, completed on February 15, 2024, largely consisted of supplemental custodian collections and materials responsive to certain follow-up requests made by Staff Attorney Yuen following the January testimonies. The sixth and final production, estimated at approximately 38,912 documents, will consist primarily of the remaining reviewed and processed materials from the final custodian collections, together with any residual responsiveness determinations from the privilege review team.
Upon delivery of the sixth production, Calderwood & Harkness will provide the Staff with a certification that BRB's document production is substantially complete and that BRB has conducted a reasonable and diligent search for responsive materials in accordance with its discovery obligations.
B. Custodians and Scope
The document production encompasses materials collected from the following key custodians, among others:
• Patricia Navarrete, Chief Financial Officer
• Raymond Hu, Chief Accounting Officer
• Naveen Chakravarti, Senior Vice President & Division Head, BridgeFin
• Annette Kowalski, Chief Risk Officer
• Members of BRB's credit risk analytics team, including senior analysts and modelers within the BridgeFin division
• Members of BRB's corporate accounting and financial reporting teams
The applicable date range for the document collection is January 1, 2021 through September 30, 2023, as agreed with the SEC Staff during production protocol negotiations. The broader date range captures the period leading up to BRB's adoption and implementation of ASC 326 (CECL) as well as the relevant reporting periods at issue.
The substantive categories of documents encompassed by the production include, but are not limited to:
• Internal BridgeFin credit analytics reports and dashboards, including vintage-cohort performance data, delinquency migration analyses, and net charge-off tracking;
• CECL model documentation, including model development memoranda, validation reports, back-testing results, and model change logs;
• Quarterly ACL committee meeting materials, including agendas, presentations, minutes, and post-meeting action items;
• Board of Directors and Audit Committee presentations relating to BridgeFin credit quality and ACL adequacy;
• Loan modification and re-aging records, including modification approval forms, hardship documentation, and system records reflecting delinquency clock resets;
• Correspondence, workpapers, and audit-related communications with Whitfield Keane LLP relating to the BridgeFin ACL;
• SEC reporting drafts, including markup iterations of the FY 2022 10-K and Q1–Q2 2023 10-Qs, and related correspondence with Caldwell Pratt & Stein LLP; and
• Internal communications among BRB personnel concerning BridgeFin credit performance, ACL estimation, and disclosure considerations.
C. Privilege Log
Calderwood & Harkness has maintained a cumulative privilege log identifying all documents withheld from production or produced in redacted form on the basis of privilege. As of the date of this memorandum, the privilege log identifies a total of 1,847 documents that have been withheld or redacted. The privilege bases asserted include:
• Attorney-client privilege: Communications between BRB personnel and BRB's legal counsel (both in-house and outside counsel) made for the purpose of seeking or providing legal advice.
• Attorney work-product doctrine: Documents prepared by or at the direction of counsel in anticipation of litigation or in connection with the provision of legal advice, including Calderwood & Harkness work product, Brindoval Analytic Partners work product created under the Kovel arrangement, and litigation-related analyses.
• Bank-examination privilege: Documents constituting or reflecting confidential communications between BRB and its prudential regulators, including the Office of the Comptroller of the Currency ("OCC"), in connection with the OCC's supervisory and examination functions.
As of the date of this memorandum, the SEC Staff has not formally challenged any of BRB's privilege assertions. Staff Attorney Yuen did, however, raise informal questions during a telephone conference on January 22, 2024, regarding two categories of documents logged under the bank-examination privilege. The two categories consisted of (i) internal BRB memoranda prepared in connection with OCC examinations of BRB's credit risk management practices, and (ii) correspondence between BRB and the OCC relating to supervisory feedback on the BridgeFin portfolio. In response to Mr. Yuen's inquiry, Calderwood & Harkness provided supplemental privilege log descriptions with additional detail regarding the nature and basis for privilege for each of the documents at issue. Mr. Yuen has not raised further questions regarding these entries, and we do not anticipate a formal privilege challenge at this time.
The agreed production protocol incorporates FRE 502(d) clawback protections, pursuant to which the inadvertent production of privileged materials does not constitute a waiver of the applicable privilege. This protection is memorialized in a stipulated order entered by the Commission pursuant to its procedural rules. The clawback provision has not been invoked to date.
D. Confidential Treatment
As part of the production protocol letter submitted to the SEC Staff on October 20, 2023, BRB requested confidential treatment of certain categories of proprietary and commercially sensitive documents relating to the BridgeFin digital lending platform. Specifically, BRB sought confidential treatment for documents containing the architecture, feature weights, algorithmic parameters, and proprietary risk-scoring methodologies of BRB's AI-driven underwriting model, as well as related model governance and validation documentation. These materials constitute valuable trade secrets and proprietary business information, the public disclosure of which could cause competitive harm to BRB.
The SEC Staff has not objected to BRB's confidential treatment request. Documents containing the specified proprietary information have been produced subject to confidential treatment designations reflected in the Bates stamp and accompanying metadata. Calderwood & Harkness will continue to monitor the status of the confidential treatment request and will notify the Audit Committee if the Staff raises any objection or if any third party seeks access to the produced materials through the Commission's FOIA process.
IV. Witness Testimony — Summary and Key Takeaways
This section provides a summary of the three witness testimonies that have been conducted to date, together with Calderwood & Harkness's assessment of the significance of each testimony for the overall trajectory of the Investigation. The summaries below are based on the witnesses' testimony as reflected in the official court reporter's transcript (certified copies of which have been obtained by Calderwood & Harkness) as well as notes taken by counsel during the proceedings. All three testimonies were conducted at the SEC's offices in New York.
A. Patricia Navarrete (Chief Financial Officer) — January 18, 2024
Ms. Navarrete testified before Senior Staff Attorney Andrea Felton, Staff Attorney Christopher Yuen, and Staff Accountant Diane Milosevic on January 18, 2024, pursuant to the testimony subpoena issued on November 22, 2023. The testimony lasted approximately six and one-half (6.5) hours on the record, exclusive of breaks. Calderwood & Harkness (Victoria Chambers and Jasmine Thornton) represented Ms. Navarrete at the testimony.
The Staff's examination covered the following principal topics:
• The ACL estimation process at BRB, including the role of the CFO in overseeing and approving the quarterly ACL determination;
• The quarterly CECL model governance framework, including the composition and function of BRB's ACL Committee and the CFO's participation therein;
• Ms. Navarrete's review and certification of the FY 2022 10-K and the Q1 and Q2 2023 10-Qs, including the Sarbanes-Oxley Section 302 certifications;
• BRB's internal controls over financial reporting as they relate to the ACL estimation and disclosure process;
• Communications between Ms. Navarrete and Whitfield Keane LLP regarding the adequacy of the BridgeFin ACL and any audit differences or proposed adjustments identified during the FY 2022 audit; and
• Ms. Navarrete's awareness of and response to internal credit-quality reports reflecting delinquency and loss trends in the BridgeFin portfolio.
The Staff's questioning focused on three areas of particular significance:
First, the Staff devoted substantial time to the treatment of 12,847 re-aged or modified BridgeFin loans with an aggregate outstanding principal balance of $236.4 million. Specifically, the Staff's questions explored whether resetting the delinquency clock upon the granting of a loan modification — such that a previously delinquent loan is reclassified as "current" for purposes of the vintage-cohort loss-rate analysis — inappropriately suppressed the loss-rate estimates that fed into BRB's ACL calculation. Ms. Felton presented Ms. Navarrete with several internal BridgeFin credit analytics reports showing the volume and timing of modifications in Q3 and Q4 2022, and asked Ms. Navarrete to explain the basis for the re-aging treatment and its effect on reported delinquency metrics.
Second, the Staff examined the basis for the qualitative overlay factors that BRB applied within its CECL model. Under ASC 326, a reporting entity's CECL estimate must reflect not only quantitative historical loss data but also qualitative and environmental factors that may affect expected future credit losses. The Staff's questions suggested an interest in whether BRB's qualitative overlays were sufficient to capture the credit deterioration that, in the Staff's view, was being masked by the re-aging treatment.
Third, Staff Accountant Milosevic conducted an extended line of questioning regarding whether Ms. Navarrete was aware of internal reports suggesting higher-than-reported delinquency trends in certain BridgeFin vintage cohorts originated after Q2 2021. These cohorts included loans originated during a period of rapid portfolio growth and loosened credit criteria, and some internal BridgeFin reports indicated elevated early-stage delinquency rates relative to earlier-originated cohorts.
Assessment: Ms. Navarrete testified clearly and consistently with BRB's position throughout the examination. She explained that the re-aging treatment was applied in accordance with BRB's written loan modification policy, which had been in place since 2019, and that the treatment was consistent with the guidance set forth in the OCC's Comptroller's Handbook regarding loan modifications and troubled debt restructurings. She credibly described the quarterly ACL governance process, including the role of the ACL Committee, the inputs provided by the credit risk analytics team, and the independent challenge function performed by the Chief Risk Officer. With respect to Staff Accountant Milosevic's questioning regarding vintage-cohort delinquency trends, Ms. Navarrete acknowledged that she received periodic credit-quality reports from the BridgeFin division but explained that the trends reflected therein were incorporated into the CECL model through both the quantitative vintage-cohort inputs and the qualitative overlay factors. Milosevic pressed on this point but did not appear to establish that Ms. Navarrete had been informed of material credit deterioration that was not adequately reflected in BRB's public disclosures.
B. Naveen Chakravarti (SVP & Division Head, BridgeFin) — January 30, 2024
Mr. Chakravarti testified before Senior Staff Attorney Andrea Felton, Staff Attorney Christopher Yuen, and Staff Accountant Diane Milosevic on January 30, 2024, pursuant to the testimony subpoena issued on December 5, 2023. The testimony lasted approximately five (5) hours on the record. Calderwood & Harkness (Jasmine Thornton and Liam Donahue) represented Mr. Chakravarti at the testimony.
The Staff's examination covered the following principal topics:
• The BridgeFin loan origination and underwriting process, including the role of BRB's AI-driven underwriting model in credit decisioning;
• AI-driven underwriting model governance, including model development, validation, monitoring, and change-management procedures;
• BridgeFin's modification and re-aging policies, including the criteria for granting modifications and the operational procedures for resetting delinquency clocks within BRB's loan servicing systems;
• BridgeFin credit-quality reporting to senior management, the credit risk function, and the ACL Committee.
The Staff's questioning focused on the following areas of particular significance:
First, the Staff examined the criteria for granting loan modifications to BridgeFin borrowers and the specific re-aging protocol, including the system-level mechanics by which a modified loan's delinquency status was reset to "current" in BRB's servicing and reporting systems.
Second, the Staff focused extensively on the volume and timing of loan modifications during the Q3 and Q4 2022 period. The Staff presented Mr. Chakravarti with data showing that approximately 8,400 of the 12,847 modified loans at issue were modified during this six-month period, representing a significant acceleration in modification activity relative to prior quarters. The Staff's questioning explored whether the concentration of modification activity in the period immediately preceding BRB's fiscal year-end was coincidental or whether it reflected a deliberate effort to manage reported delinquency metrics in advance of year-end reporting.
Third, and relatedly, the Staff explored whether the BridgeFin modification program was designed or used, in whole or in part, to manage reported delinquency metrics. This line of questioning was the most pointed during Mr. Chakravarti's testimony and suggested that the Staff is considering whether the modification program served a dual purpose — borrower assistance on the one hand, and delinquency metric management on the other.
Fourth, the Staff examined Mr. Chakravarti's communications with Ms. Navarrete and Mr. Hu regarding BridgeFin credit-quality trends, including the escalation of internal reports reflecting credit deterioration.
Assessment: Mr. Chakravarti explained that modifications were granted based on documented borrower hardship criteria — including involuntary unemployment, medical events, and income disruption — and were not used to manage reported delinquency metrics or to achieve any reporting objective. He acknowledged that the pace of modifications increased in late 2022 as macroeconomic conditions deteriorated (including rising interest rates, elevated inflation, and increasing consumer financial stress indicators), but he maintained that this acceleration was consistent with BRB's borrower-assistance philosophy and the Bank's commitment to responsible lending practices. He testified that the modification criteria were applied consistently regardless of the quarter in which a modification was granted and that no instructions were given to the BridgeFin servicing team to accelerate or increase modification volumes for reporting purposes.
The Staff appeared particularly interested in a November 2022 internal email thread (Bates No. BRB-SEC-047832 through BRB-SEC-047836) in which a BridgeFin credit analyst noted that re-aging "significantly impacts our 90+ day bucket." Calderwood & Harkness had identified this document during witness preparation and devoted significant preparation time to ensuring that Mr. Chakravarti could explain the context of the communication. Mr. Chakravarti testified that the analyst's observation was a factual statement about the mechanical effect of re-aging on delinquency reporting — which is inherent in any modification program that resets the delinquency clock — but that it did not imply that the modification program was being used for the purpose of manipulating reported metrics. He further explained that the analyst's observation was made in the context of a routine credit-quality review meeting, during which the BridgeFin team was analyzing the performance of modified loans for purposes of loss-forecasting and was not suggesting impropriety. On balance, while this email thread is a document the Staff may cite in support of its theory, Mr. Chakravarti's testimony regarding the context and purpose of the communication was credible and consistent.
C. Raymond Hu (Chief Accounting Officer) — February 14, 2024
Mr. Hu testified before Senior Staff Attorney Andrea Felton, Staff Attorney Christopher Yuen, and Staff Accountant Diane Milosevic on February 14, 2024. As noted above, Mr. Hu's testimony was provided voluntarily, without subpoena, as part of BRB's cooperative posture. The testimony lasted approximately seven (7) hours on the record — the longest of the three testimonies — reflecting the technical complexity of the subject matter. Calderwood & Harkness (Victoria Chambers and Jasmine Thornton) represented Mr. Hu at the testimony.
The Staff's examination covered the following principal topics:
• BRB's ACL estimation methodology under ASC 326 (CECL), including the vintage-cohort model design, the selection of model inputs and assumptions, and the estimation of lifetime expected credit losses;
• Vintage-cohort model design, including the construction of vintage pools, the assignment of loans to cohorts based on origination period, and the calculation of historical loss rates by vintage;
• Inputs and assumptions used in the CECL model, including macroeconomic forecast variables, prepayment assumptions, and loss-severity factors;
• Quarterly true-up procedures, including the process by which BRB updated its ACL estimate each quarter to reflect new information;
• Qualitative overlay adjustments applied to the quantitative model output;
• Communications with Whitfield Keane LLP regarding ACL adequacy, the audit procedures performed by WK with respect to the BridgeFin ACL, and any audit differences or proposed adjustments;
• Materiality assessments, including BRB's internal materiality threshold and its application to the ACL estimation process.
The Staff's questioning focused on the following areas of particular significance:
First, the Staff devoted extensive time to the specific mechanics of how BRB's CECL model treated re-aged loans within the vintage-cohort framework. The central question was whether, upon modification and re-aging, a loan was moved to "current" status within its original vintage cohort (thereby reducing the loss rate attributed to that cohort) or whether the loan was retained in its original delinquency bucket within the vintage analysis (thereby preserving the delinquency history). Mr. Hu explained that BRB's model treated re-aged loans as current within the vintage framework upon modification, consistent with BRB's loan modification policy and the system-level delinquency reset. The Staff's position, as reflected in the nature of the questioning, is that this treatment understated the expected loss rate for the affected vintage cohorts.
Second, the Staff explored the sensitivity of the ACL estimate to the re-aging treatment. Staff Accountant Milosevic conducted an extended and technically detailed line of questioning in which she presented Mr. Hu with what she described as the Staff's preliminary analysis showing that, if re-aged loans were retained in their original vintage delinquency buckets rather than reclassified as current, the resulting ACL would increase from $143.5 million to approximately $180.8 million — a difference of $37.3 million.
Third, the Staff questioned Mr. Hu regarding BRB's internal materiality threshold. Mr. Hu confirmed that BRB applies a materiality threshold of 5% of pre-tax income for purposes of evaluating the significance of misstatements or estimation differences. Based on BRB's FY 2022 pre-tax income of $612 million, this threshold equates to $30.6 million. The Staff's questioning emphasized that the alleged $37.3 million understatement exceeds BRB's own materiality threshold by $6.7 million.
Fourth, the Staff asked Mr. Hu whether he believed the difference between BRB's reported ACL of $143.5 million and the Staff's preliminary $180.8 million figure — $37.3 million — constituted a material misstatement. Mr. Hu responded carefully, noting that the materiality of any estimation difference must be evaluated in context, including the range of reasonable estimates under ASC 326, the inherent uncertainty in loss forecasting, and the qualitative factors relevant to materiality under Staff Accounting Bulletin No. 99. He did not concede that the difference constituted a material misstatement.
Assessment: Mr. Hu was the most technically detailed witness and performed well under an extended and demanding examination. His testimony was consistent with BRB's position that the re-aging treatment is one of several reasonable methodological approaches under ASC 326 and that BRB's CECL model, including its qualitative overlay factors, produced an ACL estimate within the range of reasonable estimates. He explained that the qualitative overlays were designed to capture macro-level credit deterioration that the quantitative vintage-cohort model might not fully reflect, including deterioration related to the performance of modified loans.
One significant factual point emerged during Mr. Hu's testimony. In response to Staff Accountant Milosevic's questioning regarding model sensitivity, Mr. Hu disclosed that BRB conducted an internal sensitivity analysis in Q3 2022 that examined the effect of alternative re-aging treatments on the ACL estimate. That sensitivity analysis showed an ACL range of $138 million to $172 million, depending on the assumptions applied to the re-aging treatment. This disclosure is significant for several reasons:
• The upper end of BRB's own internal sensitivity range ($172 million) is below the Staff's preliminary $180.8 million figure by $8.8 million, which suggests that BRB's model, even under more conservative assumptions, produced a lower estimate than the Staff's analysis. This could support BRB's argument that the Staff's methodology is itself aggressive and produces results outside the range of reasonable estimates.
• However, the upper end of the sensitivity range ($172 million) is also $28.5 million above BRB's reported ACL of $143.5 million. The Staff may argue that BRB was aware — through its own internal analysis — that alternative reasonable assumptions could produce a significantly higher ACL, yet chose to report the lower end of the range without adequate disclosure of the estimation uncertainty.
• The lower end of the sensitivity range ($138 million) is below the reported ACL of $143.5 million, indicating that BRB's reported ACL fell within its own modeled range, albeit closer to the lower end.
On balance, the sensitivity analysis data is a double-edged sword. It demonstrates that BRB was engaged in rigorous analytical work and was aware of estimation variability — which can be characterized as evidence of good faith and methodological diligence. At the same time, it provides the Staff with a factual basis for arguing that BRB was on notice that reasonable alternative approaches could produce a meaningfully higher ACL and that BRB's choice to report toward the lower end of the range warrants scrutiny.
D. Cross-Cutting Observations from All Three Testimonies
Based on our review and analysis of all three witness testimonies, Calderwood & Harkness offers the following cross-cutting observations:
The SEC Staff's theory is centered on the re-aging treatment. The consistent theme across all three testimonies is the Staff's focus on the treatment of the 12,847 modified BridgeFin loans ($236.4 million aggregate balance) and the effect of the re-aging treatment on reported delinquency and loss rates. The Staff's position, distilled from its questioning, is that by reclassifying modified loans as "current," BRB's vintage-cohort model understated the expected loss rate for the affected cohorts, resulting in an ACL that was materially lower than it should have been.
The quantitative impact, as framed by the Staff, is significant. The Staff's preliminary analysis, as reflected in its testimony questioning, indicates the following metric-level differences:
No scienter evidence has emerged. Importantly, the Staff has not, to date, indicated that it is pursuing a scienter-based fraud theory. The statutory provisions mentioned in the subpoenas and referenced during testimony are limited to Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1 and 12b-20 thereunder. These are non-scienter provisions — Section 13(a) and Rule 13a-1 impose strict liability for filing inaccurate periodic reports, and Rule 12b-20 requires that filings contain all material information necessary to make required statements not misleading (subject to a negligence standard in certain circumstances). Section 13(b)(2)(A), the books-and-records provision, imposes a strict-liability standard for maintaining accurate books and records. At no point during the three testimonies did the Staff's questioning suggest that it was building a case for scienter — there were no questions about motive, personal financial interest, knowledge of wrongdoing, or intent to deceive investors.
No "smoking gun" has been identified. No testimony produced a "smoking gun" document or admission suggesting intentional manipulation of the ACL or related metrics. While the November 2022 email thread regarding the impact of re-aging on the "90+ day bucket" is the most potentially adverse document identified to date, Mr. Chakravarti's contextual explanation was credible and the email itself reflects a factual observation rather than evidence of a scheme.
V. SEC Staff's Apparent Theories and Potential Charges
A. Statutory Framework
Based on the scope of the subpoenas, the topics addressed during testimony, and the provisions cited in the Staff's process, we believe the Staff is evaluating potential charges under the following provisions of the federal securities laws:
Section 13(a) of the Exchange Act (15 U.S.C. § 78m(a)): Section 13(a) requires issuers of registered securities to file periodic reports with the Commission in accordance with such rules and regulations as the Commission may prescribe. Violations of Section 13(a) are typically charged in conjunction with violations of the specific rules requiring the filing of annual reports (Rule 13a-1) and quarterly reports (Rule 13a-13).
Rule 13a-1 (17 C.F.R. § 240.13a-1): Rule 13a-1 requires every issuer of a security registered under Section 12 of the Exchange Act to file an annual report on Form 10-K. An issuer that files a materially inaccurate 10-K may be charged with violating Rule 13a-1 and, derivatively, Section 13(a).
Rule 12b-20 (17 C.F.R. § 240.12b-20): Rule 12b-20 requires that, in addition to the information expressly required to be included in a filing, the filing must 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. This rule is frequently invoked in cases alleging material omissions from periodic reports.
Section 13(b)(2)(A) of the Exchange Act (15 U.S.C. § 78m(b)(2)(A)): Section 13(b)(2)(A), commonly referred to as the "books-and-records" provision, requires every issuer to make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer. This provision is a strict-liability provision — no showing of scienter or even negligence is required.
We emphasize that all of the foregoing provisions are non-scienter provisions. Section 13(a), Rule 13a-1, Rule 12b-20, and Section 13(b)(2)(A) do not require the SEC to prove that BRB or any individual acted with an intent to deceive, manipulate, or defraud. Depending on the specific provision, the applicable standard is strict liability or, at most, negligence. This is a meaningful distinction because it means the Staff's burden of proof is lower than it would be in a fraud case, but it also means that the potential sanctions — which in non-scienter cases typically take the form of a cease-and-desist order and a civil penalty, without the more severe consequences associated with fraud charges (such as officer-and-director bars or disgorgement) — are correspondingly less severe.
B. The Core Allegation
Based on our analysis of the testimony questioning and the trajectory of the Investigation, we believe the core allegation that the Staff is developing can be summarized as follows:
BRB's reported ACL of $143.5 million (3.50% of the $4.1 billion BridgeFin outstanding loan portfolio) as of December 31, 2022, materially understated expected credit losses. The Staff's preliminary view, as reflected in Staff Accountant Milosevic's testimony questioning, is that the ACL should have been approximately $180.8 million (4.41%), yielding a potential understatement of approximately $37.3 million. The difference of $37.3 million exceeds BRB's own internal materiality threshold of $30.6 million (calculated as 5% of FY 2022 pre-tax income of $612 million) by $6.7 million, or approximately 21.9% above the threshold.
The Staff's theory rests on the contention that BRB's treatment of re-aged and modified loans was improper — specifically, that loans that were modified and re-aged should have been retained in their original vintage delinquency buckets for loss-rate estimation purposes, rather than being reclassified as "current" upon modification. The Staff's position is that the reclassification treatment artificially reduced the delinquency and loss rates attributed to the affected vintage cohorts, thereby suppressing the CECL model's estimate of lifetime expected credit losses.
If the Staff's analysis is credited, the effect is to increase both the reported net charge-off rate (from 2.14% to approximately 3.05%) and the reported 90+ day delinquency rate (from 1.72% to approximately 2.38%) for the BridgeFin portfolio as of December 31, 2022. The Staff may argue that these revised metrics, had they been accurately reported, would have been material to investors in evaluating the credit quality of BRB's fastest-growing loan segment.
C. Defense Positions
Calderwood & Harkness, in consultation with Brindoval Analytic Partners, has identified the following principal defense positions:
Reasonableness of BRB's CECL Methodology. ASC 326 (CECL) is inherently an estimation exercise. The standard does not prescribe a single methodology for estimating expected credit losses; rather, it permits reporting entities to use a range of methods, including discounted cash flow, loss-rate, vintage, probability-of-default, and other approaches. The vintage-cohort approach used by BRB is a widely accepted methodology, and the treatment of re-aged loans within that framework involves a judgment that is within the scope of management's reasonable discretion. BRB's approach — reclassifying modified loans as "current" within the vintage analysis — is one of several reasonable approaches and is not inconsistent with the requirements of ASC 326.
Consistency with Loan Modification Policy and OCC Guidance. BRB's re-aging treatment was applied in accordance with its written loan modification policy, which has been in effect since 2019. This policy is consistent with the guidance set forth in the OCC's Comptroller's Handbook, which permits the reclassification of a modified loan's delinquency status upon the granting of a modification, provided that specified criteria are met. BRB's re-aging treatment is not unique or unusual; peer institutions in the consumer lending space apply similar treatments when loans are modified.
Brindoval Analytic Partners' Forensic Analysis. Brindoval Analytic Partners' forensic analysis (joint work-product memorandum dated December 22, 2023) supports the position that BRB's vintage-cohort approach, including the re-aging treatment, produces ACL estimates within a reasonable range. Brindoval's analysis further demonstrates that the Staff's preliminary $180.8 million figure is based on assumptions regarding the re-default rate of modified loans that are themselves subject to significant estimation uncertainty and that may not be well-supported by the available data. Specifically, Brindoval's analysis suggests that the Staff's approach may overstate the re-default rate for modified BridgeFin loans by relying on industry-wide re-default data rather than BridgeFin-specific performance data, which shows a lower re-default rate.
Clean Audit Opinion. BRB's independent auditor, Whitfield Keane LLP, audited BRB's consolidated financial statements for FY 2022 and issued an unqualified (clean) audit opinion. WK did not issue a qualification, modify its opinion, or identify a material misstatement relating to the BridgeFin ACL. While the SEC is not bound by the auditor's opinion and may reach different conclusions regarding materiality, the fact that a PCAOB-registered audit firm examined the same ACL under the same accounting standards and concluded that it was fairly stated is a significant data point that bears on the reasonableness of BRB's methodology and the absence of a clear-cut error.
OCC Supervisory Assessment. BRB's prudential regulator, the OCC, conducts ongoing supervisory assessments of BRB's credit risk management practices, including the ACL estimation methodology, under OCC Charter No. 24891. BRB's most recent composite CAMELS rating is 2 (satisfactory), and the OCC's concurrent supervisory assessment has not identified material deficiencies in the ACL methodology or the treatment of modified loans. While the OCC's supervisory conclusions are made for safety-and-soundness purposes and are not binding on the SEC for securities-law purposes, they provide additional support for the reasonableness of BRB's approach.
Voluntary Disclosure Enhancements. BRB has proactively enhanced its BridgeFin-related disclosures in its Quarterly Report on Form 10-Q for Q3 2023, filed with the Commission on November 9, 2023. The enhanced disclosures include vintage-level delinquency tables, expanded Management's Discussion and Analysis ("MD&A") regarding the performance of modified loans and the re-aging treatment, and additional risk-factor disclosures regarding BridgeFin credit quality. These voluntary enhancements were implemented before the Investigation reached an advanced stage and demonstrate BRB's commitment to transparency and its responsiveness to evolving investor information needs.
VI. Assessment of Likelihood of Wells Notice
A. Factors Suggesting a Wells Notice Is Likely
Calderwood & Harkness has evaluated the trajectory of the Investigation and the available evidence in order to assess the likelihood that the Staff will issue a Wells notice — the pre-enforcement notification that provides the respondent with an opportunity to submit a written response (a "Wells Submission") before the Staff makes a formal recommendation to the Commission regarding the filing of an enforcement action. We have identified the following factors that suggest a Wells notice is likely:
First, the Staff has devoted substantial resources to the Investigation, including three witness testimonies (totaling approximately 18.5 hours of on-the-record testimony), the assignment of a dedicated Staff Accountant (Diane Milosevic), and the active involvement of both the Assistant Director of the Financial Fraud Unit (Gregory Bonham) and the Branch Chief (Renata Moss). This level of resource commitment is generally indicative of a matter that the Staff considers significant and is unlikely to close without some form of resolution.
Second, the alleged understatement of $37.3 million exceeds BRB's own internal materiality threshold of $30.6 million by $6.7 million. The Staff is likely to view BRB's own materiality threshold as a significant benchmark, and the fact that the alleged misstatement exceeds it — even if only by a relatively modest margin — provides the Staff with a quantitative anchor for its materiality argument.
Third, the re-aging issue is factually concrete and susceptible to a relatively straightforward narrative about delinquency metrics being "masked" through the modification and re-aging process. SEC enforcement cases tend to be stronger when they can be distilled into a clear and comprehensible story for a jury or Commission proceedings, and the re-aging theory — while technically complex — can be simplified into a narrative about a bank that reclassified delinquent loans as current in order to suppress reported delinquency rates and lower its reserve.
Fourth, SEC enforcement priorities in the post-CECL adoption environment have included ACL adequacy cases. The Commission's adoption of CECL (ASC 326) represents a significant change in the credit loss estimation framework, and the Division of Enforcement has signaled its intention to scrutinize CECL implementation and the adequacy of ACL estimates. This investigation may be viewed by the Staff, in part, as an opportunity to establish precedent regarding the acceptable boundaries of CECL estimation practices.
B. Factors Suggesting the Staff May Decline to Proceed
Notwithstanding the foregoing, Calderwood & Harkness has also identified meaningful factors that may counsel the Staff against proceeding:
First, there is no evidence of scienter. The Investigation has not produced any evidence of intentional manipulation, knowing misstatement, or reckless disregard for the truth. The case, as currently constituted, would be limited to non-scienter charges under Sections 13(a) and 13(b)(2)(A) and related rules. While the Staff does not need to prove scienter under these provisions, the absence of scienter evidence limits the gravity of the case and may affect the Staff's assessment of whether the matter warrants the expenditure of additional enforcement resources.
Second, BRB's methodology is within a range of reasonable estimates under ASC 326, making this, at its core, a "battle of experts" case. Cases involving disputes over accounting estimates are inherently more difficult for the SEC to prosecute because the respondent can present expert testimony that the chosen methodology was reasonable and within the range of acceptable approaches. The CECL framework expressly contemplates management judgment in the estimation of expected credit losses, and BRB can demonstrate that its judgment was exercised in good faith and in accordance with established policies.
Third, BRB's independent auditor, Whitfield Keane, audited the FY 2022 financial statements and did not flag the BridgeFin ACL as materially misstated. A clean audit opinion is a powerful defense in a reporting-violation case because it demonstrates that an independent expert examined the same financial statements and concluded that they were fairly presented.
Fourth, the OCC has not identified deficiencies in BRB's ACL methodology or the treatment of modified loans. The OCC's concurrent supervisory assessment, while conducted for safety-and-soundness purposes rather than securities-law compliance, provides an additional independent validation of BRB's approach.
Fifth, BRB voluntarily enhanced its BridgeFin disclosures in the Q3 2023 10-Q before the Investigation reached an advanced stage. Voluntary remediation is a factor that the Commission considers in exercising its enforcement discretion, and BRB's proactive disclosure enhancements may weigh against the filing of an action.
Sixth, the internal sensitivity analysis disclosed by Mr. Hu during his testimony complicates the Staff's narrative. The sensitivity range of $138 million to $172 million shows that BRB was aware of estimation variability and conducted rigorous analytical work. The fact that BRB's reported ACL of $143.5 million falls within BRB's own modeled range suggests that BRB made a reasonable judgment within the bounds of its own analysis. While the Staff may attempt to use the upper end of the range ($172 million) to argue that BRB should have reported a higher ACL, BRB can respond that the selection of a point estimate within a reasonable range is precisely the kind of management judgment that CECL contemplates.
C. Calderwood & Harkness's Assessment
Balancing the foregoing factors, Calderwood & Harkness assesses that there is a meaningful probability — which we estimate in the range of 40–55% — that the Staff will issue a Wells notice to BRB. Our assessment reflects the following considerations:
• The level of Staff resources committed to the Investigation and the seniority of the officials involved suggest that the Investigation is unlikely to be closed without a formal resolution.
• The alleged understatement exceeds BRB's own materiality threshold, providing the Staff with a quantitative foundation for its case.
• However, the absence of scienter, the auditor's clean opinion, the OCC's satisfactory rating, the reasonable-range defense, and BRB's voluntary remediation collectively constitute strong mitigating factors that may cause the Staff to exercise its discretion not to proceed, particularly given the resource-intensive nature of litigating estimation disputes.
If a Wells notice is issued, we believe BRB would have strong arguments in a Wells Submission. The principal arguments would include: (1) the reasonableness of BRB's CECL methodology, as supported by Brindoval's forensic analysis; (2) the OCC's concurrent supervisory findings; (3) the auditor's clean opinion; (4) peer-comparison data demonstrating that BRB's ACL coverage ratios and re-aging practices are consistent with industry norms among comparable digital-lending institutions; and (5) BRB's voluntary disclosure enhancements. In our experience, a well-supported Wells Submission that presents strong reasonableness arguments in an estimation-dispute case can be effective in persuading the Staff to close the investigation or to narrow the scope of any enforcement action.
We do not currently assess a significant risk that the Staff will pursue scienter-based (fraud) charges under Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, or under Section 17(a) of the Securities Act. The evidentiary record does not support such charges, and the Staff's questioning has not been directed toward establishing the elements of a scienter-based claim.
VII. D&O Insurance Coverage Update
BRB tendered the SEC Investigation as a Claim under its directors' and officers' liability insurance program on October 5, 2023. The relevant policies are as follows:
Primary Layer: Northcastle Mutual Assurance Company, Policy No. NMA-DO-2023-11847. This policy provides a $15 million limit of liability for D&O claims, with an entity retention (self-insured retention) of $2.5 million. The policy period is July 1, 2023 through July 1, 2024. The policy affords coverage for defense costs, judgments, and settlements arising from covered claims, subject to its terms, conditions, and exclusions.
First Excess Layer: Cascade Omnivrel Insurance Group, Policy No. CFIG-XS1-2023-5598. This policy provides $10 million in excess of the $15 million primary layer (aggregate attachment point: $15 million), for a combined tower of $25 million. Cascade Fidelity's coverage follows form to the Northcastle primary policy.
Northcastle Mutual Assurance Company acknowledged receipt of BRB's claim tender and confirmed coverage, subject to a reservation of rights, through its claims counsel, Thornfield & Rowe LLP (Brenda Alvaro, Lead Claims Counsel). The reservation of rights is standard and preserves Northcastle's ability to contest coverage with respect to specific claims or costs that may fall outside the policy's coverage terms. We are not aware of any specific coverage defenses that Northcastle is likely to assert with respect to the Investigation, though we continue to monitor the carrier's position.
Defense costs are being tracked and allocated for purposes of the insurance program. As of January 31, 2024, cumulative defense costs — inclu

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