PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE / ATTORNEY WORK PRODUCT
MEMORANDUM
TO: Gwendolyn Prescott, Chair, Audit Committee of the Board of Directors, Belmont Ridge Bank National Association
CC: Derek Sung, General Counsel & Chief Legal Officer, Belmont Ridge Bank National Association; Marcus R. Ellingham, Chief Executive Officer, Belmont Ridge Bank National Association
FROM: Victoria Chambers, Partner, Calderwood & Harkness LLP; Jasmine Thornton, Associate, Calderwood & Harkness LLP
DATE: June 10, 2024
RE: Final Report — SEC Division of Enforcement Investigation, File No. HO-14287; Summary of Proceedings, Resolution, Lessons Learned, and Recommended Enhancements to Disclosure Controls and Procedures
MATTER NO.: SC-MAT-2023-4172
CONFIDENTIALITY LEGEND: This memorandum is a privileged and confidential attorney-client communication and attorney work product prepared by Calderwood & Harkness LLP at the direction of the Audit Committee of Belmont Ridge Bank National Association. It is not intended for disclosure to any third party and should not be disseminated without prior written authorization from Calderwood & Harkness LLP. Any inadvertent disclosure does not constitute a waiver of any applicable privilege or protection.
Right-click to update Table of Contents
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 final report on the investigation 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 portfolio. This report summarizes the genesis, scope, and progression of the investigation, analyzes the key substantive issues in dispute, details the resolution and the factors that contributed to a favorable outcome, provides a full financial accounting of defense costs and insurance recovery, and sets forth recommendations for enhancements to BRB's disclosure controls and procedures, CECL model governance, and regulatory-inquiry response protocols.
The SEC investigation was opened on September 18, 2023, when BRB received a voluntary request letter from the Staff. The investigation was assigned File No. HO-14287. On October 12, 2023, the investigation was escalated to a formal investigation pursuant to a Formal Order of Investigation bearing Order No. EN-2023-0947, which authorized the Staff to issue subpoenas for documents and testimony.
The core allegation underlying the investigation was that BRB's Annual Report on Form 10-K for fiscal year 2022, filed with the Commission on February 28, 2023, and its Quarterly Reports on Form 10-Q for the first quarter of 2023, filed on May 10, 2023, and the second quarter of 2023, filed on August 9, 2023, materially understated expected credit losses in the BridgeFin consumer fintech loan portfolio as measured under the Current Expected Credit Losses methodology mandated by Accounting Standards Codification Topic 326, Financial Instruments—Credit Losses ("ASC 326" or "CECL").
Specifically, the SEC Staff's preliminary view was that BRB's ACL for the BridgeFin portfolio should have been approximately $180.8 million, representing 4.41% of the $4.1 billion in outstanding BridgeFin loans as of December 31, 2022, as compared to the $143.5 million (3.50% of outstanding) that BRB reported. The resulting potential understatement of $37.3 million exceeded BRB's internal materiality threshold of $30.6 million, which was calculated as 5% of FY 2022 pre-tax income of $612 million, by approximately $6.7 million.
The investigation progressed through a voluntary request phase, a formal document-production and testimony phase, and ultimately culminated in a Wells process. BRB received a Wells call on March 8, 2024, advising that the Staff was considering recommending enforcement action for violations of certain reporting provisions of the Securities Exchange Act of 1934. Calderwood & Harkness LLP filed a comprehensive Wells Submission on April 5, 2024, on behalf of BRB, together with supporting expert analysis, peer comparisons, and factual declarations.
We are pleased to report that, by letter dated May 30, 2024, the SEC Staff notified Calderwood & Harkness that it had determined not to recommend an enforcement action against Belmont Ridge Bank National Association in connection with File No. HO-14287. The investigation has been terminated with no charges filed, no civil penalties imposed, no cease-and-desist order entered, and no restatement of BRB's previously filed financial statements required. This outcome represents a fully favorable resolution for the Bank.
Total defense costs incurred in connection with the investigation amounted to $4,466,022, consisting of $3,847,622 in fees charged by Calderwood & Harkness LLP and $618,400 in forensic accounting fees charged by Brindoval Analytic Partners LLC. Following application of the $2,500,000 entity retention under BRB's primary directors and officers liability insurance policy with Northcastle Mutual Assurance Company (Policy No. NMA-DO-2023-11847), the D&O insurer reimbursed BRB $1,966,022, resulting in a net cost to the Bank of $2,500,000.
The balance of this memorandum is organized as follows: Section II provides background on BRB, the BridgeFin division, and the engagement of outside counsel and advisors. Section III presents a detailed chronology of the investigation from inception through termination. Section IV analyzes the key factors that contributed to the favorable outcome. Section V provides a financial summary of defense costs and insurance recovery. Section VI identifies lessons learned from the investigation. Section VII sets forth recommended enhancements to BRB's disclosure controls and procedures. Section VIII addresses residual considerations, including statute-of-limitations matters, Form 8-K disclosure, private litigation monitoring, document retention, and the auditor relationship. Section IX provides a brief conclusion.
II. Background
A. Belmont Ridge Bank NA — Overview
Belmont Ridge Bank National Association is a national banking association chartered by the Office of the Comptroller of the Currency under OCC Charter No. 24891. BRB's common stock is listed on the Nasdaq Stock Market under the ticker symbol "BRDG." The Bank is headquartered at 200 Park Avenue South, 38th Floor, New York, NY 10003.
As of December 31, 2022, BRB reported total consolidated assets of approximately $38.2 billion, total deposits of approximately $29.6 billion, and total shareholders' equity of approximately $4.03 billion. For fiscal year 2022, BRB reported pre-tax income of $612 million, net income of $471.2 million, and diluted earnings per share of $6.14 on approximately 76.7 million common shares outstanding. As of approximately September 2023, BRB's market capitalization was approximately $4.7 billion.
BRB's senior management team during the relevant period included Marcus R. Ellingham, Chief Executive Officer; Patricia "Trish" Navarrete, Chief Financial Officer; Derek Sung, General Counsel and Chief Legal Officer; Annette Kowalski, Chief Risk Officer; and Raymond Hu, Chief Accounting Officer. As of September 2023, BRB maintained an OCC composite CAMELS examination rating of "2" (Satisfactory).
BRB adopted the CECL standard (ASC 326) effective January 1, 2020, consistent with the mandatory adoption timeline for SEC-filing entities. Since adoption, BRB has utilized a vintage-cohort approach to estimate expected credit losses across its various loan portfolios, including the BridgeFin consumer lending portfolio that is the subject of this report.
B. BridgeFin Division
BridgeFin is a digital-first consumer lending platform that operates as an internal division of BRB. It is not organized as a separate legal entity. BridgeFin was launched in the third quarter of 2020 and is headed by Naveen Chakravarti, Senior Vice President and Division Head. The platform leverages a proprietary AI-driven underwriting model to originate unsecured personal loans and small-business microloans through digital channels.
For fiscal year 2022, BridgeFin originated approximately $2.87 billion in new loans. As of December 31, 2022, BridgeFin's outstanding loan balance was approximately $4.1 billion. The average loan size was approximately $18,400 for personal loans and approximately $42,000 for micro-business loans.
BRB reported the following credit-quality metrics for the BridgeFin portfolio as of and for the year ended December 31, 2022: a net charge-off rate of 2.14%, a 90+ day delinquency rate of 1.72%, and an ACL of $143.5 million, representing an ACL coverage ratio of 3.50% of outstanding balances. These metrics, and particularly the ACL coverage ratio, became the central focus of the SEC Staff's investigation.
The BridgeFin division's rapid growth — from launch in Q3 2020 to a $4.1 billion portfolio in just over two years — and its reliance on novel, AI-driven underwriting technology presented both business opportunities and heightened regulatory and disclosure challenges. As discussed more fully in Section VI, the investigation highlighted the importance of ensuring that BRB's centralized financial reporting and disclosure infrastructure keeps pace with the growth and complexity of new business lines such as BridgeFin.
C. Engagement of Outside Counsel and Advisors
Upon receipt of the SEC's voluntary request letter on September 18, 2023, BRB's regular outside securities counsel, Caldwell Pratt & Stein LLP (the "Securities Counsel"), received the initial correspondence. Martin Caldwell, the Lead Partner at Caldwell Pratt & Stein responsible for the BRB relationship, had prepared and reviewed the Form 10-K and the Forms 10-Q that were the subject of the SEC's inquiry. Given the potential for an enforcement investigation and the need for specialized defense counsel, BRB promptly retained Calderwood & Harkness LLP ("C&H") to serve as defense counsel in connection with the matter.
Calderwood & Harkness's engagement letter was executed on September 20, 2023, and the matter was assigned internal Matter No. SC-MAT-2023-4172. The C&H engagement team comprised the following attorneys:
• Victoria Chambers, Partner — Responsible Partner and lead defense strategist
• Howard Quinn, Partner — Billing Partner and strategic advisor
• Jasmine Thornton, Associate — Lead Associate, day-to-day case management, document review oversight, witness preparation, and primary drafter of the Wells Submission
• Liam Donahue, Associate — Working Associate, document review, research, and production management
On October 10, 2023, BRB, at C&H's recommendation, retained Brindoval Analytic Partners LLC ("Brindoval"), a forensic accounting and financial advisory firm, to provide expert analysis of BRB's CECL methodology and ACL estimation process. The engagement was structured under the Kovel doctrine and the work-product protection, with Brindoval's work directed by and for the benefit of C&H in providing legal advice to BRB. Dr. Franklin Osei, CPA, CFF, served as Brindoval's lead engagement partner and ultimately authored the expert report that was submitted as Exhibit A to the Wells Submission.
Whitfield Keane LLP served as BRB's independent registered public accounting firm for fiscal years 2021 and 2022. Lorraine Dupont served as the audit engagement partner, and Whitfield Keane is registered with the Public Company Accounting Oversight Board under Registration No. 2847. In connection with the SEC's inquiry, Whitfield Keane retained separate counsel, Hargrove & Millstein LLP, with Samuel Hargrove serving as the lead attorney. While no findings adverse to Whitfield Keane arose from the investigation, the involvement of BRB's independent auditor required careful coordination to ensure that BRB's privilege positions were maintained and that communications between BRB personnel and the auditor were properly segregated from privileged attorney-client communications.
D. D&O Insurance Coverage
BRB maintained the following directors and officers liability insurance coverage during the relevant period:
Primary Layer: Northcastle Mutual Assurance Company served as BRB's primary D&O insurer under Policy No. NMA-DO-2023-11847, with a policy period of July 1, 2023 through July 1, 2024. The policy provided a primary limit of $15 million, subject to a $2,500,000 entity retention. Claims counsel to Northcastle Mutual was Thornfield & Rowe LLP, with Brenda Alvaro serving as the responsible attorney.
First Excess Layer: Cascade Omnivrel Insurance Group provided first excess D&O coverage under Policy No. CFIG-XS1-2023-5598, providing $10 million in excess of the $15 million primary limit. This layer was not implicated given the total defense costs of $4,466,022.
BRB's insurance broker for the D&O program was Ridgeline Governance Advisors LLC, with Melinda Tran, Senior Vice President, serving as the account executive. Ridgeline facilitated the claims-tendering process on behalf of BRB.
The D&O claim was tendered to Northcastle Mutual on October 5, 2023, promptly following the retention of Calderwood & Harkness and the formal commencement of the defense effort. The tendering and coverage process is discussed further in Section V below.
III. Chronology of the Investigation
The following section provides a detailed chronological account of the SEC investigation from the pre-investigation period through the termination letter. A full chronological timeline in tabular format is maintained in the matter file and cross-referenced as Appendix A to this memorandum.
A. Pre-Investigation Period (Through September 17, 2023)
BRB's fiscal year 2022 ended on December 31, 2022. The filings that became the subject of the SEC's investigation were prepared in the ordinary course during the first eight months of 2023:
• February 28, 2023: BRB filed its Annual Report on Form 10-K for fiscal year 2022 with the Commission. The filing reported, among other things, the BridgeFin portfolio's ACL of $143.5 million (3.50% coverage ratio), a net charge-off rate of 2.14%, and a 90+ day delinquency rate of 1.72%. The Form 10-K was prepared and reviewed with the assistance of Caldwell Pratt & Stein LLP and was audited by Whitfield Keane LLP, which issued an unqualified audit opinion.
• May 10, 2023: BRB filed its Quarterly Report on Form 10-Q for the first quarter of 2023. The filing was reviewed (but not audited) by Whitfield Keane LLP and was prepared with the assistance of Caldwell Pratt & Stein LLP.
• August 9, 2023: BRB filed its Quarterly Report on Form 10-Q for the second quarter of 2023. As with the Q1 filing, this report was reviewed by Whitfield Keane LLP and prepared with the assistance of Caldwell Pratt & Stein LLP.
Each of these filings included the certifications required under Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, signed by Mr. Ellingham (CEO) and Ms. Navarrete (CFO). At the time these filings were prepared and submitted, there was no indication from BRB's internal controls over financial reporting, from Whitfield Keane's audit or review procedures, or from any regulatory examination that the BridgeFin ACL was materially misstated.
B. Voluntary Request Phase (September 18 – October 11, 2023)
• September 18, 2023: BRB received a voluntary request letter from the SEC Division of Enforcement. The letter was initially directed to Caldwell Pratt & Stein LLP in its capacity as BRB's securities reporting counsel. The letter advised BRB that the Staff had opened an investigation bearing File No. HO-14287 and requested the voluntary production of documents and information relating to BRB's ACL estimation process and disclosures for the BridgeFin portfolio. The scope of the request encompassed board and committee materials, internal memoranda, model documentation, loan-level data, and communications with the independent auditor relating to the ACL.
• September 20, 2023: Calderwood & Harkness LLP's engagement letter was executed by BRB, formally retaining the firm as defense counsel for the SEC investigation. C&H immediately began coordinating with Caldwell Pratt & Stein and BRB's in-house legal team, led by Derek Sung, to assess the scope of the inquiry and develop a response strategy.
• September 29, 2023: C&H transmitted a letter to Senior Staff Attorney Andrea Felton at the SEC Division of Enforcement, entering an appearance on behalf of BRB, requesting a meet-and-confer session to discuss the scope and timing of the Staff's information requests, and confirming BRB's posture of full cooperation with the investigation. This early communication was designed to establish a constructive working relationship with the Staff and to set expectations regarding BRB's willingness to engage cooperatively.
• October 2, 2023: The Audit Committee was first formally briefed on the investigation via a written memorandum from C&H transmitted to Gwendolyn Prescott, Chair of the Audit Committee. The memorandum provided an overview of the voluntary request letter, the likely scope of the investigation, the engagement of outside counsel, and preliminary strategic considerations.
• October 5, 2023: BRB's D&O insurance claim was formally tendered to Northcastle Mutual Assurance Company through Ridgeline Governance Advisors LLC. The claim notice described the SEC investigation, identified the relevant filings and the BridgeFin ACL as the subject matter of the inquiry, and requested coverage for defense costs under the entity coverage provisions of Policy No. NMA-DO-2023-11847.
• October 10, 2023: Brindoval Analytic Partners LLC was retained under the Kovel/work-product framework to provide forensic accounting analysis of BRB's CECL methodology, with a particular focus on the BridgeFin portfolio's vintage-cohort model, the treatment of re-aged and modified loans, and the reasonableness of BRB's qualitative overlay adjustments.
C. Formal Investigation Phase (October 12, 2023 – March 7, 2024)
The investigation was escalated from a voluntary inquiry to a formal investigation on October 12, 2023, when the SEC issued a Formal Order of Investigation bearing Order No. EN-2023-0947. The Formal Order authorized the Staff to issue subpoenas for the production of documents and the testimony of witnesses.
1. Document Subpoena and Production Protocol
On October 15, 2023, the SEC issued a document subpoena to BRB (Subpoena No. HO-14287-001), requiring the production of documents relating to a broad range of topics including, without limitation, BRB's CECL methodology, BridgeFin loan-level data, loan modification and re-aging policies and procedures, internal credit-quality reports, communications between BRB management and Whitfield Keane LLP regarding the ACL, board and committee materials discussing BridgeFin credit quality, and the preparation and review of the relevant SEC filings.
On October 20, 2023, C&H transmitted a letter to the SEC Staff proposing a document production protocol. The proposed protocol addressed, among other things, the identification of document custodians, the relevant date ranges for the production, the keyword search terms to be applied to electronically stored information, the production format (TIFF images with load files), a Bates numbering convention (BRB-SEC-000001 et seq.), and a confidential treatment request for proprietary underwriting models and algorithmic parameters used by the BridgeFin platform. After a brief negotiation, the Staff accepted the proposed protocol with minor modifications, and BRB commenced rolling document productions.
2. Document Productions
BRB produced documents in six rolling productions over the course of approximately four months:
The total production comprised approximately 1.42 million pages of documents. The productions encompassed internal memoranda, email communications, board and committee materials, CECL model documentation, loan-level data extracts, credit-quality dashboards and reports, auditor communications, and regulatory examination correspondence (to the extent not withheld on bank-examination privilege grounds).
3. Privilege Log
C&H prepared and submitted a privilege log identifying 1,847 documents that were withheld in whole or redacted in part on the basis of the attorney-client privilege, the work-product doctrine, and/or the bank-examination privilege. The privilege log was submitted on a rolling basis in connection with the document productions and was finalized concurrently with the final production on March 1, 2024.
The bank-examination privilege assertions related primarily to correspondence and reports exchanged between BRB and the OCC in connection with the OCC's concurrent supervisory examination of BRB's credit-risk management and ACL adequacy. C&H asserted this privilege consistent with applicable precedent and OCC policy, and the SEC Staff did not challenge the assertions during the course of the investigation.
Clawback protections were established pursuant to Federal Rule of Evidence 502(d), providing that any inadvertent production of privileged or work-product-protected documents would not constitute a waiver of the applicable privilege or protection. The parties negotiated and executed a stipulated clawback order early in the formal investigation phase.
4. Testimony Subpoenas and Investigative Testimony
The SEC Staff issued testimony subpoenas to two BRB officers during the formal investigation phase:
• November 22, 2023: Testimony subpoena issued to Patricia Navarrete, Chief Financial Officer.
• December 5, 2023: Testimony subpoena issued to Naveen Chakravarti, Senior Vice President and BridgeFin Division Head.
A third witness, Raymond Hu, Chief Accounting Officer, was later requested to provide testimony, and BRB made him available on a voluntary basis consistent with its cooperation posture. In total, three investigative testimony sessions were conducted:
January 18, 2024 — Patricia Navarrete (CFO). Ms. Navarrete was examined by Senior Staff Attorney Andrea Felton, Staff Attorney Christopher Yuen, and Staff Accountant Diane Milosevic. The examination covered BRB's ACL estimation process, the CFO certifications under Sections 302 and 906 of the Sarbanes-Oxley Act, BRB's internal controls over financial reporting as they related to the BridgeFin ACL, and the treatment of re-aged loans in the CECL model. Ms. Navarrete was prepared by C&H for the testimony session and was accompanied by Victoria Chambers and Jasmine Thornton. Ms. Navarrete testified consistently with her declarations regarding the good-faith basis for BRB's ACL estimates and the operation of BRB's internal controls.
January 30, 2024 — Naveen Chakravarti (BridgeFin Division Head). Mr. Chakravarti's examination focused on BridgeFin's loan modification policies, the re-aging decisions applied to 12,847 modified loans with an aggregate outstanding balance of approximately $236.4 million, the governance framework for the BridgeFin underwriting model, and the credit-quality reporting process from BridgeFin to BRB's senior management and centralized accounting team. Mr. Chakravarti was prepared by C&H and was accompanied by Jasmine Thornton and Liam Donahue. His testimony was consistent and credible, though it highlighted certain data-flow timing issues between the BridgeFin division and BRB's centralized ACL estimation team, as discussed further in Section VI below.
February 14, 2024 — Raymond Hu (Chief Accounting Officer). Mr. Hu's examination focused on the technical mechanics of BRB's ACL estimation process, the quarterly true-up procedures, the determination and application of qualitative overlay adjustments, and communications between BRB's accounting team and Whitfield Keane LLP (Lorraine Dupont, Audit Engagement Partner) regarding the BridgeFin ACL. Mr. Hu was prepared by C&H and was accompanied by Victoria Chambers and Liam Donahue.
5. Internal Analysis and Audit Committee Reporting
On December 22, 2023, C&H and Brindoval completed a joint attorney work-product memorandum analyzing BRB's CECL methodology in detail. The memorandum concluded that BRB's vintage-cohort approach, including the treatment of re-aged/modified loans, fell within the range of reasonable estimates permitted under ASC 326, though it identified certain areas where documentation of the rationale for key estimation judgments could be strengthened.
On February 22, 2024, C&H provided an interim status memorandum to the Audit Committee, updating Ms. Prescott and the Committee on the progress of the investigation, the completion of the three testimony sessions, and the anticipated next steps, including the possibility of a Wells notice.
D. SEC Staff's Preliminary Theories and Key Disputed Issues
Based on the document productions, the investigative testimony, and the Staff's own analysis, the SEC Staff developed the following preliminary theories and contentions:
Core Contention: BRB's CECL model treated 12,847 re-aged or modified BridgeFin loans, with an aggregate outstanding balance of approximately $236.4 million, as "current" after modification, effectively resetting the delinquency clocks for these loans. The Staff contended that these loans should have remained in their original vintage delinquency buckets for loss-rate estimation purposes, on the theory that modification and re-aging did not eliminate the underlying credit risk associated with prior delinquency.
Impact on Credit Metrics per Staff's Analysis: The Staff's alternative calculation yielded materially different credit-quality metrics:
The $37.3 million difference between BRB's reported ACL and the Staff's calculated ACL exceeded BRB's internal materiality threshold of $30.6 million (5% of FY 2022 pre-tax income of $612 million) by approximately $6.7 million.
Potential Statutory Violations: The Staff indicated that it was considering potential violations of the following provisions:
• Section 13(a) of the Securities Exchange Act of 1934 (periodic reporting obligations);
• Section 13(b)(2)(A) of the Securities Exchange Act of 1934 (books-and-records requirements);
• Rule 13a-1 under the Securities Exchange Act of 1934 (annual report filing requirements); and
• Rule 12b-20 under the Securities Exchange Act of 1934 (requirement to include material information necessary to make required statements not misleading).
Notably, the Staff did not indicate that it was considering scienter-based fraud charges under Section 10(b) of the Exchange Act or Rule 10b-5, a significant factor in the defense strategy and the ultimate resolution.
Staff Personnel: The investigation was staffed by Senior Staff Attorney Andrea Felton and Staff Attorney Christopher Yuen, with Staff Accountant Diane Milosevic providing accounting expertise. The investigation was supervised by Branch Chief Renata Moss and Assistant Director Gregory Bonham of the Division of Enforcement's Financial Fraud Unit.
E. Wells Process (March 8 – May 30, 2024)
1. Wells Call
On March 8, 2024, Branch Chief Renata Moss and Assistant Director Gregory Bonham conducted a Wells call with Victoria Chambers and Jasmine Thornton of Calderwood & Harkness. During the call, the Staff advised that it was considering recommending that the Commission authorize an enforcement action against Belmont Ridge Bank NA for violations of Sections 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 and Rules 13a-1 and 12b-20 thereunder. The Staff confirmed that scienter-based fraud charges were not being considered. The Staff indicated that the potential recommendation would seek a cease-and-desist order and a civil monetary penalty; the specific penalty amount was not disclosed during the Wells call.
2. Internal Strategy and Audit Committee Authorization
On March 10, 2024, C&H prepared an internal analysis memorandum assessing the Wells notice, evaluating the strength of the Staff's position, and outlining potential response strategies, including a detailed risk matrix weighing the probability of various outcomes and a litigation-cost projection comparing the costs and risks of contesting an enforcement action versus exploring a negotiated settlement.
On March 15, 2024, an emergency session of the Audit Committee was convened. C&H presented the Wells notice, the internal analysis, and a recommended strategy for preparing and filing a Wells Submission. The Audit Committee reviewed the risk matrix and the settlement-versus-contest analysis, and approved the recommended approach of filing a comprehensive Wells Submission arguing for termination of the investigation without any enforcement action. The Committee authorized C&H to proceed with preparation of the submission and to seek an extension of the filing deadline if necessary.
3. Extension of Deadline
C&H requested an extension of the Wells Submission deadline from March 29, 2024 to April 5, 2024, to allow sufficient time to finalize the Brindoval expert report and compile supporting exhibits. The SEC Staff granted the requested extension.
4. Wells Submission
On April 5, 2024, C&H filed a comprehensive Wells Submission on behalf of BRB. The submission was 42 pages in length and was accompanied by seven exhibits (Exhibits A through G). The principal arguments advanced in the Wells Submission were as follows:
(a) Reasonableness of CECL Methodology. BRB's vintage-cohort approach to CECL estimation, including the treatment of re-aged and modified loans, was reasonable and fell within the range of acceptable estimates under ASC 326. The CECL standard is inherently principles-based and contemplates a range of acceptable outcomes; the difference between BRB's ACL and the Staff's calculated ACL reflected a legitimate judgment difference, not a misstatement or an error in the application of accounting standards.
(b) Consistency with Regulatory Guidance. BRB's re-aging treatment was consistent with guidance in the OCC's Comptroller's Handbook on allowance for credit losses and with practices employed by peer institutions. Moreover, the re-aging treatment was disclosed in the Management's Discussion and Analysis section of BRB's Form 10-K.
(c) Good-Faith Judgment. The difference between BRB's $143.5 million ACL and the Staff's $180.8 million view reflected the exercise of good-faith management judgment in the estimation process, not a deliberate or reckless understatement of expected credit losses. BRB's estimation process was subject to multiple layers of review, including review by the CFO, the CAO, the CRO, and the independent auditor.
(d) Absence of Scienter. There was no evidence that any BRB officer or employee intentionally or recklessly understated the ACL. The re-aging treatment was applied consistently across the BridgeFin portfolio and was not concealed from the auditor or regulators.
(e) Peer Comparison. An analysis of 12 peer digital-lending institutions demonstrated that BRB's ACL coverage ratio of 3.50% fell within the interquartile range of the peer group, undermining the Staff's contention that the reported ACL was materially deficient.
The exhibits accompanying the Wells Submission were as follows:
• Exhibit A: Expert Report of Dr. Franklin Osei, CPA, CFF, Brindoval Analytic Partners LLC, analyzing BRB's CECL methodology and concluding that the $143.5 million ACL was within the range of reasonable estimates under ASC 326.
• Exhibit B: Peer Comparison Analysis, presenting a detailed comparison of BRB's ACL coverage ratio to those of 12 peer digital-lending institutions and demonstrating that BRB's ratio fell within the interquartile range.
• Exhibit C: Timeline of BRB's Voluntary Disclosure Enhancements, documenting BRB's proactive addition of vintage-level delinquency tables and expanded MD&A disclosure in the Q3 2023 Form 10-Q filed November 9, 2023.
• Exhibit D: OCC Examination Correspondence Summary (redacted for bank-examination privilege), demonstrating that the OCC's concurrent examination found no material ACL deficiency and that BRB maintained its CAMELS composite rating of "2" (Satisfactory).
• Exhibit E: Declarations of Patricia Navarrete (CFO) and Raymond Hu (CAO), attesting to the good-faith basis of BRB's ACL estimates, the operation of internal controls, and the quarterly CECL governance process.
• Exhibit F: Supplemental data tables providing vintage-level breakdowns of the BridgeFin portfolio's credit performance metrics.
• Exhibit G: Selected precedent analysis of SEC enforcement actions involving CECL estimation, demonstrating that enforcement actions have typically involved egregious facts — such as deliberate manipulation of inputs, concealment of information from auditors, or override of model outputs — none of which were present here.
5. Supplemental Letter
On April 22, 2024, C&H transmitted a supplemental letter to the SEC Staff providing updated credit-quality data for the BridgeFin portfolio as of the fourth quarter of 2023. The supplemental data demonstrated improving credit metrics: the 90+ day delinquency rate had declined to 1.48%, and BRB had voluntarily increased its BridgeFin ACL to $156.2 million in its FY 2023 Form 10-K, filed with the Commission on February 27, 2024, reflecting enhanced qualitative overlays applied in light of the investigation and BRB's ongoing assessment of credit risk in the portfolio. The supplemental letter argued that this data further supported the conclusion that BRB was actively managing and transparently disclosing credit risk in the BridgeFin portfolio, and that the ACL reported in the relevant filings was not the product of any intent to mislead investors.
F. Termination (May 30, 2024)
On May 30, 2024, the SEC Staff transmitted a letter to Calderwood & Harkness advising that, based on the information available to the Staff at that time, the Staff had determined not to recommend an enforcement action against Belmont Ridge Bank National Association in connection with File No. HO-14287. A copy of the termination letter is maintained in the matter file and is cross-referenced as Appendix D to this memorandum.
No tolling agreement was executed at any point during the investigation. The five-year statute of limitations under 28 U.S.C. § 2462, which governs the time within which the Commission must bring an action seeking civil penalties or other relief, applies to the relevant filings. The earliest of the filings at issue — the FY 2022 Form 10-K — was filed on February 28, 2023, and the limitations period with respect to that filing would expire on February 28, 2028. While the termination letter effectively resolves the matter, certain residual statute-of-limitations considerations are addressed in Section VIII below.
The investigation was terminated with no charges filed, no civil penalties imposed, no cease-and-desist order entered, and no restatement of any of BRB's previously filed financial statements required. This outcome represents a fully favorable resolution for the Bank.
IV. Analysis of Key Factors Contributing to Favorable Outcome
The favorable termination of the investigation without any enforcement action was the product of several interrelated factors. C&H believes it is important for the Audit Committee to understand these factors both to appreciate the strength of BRB's position and to identify areas where the Bank's practices can be further fortified to minimize the risk of future regulatory scrutiny.
A. Reasonableness of BRB's CECL Methodology
The most important factor in the favorable outcome was the fundamental soundness of BRB's CECL methodology. BRB's vintage-cohort approach to ACL estimation, including the treatment of re-aged and modified loans, diverged from the methodology preferred by the SEC Staff but fell within the range of acceptable estimates permitted under ASC 326. The CECL standard is inherently principles-based and recognizes that reasonable management judgment is required in estimating expected credit losses. ASC 326 does not prescribe a single methodology or a single correct answer; rather, it contemplates that institutions will exercise informed judgment in selecting and applying estimation techniques, and that a range of reasonable outcomes may result.
Brindoval Analytic Partners' expert analysis, authored by Dr. Franklin Osei, rigorously evaluated BRB's methodology and concluded that the $143.5 million ACL was defensible and within the range of reasonable estimates. Dr. Osei's report demonstrated that while the Staff's alternative methodology — which would have kept re-aged loans in their original vintage delinquency buckets — was also a permissible approach, it was not the only permissible approach. The $37.3 million difference between BRB's ACL and the Staff's calculation reflected a legitimate judgment difference inherent in the principles-based framework of ASC 326, rather than an error, a misstatement, or a failure to comply with applicable accounting standards.
Additionally, the OCC's concurrent supervisory examination of BRB's credit-risk management and ACL adequacy found no material deficiency in BRB's ACL. BRB maintained its CAMELS composite rating of "2" (Satisfactory) throughout the relevant period, providing further validation that BRB's approach was within the range of acceptable practice from a regulatory perspective.
B. Peer Comparison
The peer comparison analysis, submitted as Exhibit B to the Wells Submission, demonstrated that BRB's ACL coverage ratio of 3.50% for the BridgeFin portfolio fell within the interquartile range of a carefully selected group of 12 peer digital-lending institutions. This analysis was significant because it undermined the Staff's central contention that BRB's ACL was materially deficient. If BRB's coverage ratio had been an outlier — significantly below those of comparable institutions — the Staff's argument that the ACL was understated would have been considerably stronger. The fact that BRB's ratio was consistent with market practice among similarly situated institutions reinforced the conclusion that BRB's ACL reflected a reasonable estimate of expected credit losses.
C. Absence of Scienter
The Staff did not allege — and the evidence did not support — any finding that BRB officers or employees intentionally or recklessly understated the ACL. This was a critical factor. Throughout the investigation, the evidence consistently demonstrated that BRB's ACL estimation process was conducted in good faith, subject to multiple layers of internal review, and transparent to the independent auditor and the OCC.
The re-aging treatment was applied consistently across the BridgeFin portfolio and was not selectively deployed to achieve a particular ACL outcome. The treatment was disclosed in BRB's MD&A and was known to Whitfield Keane LLP. The testimony of Ms. Navarrete, Mr. Chakravarti, and Mr. Hu was internally consistent and credibly described a good-faith estimation process. No witness testimony, email communication, or other document revealed any intent to mislead investors or to manipulate the ACL.
The absence of scienter was particularly significant because the potential statutory violations identified by the Staff — Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules 13a-1 and 12b-20 — are strict-liability or negligence-based provisions that do not require proof of intent or recklessness. However, the SEC's enforcement discretion considerations take into account the presence or absence of scienter in determining whether to bring an enforcement action, even for non-scienter-based violations. The clear absence of any intent to deceive weighed heavily in favor of declining to recommend action.
D. Voluntary Disclosure Enhancements
BRB's proactive decision to enhance its disclosures during the pendency of the investigation significantly bolstered the defense. In its Q3 2023 Form 10-Q, filed with the Commission on November 9, 2023, BRB added vintage-level delinquency tables for the BridgeFin portfolio and expanded the MD&A discussion of BridgeFin credit-quality trends. These enhancements were implemented at C&H's recommendation and with the concurrence of the Audit Committee, and they demonstrated BRB's commitment to transparency and its willingness to provide investors with additional granularity regarding the credit quality of the BridgeFin portfolio.
The voluntary disclosure enhancements served a dual purpose. First, they addressed one of the Staff's implicit concerns — that BRB's original disclosures did not provide sufficient granularity for investors to assess the credit quality of the BridgeFin portfolio independently. Second, they mitigated any appearance of concealment by demonstrating that BRB was proactively improving its disclosures rather than waiting for regulatory action to compel enhanced transparency.
E. Improving Credit Metrics
The supplemental data provided to the SEC Staff on April 22, 2024, demonstrating improving credit metrics for the BridgeFin portfolio as of the fourth quarter of 2023, further supported the defense. The 90+ day delinquency rate had declined from 1.72% at year-end 2022 to 1.48% at year-end 2023, suggesting that the credit quality of the portfolio was improving rather than deteriorating. BRB's voluntary increase of its BridgeFin ACL to $156.2 million in its FY 2023 Form 10-K — reflecting enhanced qualitative overlays — demonstrated that BRB was actively managing credit risk and adjusting its reserves in response to evolving conditions.
This data undermined any narrative that BRB had systematically understated credit risk or that the BridgeFin portfolio was experiencing hidden deterioration. To the contrary, the improving metrics suggested that BRB's original ACL estimates, while at the lower end of the reasonable range, had not resulted in insufficient reserving.
F. Full Cooperation
BRB's posture of full cooperation throughout the investigation was an important factor in the favorable resolution. BRB produced 284,617 documents totaling approximately 1.42 million pages across six rolling productions, meeting all agreed-upon production deadlines. BRB made three key witnesses — the CFO, the BridgeFin Division Head, and the CAO — available for investigative testimony. BRB engaged constructively with the Staff on document production protocols, privilege issues, and scheduling.
The SEC's Enforcement Manual and the Commission's public statements regarding cooperation credit make clear that an entity's cooperation — including the timeliness and completeness of document productions and the availability of witnesses — is a significant factor in the Staff's exercise of enforcement discretion. BRB's consistent cooperation throughout the nine-month investigation enhanced its credibility with the Staff and contributed to the favorable outcome.
V. Financial Summary of the Investigation
A. Legal Fees and Costs
Total defense costs incurred in connection with the SEC investigation amounted to $4,466,022, broken down as follows:
1. Calderwood & Harkness LLP
Calderwood & Harkness's total fees for the engagement were $3,847,622, reflecting 5,614.5 total billable hours across the engagement team. The fee breakdown by timekeeper is as follows:
Pursuant to the fee arrangement between BRB and Calderwood & Harkness, gross fees were subject to a negotiated fee cap that produced a 19.3% reduction from the gross amount. Accordingly, the total invoiced fees were calculated as $4,767,850 × 0.807, yielding approximately $3,847,622. The fee cap was structured as a blended discount applied to aggregate fees and was negotiated at the outset of the engagement in recognition of the scope and anticipated duration of the matter.
2. Brindoval Analytic Partners LLC
Brindoval Analytic Partners' fees for forensic accounting analysis and the preparation of the expert report totaled $618,400. Dr. Franklin Osei served as the lead engagement partner, and his team performed detailed analyses of BRB's CECL model, the BridgeFin portfolio's credit-quality data, the re-aging treatment, qualitative overlay adjustments, and the peer comparison.
3. Total Defense Costs
B. D&O Insurance Recovery
BRB's D&O insurance claim was tendered to Northcastle Mutual Assurance Company on October 5, 2023, under Policy No. NMA-DO-2023-11847. After review by claims counsel Thornfield & Rowe LLP (Brenda Alvaro), Northcastle Mutual acknowledged coverage for defense costs under the entity coverage provisions of the policy, subject to the $2,500,000 entity retention.
The D&O recovery calculation is as follows:
The first excess D&O layer provided by Cascade Omnivrel Insurance Group (Policy No. CFIG-XS1-2023-5598, $10 million excess of $15 million) was not implicated, as total defense costs fell well below the $15 million primary limit.
Net cost to BRB after D&O recovery: $2,500,000 (the entity retention amount).
A detailed financial summary table is maintained in the matter file and is cross-referenced as Appendix B to this memorandum.
VI. Lessons Learned
While the investigation resulted in a fully favorable outcome, it nonetheless exposed several areas where BRB's practices and procedures can be strengthened. The Audit Committee should consider these lessons learned in conjunction with the specific recommendations set forth in Section VII below.
A. CECL Methodology Documentation
The investigation exposed the need for more robust contemporaneous documentation of the rationale behind key ACL estimation judgments, particularly regarding the treatment of re-aged and modified loans. BRB's internal CECL model governance framework, while adequate to support the conclusion that the ACL was within the range of reasonable estimates, lacked granular written support for the specific decision to reset delinquency clocks on modified loans within the BridgeFin portfolio.
During the preparation of the Wells Submission, significant effort was required to reconstruct the analytical basis for the re-aging treatment from emails, meeting notes, and witness recollections. Had a comprehensive, contemporaneous memorandum been prepared at the time the re-aging treatment was adopted — documenting the accounting rationale, the alternatives considered, and the basis for the conclusion that the treatment was consistent with ASC 326 — the defense effort would have been more efficient and the documentary record presented to the Staff would have been stronger from the outset.
B. Disclosure Specificity for Novel Lending Platforms
BridgeFin's digital-first lending model and AI-driven underwriting technology present unique disclosure challenges that were not fully addressed in BRB's pre-investigation filings. The BridgeFin portfolio's rapid growth, its reliance on proprietary algorithms for credit decisions, and its modification and re-aging practices were all factors that warranted more granular disclosure than was provided in the FY 2022 Form 10-K and the Q1 and Q2 2023 Forms 10-Q.
The vintage-level delinquency tables and expanded MD&A that BRB implemented in the Q3 2023 Form 10-Q proved to be highly effective in demonstrating transparency to the SEC Staff. However, these disclosures were implemented reactively, after the investigation had commenced. Ideally, BRB would have recognized the heightened disclosure sensitivity of a novel, rapidly growing digital lending platform and would have included such granularity from the time the BridgeFin portfolio became material to BRB's overall financial condition.
C. Coordination Between BridgeFin Division and Finance/Accounting
The testimony preparation process and the investigative testimony itself revealed gaps in the timeliness of credit-quality data flowing from the BridgeFin division to BRB's centralized accounting team for use in the quarterly ACL estimation process. Mr. Chakravarti's testimony highlighted that BridgeFin's internal credit dashboards contained more current and more granular delinquency data than what was available to Mr. Hu's accounting team during the quarterly ACL true-up processes.
This data-flow lag meant that the ACL estimation process was not always informed by the most current credit-quality information available within BRB. While the lag did not result in a material misstatement, it created a vulnerability that could have been exploited by the Staff and could, in different circumstances, lead to ACL estimates that do not fully reflect the most current information.
D. Interaction Between Securities Counsel and Investigation Counsel
The initial receipt of the SEC's voluntary request letter by Caldwell Pratt & Stein LLP, BRB's regular securities reporting counsel, before the retention of Calderwood & Harkness for investigation defense, underscored the importance of having pre-established escalation protocols for regulatory inquiries. While the transition to investigation counsel was accomplished promptly and without any adverse consequences, the absence of a formalized escalation protocol introduced a brief period of uncertainty regarding the appropriate response to the voluntary request letter and the allocation of responsibilities between securities counsel and investigation counsel.
In future situations, a pre-established protocol would ensure that any SEC contact — whether a comment letter, a voluntary request, or a formal subpoena — triggers immediate notification of the General Counsel and, depending on the nature of the contact, immediate engagement of pre-designated investigation counsel.
E. Privilege Management
The preparation of the 1,847-document privilege log and the assertion and defense of privilege claims — including the bank-examination privilege — required significant resources and substantial attorney time. The privilege review process was complicated by the fact that communications between BRB personnel and Whitfield Keane LLP (the independent auditor) were intermingled with attorney-client communications, requiring document-by-document analysis to determine the applicable privilege status.
More proactive segregation of privileged communications in the ordinary course of business — including the use of separate communication channels for attorney-client privileged communications and the implementation of clear protocols for distinguishing privileged legal advice from business-as-usual communications with auditors — would have significantly reduced the cost and complexity of the privilege review.
VII. Recommended Enhancements to Disclosure Controls and Procedures
Based on the lessons learned from the investigation and the analysis set forth above, Calderwood & Harkness recommends that the Audit Committee consider adopting the following enhancements to BRB's disclosure controls and procedures, CECL model governance, and regulatory-inquiry response infrastructure. An implementation timeline with suggested responsible officers is maintained in Appendix E to this memorandum.
A. ACL/CECL Model Governance Enhancements
1. Quarterly CECL Model Review Committee. BRB should establish a formal quarterly CECL Model Review Committee, chaired jointly by the Chief Risk Officer (Annette Kowalski) and the Chief Accounting Officer (Raymond Hu), with a dedicated mandate to review and document key estimation judgments made in the ACL estimation process. The Committee's charter should specifically require the review and documentation of decisions regarding loan modification and re-aging treatments, the selection and calibration of macroeconomic forecast scenarios, and the determination of qualitative overlay adjustments. Meeting minutes should be prepared contemporaneously and retained as part of the permanent ACL governance record.
2. Written Memoranda for Qualitative Overlay Adjustments. BRB should require that all material qualitative overlay adjustments to the ACL be supported by written memoranda prepared by the relevant subject-matter experts and signed off by both the CRO and the CAO. Each memorandum should document the nature and magnitude of the adjustment, the analytical basis for the adjustment, the alternatives considered, and the rationale for the selected approach. These memoranda will serve as contemporaneous documentation of management's judgment and will be invaluable in the event of future regulatory inquiries.
3. Independent Model Validation. BRB should implement independent model validation of the BridgeFin CECL sub-model on an annual basis, engaging an external model risk advisor. This validation should be conducted in addition to — and independently of — the OCC-mandated model risk management reviews. The independent validation should assess the conceptual soundness of the model, the appropriateness of the model's assumptions and inputs, the model's performance relative to actual outcomes, and the adequacy of the model's documentation.
B. BridgeFin-Specific Disclosure Protocols
1. Vintage-Level Delinquency Disclosures. BRB should maintain the vintage-level delinquency disclosure format introduced in the Q3 2023 Form 10-Q as a permanent feature of all future Forms 10-K and 10-Q. This disclosure provides investors with the granularity necessary to assess the credit quality of the BridgeFin portfolio at the vintage-cohort level and directly addresses the type of transparency concern that motivated the SEC's investigation.
2. Expanded MD&A Discussion. BRB should include in each periodic filing an expanded MD&A discussion of BridgeFin credit-quality trends, loan modification and re-aging activity (including both the number of loans modified/re-aged and the aggregate dollar volume), and net charge-off rates broken down by vintage cohort. This expanded discussion should provide investors with a clear understanding of the dynamics driving credit performance in the BridgeFin portfolio.
3. CECL Model Methodology Disclosure. BRB should add explicit disclosure of the methodology used to treat modified loans in the CECL model, including whether delinquency clocks are reset upon modification and the accounting rationale for the selected treatment. This disclosure should appear in the critical accounting estimates section of the MD&A and should be reviewed and updated quarterly to reflect any changes in methodology.
C. Data Integration and Reporting
1. Automated Data Feed. BRB should establish a direct, automated data feed from BridgeFin's credit analytics platform to BRB's centralized ACL estimation system. This automated feed should reduce or eliminate the lag between real-time BridgeFin credit data and the quarterly ACL estimation inputs, ensuring that the ACL estimation process is informed by the most current credit-quality information available.
2. Division Head Certification. BRB should require the BridgeFin Division Head to certify, on a quarterly basis, the accuracy and completeness of the credit-quality data submissions provided to the centralized accounting team for use in the ACL estimation process. This certification should be documented in writing and retained as part of the ACL governance record.
D. Regulatory Inquiry Escalation Protocol
1. Written Escalation Protocol. BRB should develop a formal, written escalation protocol for the receipt of any SEC, OCC, or other regulatory inquiry. The protocol should require immediate notification of the General Counsel (Derek Sung), the Chair of the Audit Committee, and outside investigation counsel upon receipt of any voluntary request letter, formal subpoena, comment letter, or other communication from a regulatory authority that could relate to BRB's financial reporting, disclosure practices, or compliance obligations.
2. Pre-Designation of Investigation Counsel. BRB should pre-designate investigation counsel for SEC enforcement matters. Currently, Calderwood & Harkness LLP serves in this capacity. Pre-designation will avoid any delay in the initial response to a regulatory inquiry and will ensure that investigation counsel is engaged from the earliest possible moment, facilitating privilege protection and strategic coordination.
E. Litigation Hold and Privilege Management Improvements
1. Enterprise-Wide Litigation Hold Management System. BRB should implement an enterprise-wide litigation hold management system with automated hold-notice distribution, acknowledgment tracking, and periodic compliance reminders. Such a system will ensure that document-preservation obligations are communicated promptly and comprehensively to all relevant custodians and that compliance with litigation holds is monitored and documented on an ongoing basis.
2. Communication Segregation Protocols. BRB should establish clear email and communication protocols to segregate privileged attorney-client communications from business-as-usual communications, particularly with respect to communications between BRB personnel and Whitfield Keane LLP or any successor independent auditor. These protocols should include the use of dedicated communication channels (e.g., separate email threads or subject-line conventions) for privileged legal advice, to simplify future privilege reviews and reduce the cost of privilege logging in connection with any future investigation or litigation.
3. Annual Privilege Training. BRB should provide annual training to all BRB officers and relevant personnel on privilege concepts, including the attorney-client privilege, the work-product doctrine, and the bank-examination privilege, as well as document-retention obligations. The training should emphasize the importance of maintaining the confidentiality of privileged communications, the risks of inadvertent waiver, and the practical steps that employees can take to protect privilege in their day-to-day communications.
F. Audit Committee Reporting Cadence
1. Standing Quarterly Reporting. BRB should institute standing quarterly reporting from the General Counsel to the Audit Committee on any pending or threatened regulatory inquiries, including SEC, OCC, FDIC, or other governmental investigations, examinations, or enforcement proceedings. This reporting should occur as a standing agenda item at each regular quarterly meeting of the Audit Committee and should include a summary of the status, scope, and potential exposure associated with each pending matter.
2. Five-Business-Day Briefing Trigger. BRB should adopt a policy requiring that any SEC Staff comment, voluntary request letter, or formal inquiry trigger a briefing to the Audit Committee within five business days of receipt. This policy will ensure that the Audit Committee is informed of potential regulatory matters at the earliest practicable time and is positioned to exercise its oversight function effectively.