PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT This memorandum is protected by the attorney-client privilege and the work-product doctrine. It contains the mental impressions, conclusions, opinions, and legal theories of attorneys. It is intended solely for the use of the engagement team and the client. Any unauthorized disclosure, copying, or distribution is strictly prohibited.
CALDERWOOD & HARKNESS LLP 425 Lexington Avenue, 30th Floor New York, New York 10017 Telephone: (212) 506-7000 Facsimile: (212) 506-7001
MEMORANDUM
Date: March 10, 2024
To: Victoria Chambers, Partner Howard Quinn, Partner
From: Jasmine Thornton, Lead Associate Liam Donahue, Working Associate
Re: Belmont Ridge Bank National Association — Analysis of Wells Notice and Potential Charges; SEC Investigation File No. HO-14287
Matter No.: SC-MAT-2023-4172
Classification: Attorney-Client Privileged / Attorney Work Product — Do Not Distribute Outside Engagement Team
I. Executive Summary
On March 8, 2024, the Staff of the Division of Enforcement of the United States Securities and Exchange Commission (the "Commission" or "SEC") conducted a telephonic Wells call with Calderwood & Harkness LLP, advising that the Staff is considering recommending that the Commission authorize an enforcement action against our client, Belmont Ridge Bank National Association ("BRB" or the "Bank"), in connection with SEC Investigation File No. HO-14287. The call was initiated by Branch Chief Renata Moss of the Financial Fraud Unit and Assistant Director Gregory Bonham, with Senior Staff Attorney Andrea Felton and Staff Accountant Diane Milosevic also participating on the Staff's side. Victoria Chambers and Jasmine Thornton participated on behalf of BRB.
During the call, the Staff identified the following potential charges: violations of Sections 13(a) and 13(b)(2)(A) of the Securities Exchange Act of 1934 (the "Exchange Act"), as well as Rules 13a-1 and 12b-20 thereunder. These provisions concern the accuracy of periodic reports filed with the Commission and the requirement to maintain books, records, and accounts that accurately and fairly reflect the transactions and dispositions of the issuer's assets. Notably, none of the cited provisions requires a showing of scienter — they are strict-liability provisions that require only proof that the relevant filings or records contained material misstatements or omissions.
Significantly, the Staff did not indicate that it is considering recommending any scienter-based fraud charges. There was no mention of Section 10(b) of the Exchange Act or Rule 10b-5 thereunder, nor was there any reference to Section 17(a) of the Securities Act of 1933. The Staff also did not reference aiding-and-abetting theories or any other derivative liability theories. This is a materially favorable development for BRB, as the absence of fraud charges dramatically narrows the Bank's potential exposure, eliminates the risk of injunctive relief under the anti-fraud provisions, and substantially reduces the potential civil monetary penalties that may be assessed. It also strongly supports the inference that the Staff does not believe BRB's management acted with fraudulent intent or reckless disregard for the truth — a conclusion that aligns with our assessment of the facts.
Equally important, no individual officers or directors were named as potential respondents. The Wells notice was directed solely at BRB as an entity. No Wells notices have been issued to Chief Financial Officer Patricia Navarrete, Chief Executive Officer Marcus R. Ellingham, Chief Accounting Officer Raymond Hu, Senior Vice President and BridgeFin Division Head Naveen Chakravarti, General Counsel Derek Sung, Chief Risk Officer Annette Kowalski, or any member of the Board of Directors or Audit Committee. This entity-only targeting reduces collateral litigation risk, mitigates individual indemnification issues, and simplifies the overall defense posture.
The Staff's theory centers on BRB's allowance for credit losses ("ACL") for the BridgeFin consumer lending portfolio as reported in BRB's fiscal year 2022 Form 10-K (filed February 28, 2023) and its Q1 and Q2 2023 Forms 10-Q (filed May 10, 2023 and August 9, 2023, respectively). Specifically, the Staff contends that BRB's reported ACL of $143.5 million — representing 3.50% of BridgeFin's $4.1 billion in outstanding loans — materially understated expected credit losses under Accounting Standards Codification ("ASC") Topic 326 (the Current Expected Credit Losses standard, or "CECL"). The Staff's preliminary view is that the ACL should have been approximately $180.8 million (4.41% of outstanding loans), representing a potential understatement of approximately $37.3 million. The alleged understatement is attributable to BRB's treatment of 12,847 re-aged or modified BridgeFin consumer personal loans (with an aggregate outstanding balance of $236.4 million), which BRB classified as "current" after modification, thereby resetting their delinquency clocks within the Bank's vintage-cohort CECL model.
This memorandum provides a comprehensive analysis of the legal framework of the cited provisions, the potential penalties and remedies, the Staff's likely theories, our assessment of available defense arguments, and our recommended strategy for the Wells Submission. We assess BRB's overall defense position as strong and recommend that the Bank vigorously contest the Staff's recommendation through a comprehensive Wells Submission, with the objective of obtaining a Wells-stage termination — that is, persuading the Staff to decline to recommend that the Commission authorize an enforcement action.
II. Background — Investigation to Date
A. Investigation Origins and Scope
The SEC's investigation of BRB originated with a voluntary request letter issued by the Division of Enforcement on September 18, 2023. The letter, signed by Senior Staff Attorney Andrea Felton, requested that BRB voluntarily produce certain documents relating to the Bank's CECL methodology, its BridgeFin consumer lending platform, and the accounting treatment of modified and re-aged loans within that portfolio. Calderwood & Harkness LLP was formally engaged by BRB on September 20, 2023, and promptly entered into communications with the Staff to negotiate the scope and timing of BRB's initial voluntary production.
On October 12, 2023, the Commission issued a Formal Order of Investigation (Order No. EN-2023-0947), authorizing the Staff to issue subpoenas for testimony and documents. Three days later, on October 15, 2023, the Staff issued its first document subpoena (Subpoena No. HO-14287-001), which substantially expanded the scope of the prior voluntary request and demanded production of documents in twenty-three specified categories, including but not limited to: (i) all CECL model documentation, validation reports, and back-testing analyses for the BridgeFin portfolio from January 1, 2020 through the date of the subpoena; (ii) all communications among members of BRB's Credit Risk Committee, Loan Loss Reserve Committee, and Audit Committee relating to the BridgeFin ACL; (iii) all workpapers, memoranda, and correspondence between BRB and its external auditor, Whitfield Keane LLP, relating to the ACL; (iv) all OCC examination materials relating to the BridgeFin portfolio; (v) all internal audit reports addressing credit risk or loan modifications in the BridgeFin segment; and (vi) all board-level presentations, meeting minutes, and risk dashboards addressing BridgeFin credit quality for the relevant period.
The core concern animating the Staff's investigation has remained consistent throughout: whether BRB's reported ACL of $143.5 million (3.50% of BridgeFin's $4.1 billion in outstanding loans) materially understated expected credit losses, particularly by failing to incorporate deteriorating credit quality in the BridgeFin consumer personal-loan sub-segment. The Staff's preliminary view, as communicated during the Wells call and consistent with the lines of questioning pursued in investigative testimony, is that the ACL should have been approximately $180.8 million (4.41% of outstanding loans), representing a potential understatement of approximately $37.3 million.
The key disputed item — and the linchpin of the Staff's theory — is BRB's treatment of re-aged and modified loans within the BridgeFin portfolio. Specifically, BRB's CECL model treated 12,847 re-aged or modified BridgeFin consumer personal loans (with an aggregate outstanding principal balance of approximately $236.4 million) as "current" following modification, thereby resetting the delinquency clock for purposes of vintage-cohort loss-rate estimation. The Staff contends that these loans should have remained in their original vintage delinquency buckets, such that the historically elevated loss rates associated with those original vintages would have continued to apply, resulting in a materially higher ACL. In essence, the dispute turns on whether BRB's decision to treat a modified loan as commencing a new "life" for vintage-cohort purposes — rather than continuing to track the loan in its pre-modification vintage — was a reasonable methodological choice under ASC 326.
B. Document Production
In response to the formal document subpoena and pursuant to ongoing negotiations with the Staff regarding scope and timing, BRB produced a total of 284,617 documents (encompassing approximately 1.42 million pages) across six rolling productions conducted between November 1, 2023 and March 1, 2024. These productions included electronic documents, emails, spreadsheets, presentations, meeting minutes, and internal memoranda, all processed and produced in accordance with the SEC's Electronic Document Submission Guide (EDGAR) requirements and the production specifications agreed upon with the Staff.
The production was organized by custodian and document category, with the primary custodians being Patricia Navarrete (CFO), Raymond Hu (CAO), Naveen Chakravarti (SVP & BridgeFin Division Head), Annette Kowalski (CRO), Derek Sung (General Counsel), members of the Loan Loss Reserve Committee, and members of the Credit Risk Committee. Additional non-custodial document collections were made from the Bank's enterprise content management system, its model risk management databases, and the archives of the Audit Committee and the Board of Directors.
BRB's privilege log, which has been maintained on a rolling basis and was last updated on February 28, 2024, identifies 1,847 documents that have been withheld in full or redacted in part on the basis of one or more of the following privileges: (i) attorney-client privilege; (ii) attorney work product; and (iii) bank-examination privilege (as to communications with and examination materials prepared by the OCC). The Staff has not challenged any privilege assertions to date, although we note that Staff Attorney Felton informally raised questions regarding the scope of certain work-product designations during a meet-and-confer call on January 25, 2024. We consider the privilege log to be well-supported and defensible.
C. Witness Testimony Completed
The Staff has taken investigative testimony from three BRB witnesses over the course of the investigation. Each session was conducted pursuant to subpoena under the Formal Order of Investigation, with Calderwood & Harkness counsel representing the witnesses in their capacity as employees of BRB:
1. Patricia Navarrete, Chief Financial Officer — Ms. Navarrete testified on January 18, 2024, in a session lasting approximately six hours. The examination was conducted primarily by Senior Staff Attorney Andrea Felton and Staff Accountant Diane Milosevic. The questioning focused on the following areas: (i) Ms. Navarrete's role in the ACL estimation and approval process; (ii) the basis for the reported ACL figure of $143.5 million and the qualitative adjustments applied; (iii) her review and certification of BRB's periodic filings, including the SOX Section 302 certifications she executed for the FY 2022 10-K and the Q1 and Q2 2023 10-Qs; (iv) internal controls over financial reporting relating to the CECL model; and (v) her communications with the external auditor, Whitfield Keane LLP, regarding the BridgeFin ACL. Ms. Navarrete's testimony was generally consistent with the position we have advanced — she described a thorough, multi-layered estimation process involving quantitative model outputs, qualitative overlays, review by the Loan Loss Reserve Committee, and independent validation by the model risk management group.
2. Naveen Chakravarti, Senior Vice President & BridgeFin Division Head — Mr. Chakravarti testified on January 30, 2024, in a session lasting approximately five hours. The examination was conducted primarily by Senior Staff Attorney Andrea Felton. The questioning focused on: (i) the BridgeFin platform's loan origination and underwriting model governance; (ii) the policies and procedures governing loan modifications and re-aging within the BridgeFin portfolio; (iii) the operational decision-making process for granting modifications; (iv) the volume and characteristics of modified loans; and (v) the communication of portfolio performance data to the CFO and the Loan Loss Reserve Committee. Mr. Chakravarti's testimony emphasized that the re-aging and modification practices were designed as a consumer-relief measure implemented in accordance with the Bank's loan modification policy and were consistent with OCC guidance. He also noted that the modification criteria were not intended to mask deteriorating credit quality but rather to provide borrowers with a pathway to repayment.
3. Raymond Hu, Chief Accounting Officer — Mr. Hu testified on February 14, 2024, in a session lasting approximately seven hours. The examination was conducted by Staff Accountant Diane Milosevic and Senior Staff Attorney Andrea Felton, with Assistant Director Gregory Bonham briefly participating during the final hour. The questioning focused on: (i) the technical architecture and inputs of BRB's CECL model for the BridgeFin portfolio; (ii) the vintage-cohort methodology and the specific treatment of re-aged loans within that methodology; (iii) the quarterly true-up procedures used to update model assumptions; (iv) back-testing results and model validation findings; (v) qualitative factor adjustments; and (vi) communications with Whitfield Keane LLP (specifically with engagement partner Lorraine Dupont and senior manager James Koh) regarding the ACL estimation. Mr. Hu's testimony was detailed and technically precise. He acknowledged that the re-aging treatment was a judgment call but maintained that it was reasonable, consistently applied, and consistent with the Bank's understanding of the ASC 326 framework.
Importantly, no additional testimony subpoenas have been served following Mr. Hu's February 14, 2024 examination. No subpoena was issued for CEO Marcus R. Ellingham, General Counsel Derek Sung, Chief Risk Officer Annette Kowalski, Audit Committee Chair Gwendolyn Prescott, or any other member of the Board of Directors. The absence of subpoenas for these individuals is consistent with the Staff's apparent conclusion that this matter involves a technical accounting question rather than a fraud or governance failure.
III. Detailed Analysis of the Wells Call
A. Participants and Logistics
The Wells call was conducted via teleconference at approximately 2:00 p.m. Eastern Time on Friday, March 8, 2024. The call lasted approximately twenty-two minutes. The participants were as follows:
SEC Division of Enforcement Staff:
•  Renata Moss, Branch Chief, Financial Fraud Unit
•  Gregory Bonham, Assistant Director, Financial Fraud Unit
•  Andrea Felton, Senior Staff Attorney
•  Diane Milosevic, Staff Accountant
•  Christopher Yuen, Staff Attorney
Calderwood & Harkness LLP, on behalf of BRB:
•  Victoria Chambers, Partner
•  Jasmine Thornton, Lead Associate
The call was initiated by Branch Chief Moss, who stated at the outset that the purpose of the call was to provide BRB with notice pursuant to the Commission's Wells procedures, as set forth in 17 C.F.R. § 202.5(c). No written Wells notice was transmitted in advance of or during the call; the notice was delivered orally, consistent with current Division of Enforcement practice. We anticipate receiving a written confirmation letter from the Staff within the next several business days, though such written confirmation is not required under the applicable rules.
B. Substance of the Wells Notice
Branch Chief Moss delivered the substantive Wells notice, stating that the Staff of the Division of Enforcement has determined that it is considering recommending that the Commission authorize the filing or institution of an enforcement action against BRB for violations of the following provisions:
(1) Section 13(a) of the Securities Exchange Act of 1934 — the requirement that issuers with securities registered under Section 12 of the Exchange Act file periodic reports (including annual reports on Form 10-K and quarterly reports on Form 10-Q) in conformity with the Commission's rules and regulations, and that such reports contain accurate and complete information;
(2) Section 13(b)(2)(A) of the Securities Exchange Act of 1934 — the requirement that issuers make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
(3) Rule 13a-1 under the Exchange Act — the implementing rule for the annual report filing obligation under Section 13(a), requiring the filing of Form 10-K; and
(4) Rule 12b-20 under the Exchange Act — the requirement that, in addition to information expressly required to be included in a statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading.
Moss specifically stated that the Staff was not at this time considering recommending charges based on any scienter-based provisions. She did not mention Section 10(b) of the Exchange Act, Rule 10b-5, Section 17(a) of the Securities Act of 1933, or any aiding-and-abetting or control-person liability theories. When Victoria Chambers inquired whether the Staff's position on scienter-based charges was final, Moss stated that the Staff had concluded its analysis and was not recommending fraud charges, though she added the standard caveat that the Wells notice reflects only the Staff's current recommendation and that the Commission retains discretion to modify or expand the charges.
No individual officers or directors were named as potential respondents. The Wells notice was directed solely at BRB as an entity. We asked Moss directly whether any individual Wells notices had been or were anticipated to be issued, and she stated that the Staff was not recommending action against any individual respondents in connection with this matter.
Assistant Director Bonham then provided additional context regarding the Staff's theory of the case. He stated that the Staff's view is that BRB's ACL disclosures in the FY 2022 Form 10-K and the Q1 and Q2 2023 Forms 10-Q were materially understated as a result of the Bank's treatment of re-aged and modified loans in the BridgeFin consumer lending portfolio. Bonham noted that the Staff's analysis indicated that BRB's CECL model effectively "reset" the delinquency history of re-aged loans by treating them as newly originated loans within their vintage cohort, which had the effect of applying lower historical loss rates to a population of loans that had already demonstrated elevated credit risk. Bonham stated that this treatment resulted in an ACL that did not accurately reflect the expected credit losses of the BridgeFin portfolio and, consequently, that BRB's reported financial statements contained material misstatements.
Staff Accountant Milosevic then addressed the quantitative aspects of the Staff's analysis. She stated that the Staff's independent recalculation of BRB's ACL, applying the assumption that re-aged loans should have remained in their original vintage delinquency buckets, produced an ACL of approximately $180.8 million, as compared to BRB's reported ACL of $143.5 million — a difference of approximately $37.3 million. Milosevic noted that this difference exceeded BRB's own internal materiality threshold, which the Staff understood to be approximately $30.6 million (5% of pre-tax income). She further stated that the Staff's view is that this quantitative assessment, combined with qualitative factors relating to the significance of the BridgeFin portfolio to BRB's overall credit risk profile and the sensitivity of ACL disclosures to investor decision-making, supports a finding of materiality under the applicable legal standard.
Moss concluded by informing BRB that it was afforded the standard thirty-day period to make a Wells Submission — that is, a written submission presenting the reasons why the Staff should not recommend that the Commission authorize an enforcement action. Based on the March 8, 2024 date of the Wells call, the initial deadline for the Wells Submission is March 29, 2024 (accounting for weekends), though Moss noted that requests for reasonable extensions would be considered.
C. Significant Observations from the Call
We draw the following significant observations from the substance and tenor of the Wells call:
First, the absence of scienter-based fraud charges is the single most favorable aspect of the Wells notice. The decision not to recommend charges under Section 10(b), Rule 10b-5, or Section 17(a) of the Securities Act dramatically narrows BRB's exposure in multiple respects: (i) it eliminates the risk of injunctive relief under the anti-fraud provisions, which would carry severe collateral consequences for BRB as a regulated financial institution, including potential disqualification from certain safe harbors and exemptions; (ii) it substantially reduces the potential civil monetary penalties, as non-fraud violations are generally subject only to Tier I penalties under the Exchange Act's three-tier penalty structure; (iii) it eliminates the risk of officer-and-director bars, which are available only in connection with fraud-based violations; and (iv) it undercuts any future effort to portray the matter as involving dishonesty or bad faith, which is critical to managing reputational risk and minimizing potential follow-on litigation.
Second, the entity-only target posture eliminates a significant source of risk and complexity. When the SEC brings charges against individual officers and directors, the resulting individual litigation and indemnification dynamics can create tensions between the entity's interests and those of the individual respondents. Here, because no individual Wells notices have been issued, BRB can pursue a unified defense strategy without the complications that arise when individual officers face personal liability.
Third, the Staff's overall demeanor during the call was professional and measured. The Staff appeared focused on the technical accounting treatment — specifically, the re-aging methodology and its impact on vintage-cohort loss-rate estimation — rather than on intent, recklessness, or systemic governance failures. This is consistent with the Staff's decision not to recommend fraud charges and suggests that the Staff views this matter as a reporting-quality issue rather than a fraud case. This characterization, if maintained, provides a strong foundation for resolution through a Wells Submission or, if necessary, through a negotiated settlement on favorable terms.
Fourth, the Staff did not reference any whistleblower complaint, qui tam action, or external referral as a source of the investigation. While this does not definitively rule out such a referral, it is consistent with the investigation having originated from the Staff's own review of BRB's public filings or from routine surveillance of financial institution reporting.
IV. Legal Framework — Statutory Provisions and Rules
This section provides a detailed analysis of the statutory provisions and rules that the Staff has identified as the basis for the potential enforcement action, as well as a discussion of the provisions the Staff has chosen not to invoke. Understanding this legal framework is essential to crafting an effective Wells Submission.
A. Section 13(a) of the Exchange Act
Section 13(a) of the Exchange Act, 15 U.S.C. § 78m(a), requires every issuer of a security registered pursuant to Section 12 of the Exchange Act to file with the Commission, in accordance with such rules and regulations as the Commission may prescribe, such annual and quarterly reports as the Commission may require. The implementing rules, including Rules 13a-1 (annual reports) and 13a-13 (quarterly reports), specify the form and content of these filings, which include Form 10-K (annual report) and Form 10-Q (quarterly report).
BRB's common stock trades on the Nasdaq Stock Market under the ticker symbol "BRDG" and is registered under Section 12(b) of the Exchange Act. BRB is therefore an issuer subject to the periodic reporting requirements of Section 13(a) and the rules thereunder.
A violation of Section 13(a) is established by demonstrating that the issuer's periodic reports contained material misstatements or omissions. Crucially, Section 13(a) is a strict-liability provision — no showing of scienter (i.e., intentional misconduct or reckless disregard) is required. The Commission need only prove that the reports, as filed, were materially inaccurate or incomplete. See SEC v. Savoy Industries, Inc., 587 F.2d 1149, 1167 (D.C. Cir. 1978) ("[N]o showing of scienter is required to establish a violation of § 13(a) of the Exchange Act and the rules thereunder."); In the Matter of Cornerstone Propane Partners, L.P., Exchange Act Release No. 51369 (Mar. 18, 2005) (finding Section 13(a) violation based on inaccurate financial statements without any finding of fraudulent intent).
The filings at issue in the Staff's theory are:
•  FY 2022 Form 10-K, filed with the Commission on February 28, 2023;
•  Q1 2023 Form 10-Q, filed with the Commission on May 10, 2023; and
•  Q2 2023 Form 10-Q, filed with the Commission on August 9, 2023.
Each of these filings contained BRB's consolidated financial statements, including the reported ACL for the BridgeFin portfolio. The Staff's contention is that the ACL figures reported in these filings were materially understated, rendering the financial statements materially inaccurate and the filings therefore in violation of Section 13(a).
B. Section 13(b)(2)(A) of the Exchange Act (Books and Records)
Section 13(b)(2)(A) of the Exchange Act, 15 U.S.C. § 78m(b)(2)(A), requires every issuer that has a class of securities registered pursuant to Section 12 or that is required to file reports pursuant to Section 15(d) to "make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer." This provision was added by the Foreign Corrupt Practices Act of 1977 but applies broadly to all books-and-records accuracy requirements, not merely those arising in the foreign-bribery context.
Like Section 13(a), Section 13(b)(2)(A) is a strict-liability provision that does not require any showing of scienter. See SEC v. World-Wide Coin Investments, Ltd., 567 F. Supp. 724, 751 (N.D. Ga. 1983); In the Matter of Lucent Technologies, Inc., Exchange Act Release No. 49421 (Mar. 17, 2004). The "in reasonable detail" language, added by the 1988 amendments to the Exchange Act, establishes a standard of reasonableness rather than perfection, providing that an issuer's books and records need only meet the level of detail that "would satisfy prudent officials in the conduct of their own affairs." See H.R. Conf. Rep. No. 100-576, at 917 (1988).
The Staff's theory under Section 13(b)(2)(A) is that BRB's internal records — including its ACL schedules, vintage-cohort model outputs, delinquency tracking databases, and loan-level classification records — failed to accurately reflect the credit quality of the BridgeFin portfolio because re-aged loans were misclassified as "current" within the Bank's records. This misclassification, in the Staff's view, caused the Bank's internal books and records to inaccurately portray the credit risk profile of the BridgeFin loan portfolio, which in turn flowed through to the reported ACL in BRB's financial statements.
This theory is analytically distinct from the Section 13(a) theory, though the two are closely related. The Section 13(a) theory addresses the accuracy of the filed reports; the Section 13(b)(2)(A) theory addresses the accuracy of the underlying books and records. It is common for the Commission to charge both provisions in parallel when the alleged inaccuracy in the financial statements can be traced to an inaccuracy in the issuer's internal accounting records.
C. Rule 13a-1
Rule 13a-1 under the Exchange Act, 17 C.F.R. § 240.13a-1, implements the annual reporting obligation of Section 13(a) by requiring every issuer having securities registered pursuant to Section 12 to file an annual report on Form 10-K within the prescribed time period. The rule effectively provides the procedural and substantive framework for the annual reporting obligation.
A violation of Rule 13a-1 is predicated on the same underlying theory as a Section 13(a) violation — namely, that the Form 10-K, as filed, contained material misstatements or omissions. The rule is typically charged alongside Section 13(a) rather than independently, and its inclusion in the Wells notice is standard practice. The Staff's theory is that BRB's FY 2022 Form 10-K allegedly contained material misstatements in its ACL disclosures, rendering the filing in violation of Rule 13a-1.
D. Rule 12b-20
Rule 12b-20 under the Exchange Act, 17 C.F.R. § 240.12b-20, provides that "[i]n addition to the information expressly required to be included in a statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading." This rule imposes a broad obligation to supplement required disclosures with any additional material information necessary to prevent the required disclosures from being misleading.
The Staff's theory under Rule 12b-20 introduces an important nuance beyond the ACL figure itself. Even if the reported ACL figure were defensible standing alone — a position we will advance in the Wells Submission — the Staff may contend that the FY 2022 Form 10-K and the Q1 and Q2 2023 Forms 10-Q omitted material information about BRB's re-aging practices and the deteriorating vintage-cohort credit metrics that would have been necessary for investors to understand the BridgeFin portfolio's risk profile. In other words, the Staff may argue that BRB's disclosures, while containing an ACL figure, failed to provide the contextual information needed for investors to assess the reliability and assumptions underlying that figure.
This theory has both strengths and weaknesses. On the one hand, BRB did disclose BridgeFin credit risk in its MD&A discussion, including references to the consumer personal-loan portfolio and prevailing credit trends. On the other hand, BRB's disclosures in the relevant filings did not specifically identify or quantify the re-aging treatment, the number of re-aged loans, or the impact of re-aging on the reported ACL. This omission is likely the factual basis for the Staff's Rule 12b-20 theory.
E. Absence of Scienter-Based Charges
Perhaps the most significant aspect of the Wells notice is what the Staff has chosen not to charge. The Staff has explicitly indicated that it is not considering recommending charges under the following provisions:
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder — the principal anti-fraud provision of the federal securities laws, which makes it unlawful for any person to employ any device, scheme, or artifice to defraud, or to make any untrue statement of material fact or omit to state a material fact necessary to make the statements made not misleading, in connection with the purchase or sale of any security. A violation of Section 10(b) and Rule 10b-5 requires proof of scienter — the defendant must have acted with knowledge of the falsity or with reckless disregard for the truth. See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976); Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 319 (2007).
Section 17(a) of the Securities Act of 1933 — which prohibits fraudulent conduct in the offer or sale of securities. Section 17(a)(1) requires scienter; Sections 17(a)(2) and 17(a)(3) require only a showing of negligence. See Aaron v. SEC, 446 U.S. 680, 701–02 (1980). The fact that the Staff has not cited even the negligence-based subsections of Section 17(a) further supports the conclusion that the Staff does not view this matter as involving culpable misconduct.
The absence of these scienter-based provisions from the Wells notice carries several important implications. First, it suggests that the Staff has concluded, based on its investigation — which included substantial document review and testimony from three senior BRB officers — that it cannot establish that BRB's management acted with fraudulent intent or reckless disregard for the truth. This is consistent with our own assessment of the facts: BRB's CECL methodology, including the re-aging treatment, reflected a good-faith exercise of accounting judgment by qualified professionals, supported by internal controls, model governance, and external audit review. Second, the absence of fraud charges significantly limits the remedies available to the Commission and substantially reduces the potential civil monetary penalties, as discussed in Section VI below. Third, it supports the narrative we intend to advance in the Wells Submission — that the ACL estimation involved a reasonable judgment call within the range of acceptable outcomes under ASC 326, and that the Staff's disagreement with BRB's methodology does not rise to the level of a violation of the securities laws.
V. Materiality Analysis
The concept of materiality is central to both the Staff's theory and our defense. Under the governing legal standard, a misstatement or omission is material if there is a "substantial likelihood that a reasonable investor would consider it important in making an investment decision." TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976); Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988). Materiality is a mixed question of law and fact, and the inquiry is inherently fact-specific, requiring consideration of both quantitative and qualitative factors. See SEC Staff Accounting Bulletin No. 99, "Materiality" (Aug. 12, 1999) ("SAB 99").
A. Staff's Materiality Argument
The Staff's materiality argument, as articulated during the Wells call and consistent with the lines of questioning pursued in investigative testimony, is grounded in the following quantitative analysis:
•  Alleged ACL understatement: $37.3 million (representing the difference between the Staff's recalculated ACL of $180.8 million and BRB's reported ACL of $143.5 million).
•  BRB's internal materiality threshold: BRB's internal materiality threshold for purposes of financial statement preparation and audit planning is set at 5% of pre-tax income. BRB's FY 2022 pre-tax income was $612 million, yielding an internal materiality threshold of approximately $30.6 million.
•  Exceedance of threshold: The alleged understatement of $37.3 million exceeds BRB's own internal materiality threshold by $6.7 million (approximately 21.9% above the threshold).
The Staff will likely argue that this quantitative analysis, standing alone, supports a finding of materiality under the TSC Industries / Basic Inc. standard. The fact that the alleged understatement exceeds BRB's own internally determined materiality threshold — a threshold set by BRB's management and communicated to its external auditor — provides a particularly compelling data point for the Staff, as it allows the Staff to argue that BRB's own metrics demonstrate that the misstatement was material.
In addition to the quantitative analysis, the Staff is likely to invoke qualitative factors under SAB 99 to bolster its materiality argument. The Staff may contend that: (i) the BridgeFin consumer lending portfolio was a significant component of BRB's overall credit exposure and was specifically identified in BRB's own risk disclosures as a growth area; (ii) ACL disclosures are inherently important to investors evaluating a financial institution's earnings quality, capital adequacy, and risk profile; (iii) the alleged understatement arose from a systematic methodological choice (re-aging treatment) rather than a random or isolated error, suggesting a pattern that affected multiple reporting periods; and (iv) the alleged understatement affected the same financial metric across three consecutive periodic filings, compounding its significance.
B. Defense Counterarguments on Materiality
While the Staff's quantitative argument has some force, we believe BRB has substantial counterarguments on materiality that should be prominently featured in the Wells Submission. These arguments rest on both quantitative and qualitative grounds.
Quantitative Counterarguments:
The $37.3 million alleged understatement, while exceeding BRB's internal materiality threshold, must be evaluated in the context of BRB's overall financial position, not in isolation against a single benchmark:
•  Total assets: BRB's total assets as of December 31, 2022 were approximately $38.2 billion. The alleged understatement of $37.3 million represents less than 0.1% of total assets — a ratio that, by any conventional quantitative measure, is immaterial.
•  Total shareholders' equity: BRB's total shareholders' equity as of December 31, 2022 was approximately $4.03 billion. The alleged understatement represents less than 1% of shareholders' equity.
•  Pre-tax income impact: The $37.3 million alleged understatement would reduce FY 2022 pre-tax income from $612 million to approximately $574.7 million — a reduction of approximately 6.1%. While not negligible, this level of impact is within the range that courts and the Commission have, in certain circumstances, found to be immaterial, particularly when the difference arises from a judgment call rather than an error or omission.
•  Net income and EPS impact: Assuming BRB's approximate effective tax rate of 23% (implied by the relationship between BRB's reported pre-tax income of $612 million and its reported net income of $471.2 million), the after-tax impact of the alleged understatement would be approximately $28.7 million. This would reduce net income from $471.2 million to approximately $442.5 million. On a per-share basis, the impact would be approximately $0.37 per diluted share (reducing diluted EPS from $6.14 to approximately $5.77, based on BRB's approximately 76.7 million diluted shares outstanding). While this EPS impact is meaningful, it did not cause BRB to miss analyst consensus estimates for the relevant periods, did not convert a profit to a loss, and did not change the directional trajectory of BRB's earnings.
Qualitative Counterarguments Under SAB 99:
SAB 99 establishes that a misstatement should not be deemed immaterial solely because it falls below a quantitative threshold; the Commission and its staff must also consider qualitative factors. However, the corollary is equally true: a misstatement that exceeds a quantitative threshold is not automatically material — qualitative factors may weigh against materiality. We believe the following qualitative factors weigh strongly against a finding of materiality in this case:
(i) The difference arises from a legitimate methodological judgment call, not a known error. The re-aging treatment was a deliberate methodological choice made by qualified accounting and risk management professionals at BRB, reviewed and approved through the Bank's internal governance processes, and audited by Whitfield Keane LLP without qualification. The difference between the Staff's ACL and BRB's ACL does not arise from a computational error, a data-input mistake, or the concealment of known information — it arises from a genuine disagreement over the appropriate methodology for incorporating re-aged loans into a vintage-cohort CECL model. SAB 99 recognizes that the nature and source of a difference are relevant to the materiality inquiry.
(ii) The difference does not change a loss to a profit or cause BRB to miss analyst consensus estimates. Even under the Staff's recalculated ACL, BRB would have reported substantial pre-tax income of $574.7 million and net income of approximately $442.5 million. BRB's FY 2022 results exceeded the mean analyst consensus estimate of $5.92 diluted EPS, and would have continued to exceed that estimate even after the adjustment (implied adjusted EPS of approximately $5.77 versus consensus of $5.92, which brings the figure slightly below consensus — we note this point requires further analysis and sensitivity testing by Brindoval before the Wells Submission to confirm the precise impact on analyst expectations and market reaction).
(iii) BRB's existing disclosures discussed BridgeFin credit risk. BRB's FY 2022 10-K included extensive discussion of BridgeFin's credit risk profile in its MD&A section, including disclosure of the portfolio's composition, growth trajectory, delinquency trends, and net charge-off rates. While the disclosures did not specifically identify the re-aging treatment by name or quantify its impact on the ACL, they provided investors with substantial information about the BridgeFin portfolio's risk characteristics.
(iv) BRB voluntarily enhanced its disclosures in Q3 2023. In its Q3 2023 Form 10-Q (filed November 9, 2023), BRB voluntarily added vintage-level delinquency tables and expanded its MD&A discussion of BridgeFin credit quality. This voluntary enhancement demonstrates BRB's commitment to investor transparency and undercuts any suggestion that BRB was seeking to conceal material information from investors.
The ACL Is Inherently an Estimate:
Finally, and critically, the ACL under ASC 326 (CECL) is inherently an estimate involving significant management judgment. ASC 326 does not prescribe a single correct methodology for estimating expected credit losses; it permits issuers to use range approaches, including loss-rate methods, roll-rate methods, probability-of-default methods, discounted-cash-flow methods, and combinations thereof. The standard expressly contemplates that a range of reasonable estimates will exist and that different reasonable methodologies may produce different results. BRB's CECL methodology, including the re-aging treatment, was developed and applied in good faith by qualified professionals, and our retained forensic accounting expert, Dr. Franklin Osei of Brindoval Analytic Partners, has performed a comprehensive analysis demonstrating that BRB's methodology produced ACL estimates within a reasonable range of outcomes. The Staff's disagreement with BRB's choice of methodology does not, standing alone, establish that BRB's reported ACL was "wrong" in a legal sense — it establishes only that a different methodology would have produced a different result.
VI. Potential Penalties and Remedies
This section analyzes the penalties and remedies that the Commission could seek or impose if it were to bring an enforcement action against BRB based on the charges identified in the Wells notice.
A. Civil Monetary Penalties
The Exchange Act authorizes the Commission to seek civil monetary penalties in administrative proceedings and federal court actions. The applicable penalty tiers are set forth in Section 21B of the Exchange Act (for administrative proceedings) and Section 21(d)(3) of the Exchange Act (for civil actions in federal court). The three-tier structure provides for increasingly severe penalties based on the gravity of the violation:
Tier I (any violation): For entities, the maximum Tier I penalty is up to approximately $11,162 per violation (as adjusted for inflation pursuant to the Federal Civil Penalties Inflation Adjustment Act, with the most recent adjustment effective January 15, 2024). Tier I penalties apply to any violation of the cited provisions, regardless of the violator's state of mind. This is the baseline tier applicable to strict-liability violations such as Sections 13(a) and 13(b)(2)(A).
Tier II (fraud, deceit, manipulation, or deliberate or reckless disregard): For entities, the maximum Tier II penalty is up to approximately $111,627 per violation. However, Tier II requires a showing that the violation involved "fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement." Because the Staff has not alleged any scienter or reckless disregard, and because the cited provisions are strict-liability provisions, Tier II penalties should not be available in this case.
Tier III (substantial losses or risk of losses to others): For entities, the maximum Tier III penalty is up to approximately $557,142 per violation, or the gross amount of pecuniary gain to the violator, whichever is greater. Tier III requires the conditions of Tier II plus a showing that the violation "directly or indirectly resulted in substantial losses or created a significant risk of substantial losses to other persons." Because the Staff has not alleged the conditions for Tier II, and because there is no evidence that the alleged ACL understatement caused substantial losses to investors, Tier III penalties should not be available.
Because scienter-based charges are not contemplated, Tier I penalties are the most likely ceiling for any penalty assessment. Even counting each of the three filings at issue (the FY 2022 10-K and the Q1 and Q2 2023 10-Qs) as a separate violation, the maximum aggregate Tier I penalty exposure would be approximately $33,486 ($11,162 × 3). For a financial institution with a market capitalization of approximately $4.7 billion, this represents a de minimis financial exposure.
We note that the Commission sometimes seeks penalties calculated on an alternative basis, such as the gross pecuniary gain to the issuer from the violation. However, this alternative basis is primarily applicable in fraud cases, and there is no obvious or quantifiable pecuniary gain to BRB from the alleged ACL understatement. An understated ACL, by itself, does not generate revenue or reduce expenses — it is an accounting estimate that affects the timing and amount of provision expense, but does not result in any direct cash benefit to the issuer. Accordingly, we do not believe the gross-pecuniary-gain alternative would be available or applicable in this case.
B. Cease-and-Desist Order
Under Section 21C of the Exchange Act, 15 U.S.C. § 78u-3, the Commission may, in an administrative proceeding, issue a cease-and-desist order against any person who "is violating, has violated, or is about to violate" any provision of the Exchange Act or any rule thereunder. A cease-and-desist order directs the respondent to cease and desist from committing or causing future violations of the specified provisions.
For violations of provisions that do not require a showing of scienter — such as Sections 13(a) and 13(b)(2)(A) — the standard for issuance of a cease-and-desist order is relatively low. The Commission has stated that it considers, among other things: (i) the seriousness of the violation; (ii) the isolated or recurrent nature of the violation; (iii) the respondent's degree of scienter; (iv) the respondent's recognition of the wrongful nature of the conduct; (v) the sincerity of assurances against future violations; and (vi) the likelihood that the respondent's occupation will present future opportunities for violations. See Kraft Renwick CPAs LLP Peat Corvinal LLP, Exchange Act Release No. 43862 (Jan. 19, 2001), aff'd, 289 F.3d 109 (D.C. Cir. 2002).
A cease-and-desist order is the most likely remedy the Staff would recommend if the Commission were to authorize an enforcement action. While a cease-and-desist order does not impose a direct financial penalty, it carries significant reputational consequences for a publicly traded financial institution. A cease-and-desist order becomes a matter of public record, must be disclosed in BRB's periodic filings, and may trigger notification obligations to the OCC and other banking regulators. Moreover, a cease-and-desist order creates a baseline for enhanced penalties in the event of any future violation — a subsequent violation of the same provisions would be treated as a violation committed after the issuance of a cease-and-desist order, which may result in enhanced penalties.
We note, however, that a single past violation is generally insufficient to support a finding that there is a "reasonable likelihood of future violations" absent aggravating factors such as recurrent conduct, failure to implement corrective measures, or ongoing misconduct. In this case, BRB has already voluntarily enhanced its BridgeFin disclosures in Q3 2023 and has increased its ACL for the BridgeFin portfolio in Q4 2023, demonstrating a proactive commitment to improved reporting. These facts weigh against the issuance of a cease-and-desist order.
C. Restatement or Corrective Disclosure
The Commission could, as part of a settlement or an adjudicated proceeding, require BRB to amend its FY 2022 Form 10-K and Q1/Q2 2023 Forms 10-Q to restate the ACL figures. A restatement would carry significant consequences on multiple fronts:
•  Market and reputational consequences: A restatement would be disclosed via Form 8-K (Item 4.02 — Non-Reliance on Previously Issued Financial Statements) and would be widely covered by financial media. It could result in a decline in BRB's stock price and damage to the Bank's reputation with investors, analysts, and counterparties.
•  Shareholder litigation exposure: A restatement would substantially increase the risk of shareholder class-action litigation under Section 10(b) and Rule 10b-5, as restatements are frequently cited by plaintiffs as evidence of material misstatement and scienter. Even though the SEC's own enforcement action does not involve fraud charges, private plaintiffs would likely argue that the restatement demonstrates the materiality of the misstatement.
•  OCC supervisory implications: A restatement could prompt the OCC to reassess BRB's CAMELS rating, potentially resulting in a component or composite downgrade. BRB currently maintains a satisfactory composite 2 CAMELS rating under OCC Charter No. 24891, and any degradation of that rating could have cascading effects on the Bank's regulatory posture, capital requirements, and ability to engage in certain activities.
•  Auditor relationship: A restatement would require Whitfield Keane LLP to withdraw its previously issued unqualified audit opinion on BRB's FY 2022 financial statements and to re-audit the restated financials. This could create significant friction in the auditor-client relationship and might prompt Whitfield Keane to reassess its risk tolerance for the BRB engagement.
We assess the risk of a restatement requirement as relatively low in the context of a settlement negotiation, given the non-fraud posture and the disputed nature of the accounting methodology at issue. The Commission is more likely to accept undertakings regarding enhanced disclosure controls and prospective reporting improvements than to insist on a backward-looking restatement of financial statements that were audited without qualification.
D. Assessment of Overall Exposure
Taking all of the foregoing into account, we assess BRB's overall enforcement exposure as follows:
Most realistic adverse outcome: A settled administrative cease-and-desist order, with modest or no civil monetary penalties, coupled with an undertaking by BRB to enhance its disclosure controls and procedures relating to CECL estimation and BridgeFin portfolio disclosures. This outcome would involve consent without admitting or denying the Commission's findings (the standard settlement formulation) and would likely be resolved through an administrative proceeding rather than a civil action in federal court.
Worst-case scenario: A litigated cease-and-desist proceeding before an Administrative Law Judge ("ALJ"), with the potential for a restatement requirement, Tier I civil penalties, and a fully adjudicated finding of violations. This scenario would involve substantially greater defense costs, management distraction, and public scrutiny, and would extend the timeline for resolution by twelve to eighteen months. However, we assess this scenario as unlikely if we are able to present a compelling Wells Submission and, if necessary, engage in constructive settlement discussions.
Best-case scenario: The Staff declines to recommend that the Commission authorize an enforcement action (a "Wells-stage termination") based on the strength of our Wells Submission. While this outcome is not certain, it is achievable if we can persuade the Staff that (i) the materiality of the alleged understatement is debatable; (ii) BRB's CECL methodology was within the range of reasonable estimates under ASC 326; (iii) the re-aging treatment was consistent with regulatory guidance; and (iv) BRB has already taken voluntary corrective steps. Wells-stage terminations, while not the most common outcome, do occur with meaningful frequency, particularly in matters where the Staff's theory is based on technical accounting disputes rather than clear-cut misconduct.
VII. Defense Strategy and Arguments for Wells Submission
This section sets forth the principal arguments we recommend advancing in BRB's Wells Submission. The submission should be a comprehensive, well-documented presentation designed to persuade the Staff that the weight of the evidence does not support an enforcement action. We recommend a submission of approximately forty-two pages, supported by exhibits, including the Brindoval Analytic Partners forensic report, peer comparison data, and relevant regulatory guidance.
A. Reasonableness of BRB's CECL Methodology
The centerpiece of our defense is the argument that BRB's CECL methodology — including the contested re-aging treatment — was a reasonable exercise of accounting judgment within the range of acceptable approaches under ASC 326.
BRB adopted CECL (ASC 326) effective January 1, 2020, in accordance with the mandatory adoption timeline for large accelerated filers. The adoption was well in advance of the BridgeFin consumer lending platform's launch in Q3 2020, and BRB's initial CECL implementation was conducted by the finance and risk management teams with significant input from external advisors. BRB's CECL model for the BridgeFin portfolio employed a vintage-cohort approach — one of several methodologies expressly contemplated by ASC 326 — which estimates expected credit losses by analyzing the historical loss experience of loans grouped by origination vintage.
The CECL model was developed with substantive input from the Bank's risk management team, led by Chief Risk Officer Annette Kowalski, and was subject to independent validation by BRB's model risk management group in accordance with OCC Supervisory Guidance on Model Risk Management (OCC Bulletin 2011-12, SR Letter 11-7). The model's methodology, assumptions, and outputs were also reviewed by Whitfield Keane LLP (PCAOB Registration No. 2847), under the direction of engagement partner Lorraine Dupont, as part of the annual financial statement audit. Whitfield Keane issued an unqualified audit opinion on BRB's FY 2022 financial statements, including the reported ACL, and did not identify any material weakness or significant deficiency in internal controls over financial reporting related to the CECL model.
We have retained Brindoval Analytic Partners, a nationally recognized forensic accounting and financial advisory firm, to conduct an independent analysis of BRB's CECL methodology and the Staff's recalculation. Dr. Franklin Osei, Ph.D. (Statistics, University of Pennsylvania) and CFA charterholder, is leading the Brindoval analysis. Dr. Osei's preliminary findings, which will be set forth in a comprehensive expert report to be attached as Exhibit A to the Wells Submission, demonstrate that BRB's methodology — including the re-aging treatment — produced ACL estimates within a reasonable range of outcomes. Specifically, Dr. Osei's analysis shows that the range of reasonable ACL estimates for the BridgeFin portfolio, depending on the assumptions applied regarding the treatment of re-aged loans, extends from approximately $138 million to approximately $189 million, with BRB's reported ACL of $143.5 million falling within the lower portion of that range but within the range nonetheless.
ASC 326 expressly contemplates that a range of reasonable estimates will exist and that the standard does not require a single "correct" answer. ASC 326-20-30-3 states that "[a]n entity shall not adjust its estimate of expected credit losses to the point estimate in a range if that point estimate does not reflect the entity's expectations." The key question under the standard is whether the estimate reflects the reporting entity's reasonable expectation of credit losses given the available information — not whether a different estimate might also have been reasonable or even more conservative. We will argue that BRB's ACL estimate met this standard.
B. Re-Aging Treatment Was Consistent with Regulatory Guidance
BRB's treatment of re-aged and modified loans — the specific practice at the heart of the Staff's theory — was consistent with applicable regulatory guidance and industry practice.
BRB's treatment of the 12,847 re-aged or modified BridgeFin consumer personal loans (with an aggregate outstanding principal balance of approximately $236.4 million) involved reclassifying these loans as "current" following the effective date of the modification, thereby resetting the delinquency clock for purposes of vintage-cohort tracking within the CECL model. This treatment was based on BRB's reasonable interpretation that a loan that has been modified and brought into current payment status represents a fundamentally different credit risk than a loan that remains delinquent — the modification reflects a new repayment arrangement, and the borrower's subsequent payment performance should be evaluated against the terms of the modified obligation, not the terms of the original obligation that the borrower was unable to meet.
This treatment was consistent with the OCC's Handbook guidance on troubled debt restructurings and loan modifications, which recognizes that modified loans may be returned to accrual status and treated as performing obligations upon the borrower's demonstration of sustained repayment performance under the modified terms. While the OCC Handbook does not specifically address the interaction between loan modification practices and CECL vintage-cohort tracking, BRB's interpretation was reasonable and was not contradicted by any OCC examination finding or supervisory communication.
Indeed, the OCC's concurrent supervisory assessment of BRB found no material deficiency in BRB's ACL methodology. BRB maintained a satisfactory composite 2 CAMELS rating under OCC Charter No. 24891 throughout the relevant period, and the OCC's most recent examination (completed Q3 2023) did not identify the re-aging treatment as a supervisory concern. The absence of