Bush official faces fraud issue

By Anitha Reddy
The Washington Post

WASHINGTON — President Bush's top official on corporate crime and responsibility was a director of a credit-card company that paid more than $400 million to settle allegations of consumer and securities fraud.

Larry Thompson, who is to head a task force on corporate crime, served on the board of a credit-card firm that paid more than $400 million to settle fraud allegations. Associated Press

Thompson sold all of his stock — worth nearly $5 million — in Providian after his confirmation to comply with ethics rules. The sale came a few months before Providian began to disclose problems with defaults in its credit card portfolio that led to a collapse of its stock price and thousands of layoffs.

Providian was one of the biggest credit-card companies in the so-called subprime market, which targets people with low incomes and bad credit histories. It ran into financial trouble last year after settling charges that it inflated its financial results by charging excessive fees and engaging in other practices that regulators said broke consumer-protection rules.

Thompson did not return calls for comment.

"The deputy attorney general is proud of his service on the board of Providian. He only became aware of the (fraud) issues when regulators began to make inquiries," said his spokesman, Mark Corallo. "He then personally took the lead in making the company do the right thing and it was his personal efforts that were a driving force in the company settling over $400 million and in implementing internal reforms and compliance measures."

Thompson's service on the Providian board coincided with the time that regulators said Providian engaged in fraudulent conduct. Providian settled all the complaints without admitting or denying wrongdoing.

Thompson's options in the company were vested on an accelerated basis so he could cash them in before he joined the Justice Department.

According to Providian's March 2001 proxy statement, Thompson held 89,651 shares, including unexercised options, on March 12, 2001. On the day he took office, May 10, that stock had a market value of more than $4.7 million.

Corallo did not disclose how much Thompson profited from the sale or how many shares he sold. Thompson received an extension to file his latest financial disclosure statement, in which he is required to report income during 2001, a Justice Department spokesman said. Executive-branch personnel are required to release income and asset information by June 15 unless they request an extension.

Insider trading has become an issue in shareholder and employee lawsuits against Providian.

In July 2001 — after Thompson left the board — former Providian chief executive Shailesh J. Mehta sold 75,000 shares for $3.7 million. David R. Alvarez, former president of Providian's integrated-card unit, exercised his stock options in the summer and fall of 2001 and realized a $12.2 million profit. Several other officers and directors sold stock that summer, as well.

Providian's stock price began to plunge — it hit a 52-week high of $59.85 in July — after a Sept. 4, 2001, announcement that Providian's third-quarter earnings would be lower than expected. The stock hit a low of $2 a share in November and closed yesterday at $4.65.

Thompson, a former U.S. attorney in Georgia and partner at the Atlanta law firm King & Spalding, was not questioned about his role at Providian during his confirmation hearing.

Thompson was "very conscientious and diligent," according to David Grissom, a current director who worked with Thompson on the board for four years.

Providian is the only company for which Thompson was a director, according to the financial disclosure statement filed during his confirmation proceedings. He was invited to join the board after another King & Spalding partner retired as director and recommended him for the position, the Justice Department said.

San Francisco-based Providian's growth relied on pursuing customers with poor credit histories, who typically have difficulty obtaining credit. State and federal complaints alleged that Providian denied its cardholders a customary grace period for loan payments and misled them into accepting higher interest rates and hidden charges.

Providian agreed to a $300 million settlement in June 2000 with the Office of the Comptroller of the Currency, a federal banking regulator, and the San Francisco district attorney's office after being accused of misleading marketing practices.

The settlement is "by far" the largest ever reached by the bank regulator, a spokesman for the comptroller's office said.

The company, which has more than 15 million customer accounts and $18.7 billion in assets, settled separately with the Connecticut attorney general and agreed to pay its legal costs and provide full restitution to Connecticut customers.

Six months after the comptroller settlement, the company paid $105 million to settle the same allegation in a class-action suit filed on behalf of its customers.

In March of this year, Providian paid $38 million to settle a class-action lawsuit brought by shareholders in 1999 alleging that the company's unfair marketing strategies resulted in inflated financial results that belied the true health of the company. A number of lawsuits were filed against Providian late last year after it posted disappointing third-quarter earnings.

In addition to the consumer-related legal actions, Providian officers and directors, including Thompson, are defendants in a class-action lawsuit brought by more than 10,000 Providian employees who allege that while directors and executives employed obfuscatory accounting practices and sold their own company stock holdings, they continued to recommend large holdings of company stock in 401(k) retirement plans.

A lawyer for the plaintiffs, Lynn Lincoln Sarko of Keller Rohrback in Seattle, said the case is in an early stage and that Thompson was named as a defendant because of his fiduciary responsibility as a director when the practices were occurring.

Thompson and others could be dropped as defendants if the plaintiffs find that they were not responsible for losses by employee retirement funds, Sarko said.