- Associated Press - Wednesday, February 5, 2014

DOVER, Del. (AP) - A former Wilmington Trust executive and another bank executive schemed to make improper loans to each other over more than a decade, according to a federal indictment unsealed Wednesday.

Brian D. Bailey, a former vice president and Delaware market manager for Wilmington Trust, faces federal bank fraud, conspiracy and money laundering charges.

Bailey, 51, made an initial court appearance Wednesday afternoon in Wilmington and was released on his own recognizance after being ordered to surrender his passport. His arraignment is scheduled Feb. 19. Bailey’s attorneys did not immediately return telephone messages Wednesday.

Bailey’s indictment is the latest development in an ongoing federal investigation of lending practices at Wilmington Trust, which was sold to M&T; Bank Corp. in 2010 after its deteriorating loan portfolio left it on the verge of collapse.

Authorities allege that Bailey and James A. Ladio made roughly two dozen loans and loan modifications in excess of $1.5 million to each other through their respective banks over a course of about 12 years.

Ladio, 57, is a former chief lending officer for Artisans Bank and later served as president and CEO of MidCoast Community Bank, which terminated him in August. He pleaded guilty to bank fraud and money laundering charges in December. His sentencing is scheduled for April 17.

Prosecutors say the scheme defrauded Wilmington Trust, Artisans and MidCoast, where Bailey worked as a loan officer after resigning from Wilmington Trust in May 2010. Authorities say the two men concealed from the banks that they had authorized loans to each other, misrepresented the purposes for the loans or were “willfully blind” to their true nature, and failed to conduct basic underwriting functions.

Authorities also allege that the men used their authority as commercial lenders to originate commercial loans and lines of credit for what they knew to be consumer debt purposes, circumventing the normal approval process and loan terms, and provided loan accommodations to each other that weren’t available to the general public.

Authorities claim the alleged scheme dates to at least July 2001, when Bailey, through Wilmington Trust, approved a $29,000 loan for Ladio that was structured as a commercial line of credit for investment property, but which was used to pay personal debts and other expenses.

The following year, Ladio, through Artisans, allegedly approved three vehicle loans totaling $107,000 to Bailey for a truck, a Mercedes-Benz, and a Porsche. Authorities say the Mercedes and Porsche loans were underwritten out of Artisans’ commercial real estate section, rather than its consumer loan section, giving Bailey more favorable terms.

The indictment also describes a $175,000 commercial line of credit Ladio arranged in 2006 for Bailey, purportedly for purchase of an investment property. Authorities allege that Bailey instead used the proceeds to pay for home renovations.

Two days after Ladio approved Bailey’s $175,000 line of credit, Bailey in turn approved a $165,000 commercial loan through Wilmington Trust to Ladio, prosecutors said. Ladio used the loan, which purportedly was for investment purposes, to pay off personal debts, according to the indictment.

Authorities say the loan scheme continued after Ladio resigned from Artisans in 2006 to help found MidCoast, where Bailey joined him in 2010.

“Ladio hired Bailey, in part, because of their past lending relationship and out of a shared desire to conceal that relationship going forward,” the indictment states.

The indictment reiterates previous allegations that Ladio persuaded two MidCoast customers to apply for commercial loans in 2010 and 2011, ostensibly for business purposes. In reality, the customers drew more than $1.2 million on their new lines of credit to loan money to Ladio, according to authorities. Prosecutors say Ladio then used the money to pay off debts, including obligations to Wilmington Trust. The lender had entered into a forbearance agreement with him after asking Bailey to resign in May 2010, following an internal investigation.

According to the indictment, Bailey acted as the loan officer in the second MidCoast customer transaction “and was aware generally that Ladio had been seeking loans from third parties to repay his obligations under the WTC forbearance agreement.”

Bailey was asked to resign from MidCoast last May after a former Wilmington Trust colleague, Joseph Terranova, pleaded guilty to conspiracy to commit bank fraud. Terranova is awaiting sentencing.

In addition to the criminal investigation, Wilmington Trust is the subject of a securities class action lawsuit alleging that senior officers and executives portrayed the bank as a conservative lender but in fact played fast and loose with the company’s real estate loan portfolio, perpetrating a fraud that led to the demise of the 107-year-old bank.

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