Department of Justice Seal Department of Justice
MONDAY, JUNE 2, 2003
(202) 514-2008
TDD (202) 514-1888


WASHINGTON, D.C. - Deputy Attorney General Larry Thompson, Assistant Attorney General Michael Chertoff of the Criminal Division and FBI Director Robert Mueller - all members of the President’s Corporate Fraud Task Force - announced today that PNC ICLC Corp., a subsidiary of the PNC Financial Services Group, Inc., of Pittsburgh, Pennsylvania, will pay $90 million to a restitution fund and $25 million in penalties to the United States as part of a deferred prosecution agreement on criminal charges of conspiracy to violate securities laws.

A criminal complaint filed today at U.S. District Court for the Western District of Pennsylvania charges PNCICLC with conspiracy to violate federal securities laws, a violation of 18 USC Section 371, by fraudulently transferring $762 million in mostly troubled loans and venture capital investments from PNCICLC to certain off-balance sheet entities, known as the PAGIC entities. In a separate agreement with the government, PNC - the seventh largest bank holding company in the United States - has pledged its complete cooperation with a continuing investigation into the PAGIC transactions entered into by PNCICLC in 2001.

In light of PNC’s remedial actions, its willingness to acknowledge responsibility for its wrongdoing, and its continuing cooperation in the criminal investigation of this matter, the U.S. government has agreed to defer prosecution on the criminal complaint for 12 months, and eventually dismiss the complaint if PNCICLC and PNC fully comply with the obligations set forth in the deferred prosecution agreement and the agreement on cooperation.

“The continued cooperation of corporate wrongdoers is an essential part of ‘real time’ fraud enforcement,” said Deputy Attorney General Larry Thompson, the head of President Bush’s Corporate Fraud Task Force. “This agreement strikes a balance between our commitments to rooting out corporate corruption and securing the assistance we need to conduct swift and thorough investigations.”

“The goals of the Department of Justice are met with today’s agreement,” said Assistant Attorney General Michael Chertoff. “We are sending the message that securities fraud is criminal conduct, while at the same time recognizing cooperation and internal reform by corporations.”

“The deferred prosecution agreement announced today will help heal the damage inflicted on investors, and we hope it will dissuade others from engaging in similar violations,” said FBI Director Robert Mueller. “The efforts of the investigators in our Pittsburgh field office and our Financial Institution Fraud Unit at headquarters show that the Bureau remains committed to uncovering securities frauds that hurt investors and damage the economy. The FBI remains committed to working closely with our SEC partners, whose cooperation was invaluable to this investigation.”

The charges and the deferred prosecution agreement filed today arose from the transfer by PNCICLC, in the last three quarters of 2001, of $762 million in mostly troubled loans and venture capital investments from PNCICLC to certain off-balance sheet entities. According to the criminal complaint, PNCICLC intended the entitites receiving these assets to be regarded as Special Purpose Entities, or SPEs, under generally accepted accounting principles (“GAAP”).

At the time PNCICLC entered into the PAGIC transactions, there were three main GAAP requirements for nonconsolidation and sales recognition by the sponsor or transferor to be appropriate: (1) the majority owner of the SPE must be an independent third party who has made a substantive capital investment in the SPE, (2) the independent third party must have control of the SPE, and (3) the majority owner must have substantive risks and rewards of ownership of the SPE. PNCICLC knew the PAGIC transactions violated the GAAP requirements for non-consolidation of SPEs because the majority owner of the SPE did not make or maintain a substantive capital investment in the SPE and did not have the substantive risks and rewards of ownership of the SPE.

According to the complaint, PNC’s failure to properly consolidate those SPEs onto PNC’s balance sheet, combined with the requirement that the SPEs’ assets be characterized as Aheld for sale@ assets when consolidated on PNC=s balance sheet, resulted, among other things, in (a) a material overstatement of PNC’s earnings per share for the third quarter of 2001 by more than 21 percent; (b) a material understatement of PNC’s fourth quarter 2001 loss per share by 25 percent in press releases issued on Jan. 3, 2002 and Jan. 17, 2002; (c) material overstatements of 2001 earnings per share by 52 percent in a Jan. 17, 2002, press release; (d) material understatements of the amounts of PNC’s nonperforming loans and nonperforming assets; and (e) material overstatements of the amounts of reductions in loans held for sale and overstatements in amounts of securities available for sale. Following PNC’s restatement and consolidation of the PAGIC entities onto PNC’s balance sheet on Jan. 29, 2002, PNC’s stock price dropped by more than 9 percent.

In July 2002, PNC entered into separate written agreements concerning the PAGIC transactions with the Federal Reserve Bank of Cleveland and the Federal Reserve Board, the Office of the Comptroller of the Currency, and the United States Securities and Exchange Commission. Since July 2002, an investigation conducted by the FBI, as well as additional facts provided by the SEC and Federal Reserve, brought to light additional information. The agreements entered into today fully account for the behavior of PNC and PNCICLC in the PAGIC transactions. Those agreements also provide for restitution to victims, acknowledgment of responsibility by PNC for its behavior in the PAGIC transactions, and the continued cooperation of PNC and PNCICLC in the government’s ongoing investigation of others.