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Thursday, April 4, 2013

Witness: Embezzlement suspicions didn't halt loans in Virginia

Bank of the Commonwealth continued making loans to two big borrowers after one of them told a bank official that he suspected his business partner of embezzling $3 million in loan funds, according to testimony Wednesday in a weekslong fraud trial.
George Hranowskyj and his partner, Eric Menden, received some $40 million in loans from the Norfolk-based bank for their real estate business in the years leading up to the bank's collapse in 2011. They are serving federal prison terms after pleading guilty to fraud charges last year.

Now the two are star witnesses in a trial in U.S. District Court in which five defendants, including top bank officials, are charged with conspiring to defraud the bank out of $71 million.

Hranowskyj testified Wednesday that in January 2009, he went to Stephen Fields, a bank vice president, with his suspicions that Menden had been siphoning money from construction loans the two had received.

Fields, one of the defendants in the case, was the loan officer on most of Menden's and Hranowskyj's business deals.

Hranowskyj said he laid out his suspicions in a letter to Fields, which he hand-delivered in his bank office and watched as Fields read it.

"He looked a little bit shocked," Hranowskyj said. "He slid the letter back to me and told me that if he were to go forward with it, it would bring down my economic world."

Hranowskyj said he then took the letter back and put it in his pocket. He said his suspicions about embezzlement by his partner eventually led to a bitter split between the two.

Meanwhile, the bank continued to extend millions of dollars in loans to the pair, Hranowskyj said, including $1.2 million to buy a beach house on the Outer Banks.

Menden testified earlier in the trial that he and his partner both took hundreds of thousands of dollars from construction loans for their personal use.

Hranowskyj acknowledged on cross-examination that Fields never asked him to hide anything to get a loan and on some occasions advised him against making questionable investments.

Another prosecution witness, Kevin Roberts, a former loan officer at the bank, described a $1.3 million loan to Dr. Nickolas Pezzella, a Chesapeake physician, for the purchase of three bank-owned properties.

Pezzella is Menden's cousin. Menden testified earlier that he and his partner bought bank-owned properties as a favor to get them off the bank's list of troubled assets. When he reached his legal borrowing limit, Menden said, he used straw buyers such as Pezzella, who were buyers in name only. Pezzella has not been accused of any wrongdoing.

In return for doing such favors for the bank, Menden and Hranowskyj have testified, they expected and received favorable treatment, including low interest rates, loans with no money down, and tolerance of late payments and overdrawn accounts.

Roberts testified that he was assigned to the Pezzella loan at the direction of Fields and another bank vice president, Simon Hounslow, also a defendant in the case.

He said that at Menden's request, the Pezzella loan was structured so that the entire amount - including funds intended for rehabilitation of the properties - was paid out at closing. That was unusual, he said: Normally, rehabilitation funds would be paid out as the work was done.

The loan later drew scrutiny from federal bank examiners, he said.

At one point, Roberts said, Hounslow called a meeting and demanded to know: "Who instructed you to do the loan this way?"

Roberts said he responded: "You did."

Roberts testified that he was subsequently fired by Hounslow.

Another government witness, Charlene Spadaccini-Moye, a former loan assistant at the bank, described processing favorable modifications to loans for the foundering real estate investments of Brandon Woodard, the son of bank President and CEO Edward Woodard Jr.

Both Woodards are defendants in the case.

The loan modifications included a two-year extension, a lower interest rate and an increase in the principal to cover payment of back taxes, insurance and escrow reserves. The latter provision was unique in her experience, Spadaccini-Moye said.

Testimony in the case continues today.

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