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Watchdogs served firm { July 13 2002 }

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U.S. Corporate Watchdog Served At Troubled Firm
Providian Settled Allegations of Fraud

By Anitha Reddy
Washington Post Staff Writer
Saturday, July 13, 2002; Page A01

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 D. Thompson, deputy attorney general and head of a new multi-agency corporate-crime task force, was a Providian Financial Corp. board member and chairman of its audit and compliance committee from June 1997 until his unanimous confirmation by the Senate on May 10, 2001.

Thompson sold all 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 looming problems with defaults in its credit card portfolio, problems that led to a collapse of its stock price and the layoffs of thousands of employees.

Providian was one of the biggest credit card companies in the "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 state and federal 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," Corallo said.

Thompson's service on the Providian board coincided with the time 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. "A majority of companies don't require departing directors to forfeit their options," said Laurel Munson, spokeswoman for Providian. "When a non-employee retires we typically accelerate their vesting."

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 of each year 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 offices 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 eventually hit a low of $2 a share in November and closed trading yesterday at $4.65.

Thompson, a former U.S. attorney in Georgia and partner and defense lawyer at the Atlanta law firm King & Spalding, was not questioned about his role at Providian during his public 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 that the company has settled 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.

"Is any bit of food too small to grab when you're starving and when there is nothing else in sight?" Providian founder Andrew Kahr wrote to company executives in a March 1999 memo obtained by the San Francisco Chronicle. "The trick is charging a lot, repeatedly, for small doses of instrumental credit."

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

In March 2002, 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 current 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 lawsuit is in its early stages and that Thompson and others could be dropped as defendants.

During the second quarter of 2001, Providian began writing off bad loans monthly rather than immediately, as it had done previously. As a result, Providian was able to delay recognition of $30 million in loan losses to the third quarter.

A Providian spokeswoman said the employee suit "holds no merit" and refused further comment on pending litigation.

2002 The Washington Post Company

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