Larry D. Thompson, head of the federal task force on corporate fraud and former director of Providian Financial Corp., made a profit of between $1 million and $5 million when he exercised his Providian stock options in July 2001, according to his annual financial disclosure statement released yesterday.
Thompson, who was also chairman of the troubled credit card firm's audit committee until his resignation to become U.S. deputy attorney general in May 2001, exercised his options and sold Providian stock worth nearly $5 million in a series of transactions in early July last year, according to the disclosure statement. His total profit from the transactions remained uncertain, however, because Thompson is not required to disclose exactly how much his gain was, but only a range.
The value of Providian's stock plummeted in early September, about two months after Thompson exercised his options, when the company surprised investors with more problem loans than expected. In July 2001, when Thompson divested his Providian assets, other former insiders sold their stock as well. Then-chief executive Shailesh J. Mehta sold 75,000 shares for $3.7 million and the then-president of the company's credit card unit, David R. Alvarez, exercised options to realize a $10.7 million profit.
Thompson's spokesman, Mark Corallo, said Thompson's understanding when he took office was that ethics requirements dictated the sale of the stock. But according to the ethics agreement Thompson entered into when he became deputy attorney general, he was not required to do so, government ethics officials say. Instead, he could maintain control over his holdings but had to recuse himself from matters involving the company.
"The deputy attorney general gave instructions to begin the process of selling all of his Providian stock within only a few days of taking public office on May 15, 2001," Corallo said. "At that point he turned control of the mechanics of the stock sale over to financial professionals. It was his clear understanding that this complete divestiture was the ethically correct course of action. He has fully disclosed all of these transactions."
In the late 1990s, Providian grew rapidly through aggressive marketing to "subprime" borrowers -- people with lower incomes or who have inferior credit histories.
In 1999, banking regulators and officials in several states alleged that Providian misled customers by inadequately disclosing the terms and fees of its cards. Providian has since paid more than $400 million to settle the allegations without admitting or denying wrongdoing. Providian employees also have filed suit against the company since its September disclosure, claiming it misled employees holding Providian stock in their 401(k) plans.
Thompson, a former partner at the Atlanta law firm King & Spalding, was a director of Providian from 1997 until his Department of Justice appointment was confirmed. Corallo said Thompson never sold Providian stock while he was a member of the board, "despite substantial ups and downs in the stock price during his four-year tenure."
When San Francisco-based Providian told investors in September 2001 that it had been tallying problem loans monthly instead of daily -- inflating its financial results for the second quarter because it bumped the recognition of problem credits into the third -- its stock dived $8.70 to $30.36. Concerns about its business prospects and accounting methods had already pushed the stock from almost $60 in July to under $40 before the Sept. 4 announcement.
Thompson held 89,651 shares, including at least 62,500 unexercised options, on March 12, 2001, according to the company's March 2001 proxy statement. On the day he took office, that stock had a market value of more than $4.7 million.
He sold his stock holdings on July 5 and July 16, 2001, and exercised his options on July 6 in three separate transactions that totaled between $1 million and $5 million, according to his financial disclosure statement. During the period of his transactions, Providian's stock ranged between $56.05 and $57.75 a share, near its 52-week high.
Thompson's financial disclosure form did not contain the strike price of his options, and his spokesman would not say exactly how much Thompson profited from Providian stock.
Thompson has declined to comment on Providian. When asked at a press conference last week about his fitness for his position as deputy attorney general, he said, "Well, this is Washington, isn't it."
"And I believe all those who have worked with me and against me will attest of my integrity," Thompson told reporters. "I think my integrity and my record of public service speaks for itself."
The possibility of insiders making trades on non-public information will be an issue in a lawsuit against the company and its officers and directors, including Thompson, filed recently by 10,000 employees, according to Derek Loeser, an attorney for the plaintiffs at Keller Rohrback LLP in Seattle.
The complaint alleges that company officials continued to recommend large holdings of Providian stock in employee 401(k) retirement plans in the summer of 2001, even though they knew accounting policies obscured the corporation's true financial condition and some executives and board members were selling their stock at the same time.
The accounting change had the effect of allowing Providian to delay revealing $30 million in at-risk loans from the second quarter of 2001 until the third quarter. Thompson was not a director of Providian when the change was formally made, but is named as a defendant because he was a director when many of the practices that would later damage Providian's stock value were in place, according to the complaint.
SAN FRANCISCO --A public interest group Wednesday sued U.S. Deputy Attorney General Larry Thompson, alleging that he engaged in some of the financial chicanery that he has vowed to punish in President George W. Bush's crusade against corporate crime.
The civil complaint, filed by Judicial Watch Inc. in San Francisco federal court, focuses on Thompson's role as a director at credit card issuer Providian Financial Corp. (PVN) from 1997 until his May 2001 confirmation as the second-in-command at the U.S. Justice Department.
Thompson assumed a higher public profile last month when he was appointed as head of a "financial SWAT team" created to weed out corporate corruption and help restore confidence in the scandal-ridden stock market.
The new role has focused attention on Thompson's tenure as chairman of Providian's audit committee, a part of corporate boards that is supposed to ensure companies issue accurate financial statements.
The lawsuit asserts that Thompson ignored his watchdog duties and helped Providian conceal deepening financial troubles that crippled the company and wiped out $15 billion in shareholder wealth during 2001.
The Justice Department described the allegations against Thompson as "frivolous," and said his record as a Providian director had been fully disclosed to the U.S. Senate before his unanimous confirmation.
Thompson's "actions have been entirely professional and proper at all times and in all respects," Justice Department spokeswoman Barbara Comstock said.
San Francisco-based Providian brushed off the suit's allegations as irrelevant because the company is being run by a new management team.
Besides Thompson, the lawsuit names four other former Providian executives and directors.
"On the face of it, (Judicial Watch) appears to be using Providian to make a political point," Providian spokeswoman Laurel Munson said.
The company previously has been hit with several other shareholder lawsuits alleging management covered up its problems during 2001.
Providian's shares plunged from a 2001 high of $60.91 to as low as $2.01 after management revealed the breadth of its problems last October. Providian's shares rose 21 cents to close at $4.90 Wednesday on the New York Stock Exchange.
Before Providian's stock began to plummet, Thompson sold his 89,651 shares during July 2001. Thompson hasn't publicly disclosed how much he made from those sales. Providian's stock price ranged from $46.13 to $59.95 during that time.
The suit alleges Thompson made the sales because he knew Providian's stock would plunge once management laid out the company's financial problems. The Justice Department says Thompson ordered his broker to sell his Providian stock to avoid possible conflicts of interest.
The Bush administration's top corporate crime fighter was sued in a San Francisco federal court Wednesday for allegedly promoting securities fraud at credit card giant Providian Financial Corp.
In the suit, the public interest group Judicial Watch accused Deputy Attorney General Larry Thompson of working with other company officials to hide losses and inflate profits last year. Thompson served as a director of the San Francisco company from 1994 until May 2001, when he joined the Justice Department.
He was not with the company when alleged financial reporting violations took place and sold his holdings in the firm before he began his government job.
A Justice Department spokeswoman called the suit frivolous.
The lawsuit also alleges that Thompson used his government position to block any investigation of Providian, a charge the Justice Department said is baseless.
"They are going to have a major uphill battle," San Francisco securities lawyer Jeffrey Feldman, who is not involved in the case, said about Judicial Watch's suit. "They may have named him because he is so high profile."
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