The SEC has charged the CEO and chief financial officer of Franklin Bank Corp. in Houston with fraud for aggressive loan modification programs intended to hide nonperforming loans and artificially boost net income and earnings.

According to the SEC, former Franklin Bank CEO Anthony J. Nocella and J. Russell McCann, CFO, allegedly used the loan modifications during the third and fourth quarters of 2007.

The bank holding company declared bankruptcy in 2008.

The SEC complaint, filed April 5 in the U.S. District Court for the Southern District of Texas, said Franklin's holdings of delinquent and nonperforming loans rose significantly in the summer of 2007.

Nocella and McCann instituted three loan modification schemes that caused Franklin to classify such loans as performing, according to the complaint. By the end of September 2007, Nocella and McCann allegedly used the loan modification programs to conceal more than $11 million in nonperforming single family residential loans and $13.5 million in nonperforming residential construction loans.

The SEC said as a result of the loan modifications, Franklin overstated its third quarter 2007 net income and earnings by 317% and 77% respectively, and reported that it earned $0.30 per share, of which $0.23 per share was directly attributable to the loan modifications.

On May 2, 2008, in a Form 8-K report filed with the SEC, Franklin acknowledged that the accounting for the loan modifications should be revised and that investors should no longer rely upon Franklin's form 10-Q for the quarter ended Sept. 30, 2007.

The SEC's complaint seeks financial penalties, officer and director bars, and permanent injunctive relief against Nocella and McCann to enjoin them from future violations of the federal securities laws.

The complaint also seeks repayment of bonuses received by Nocella and McCann under Section 304 of the Sarbanes Oxley Act of 2002, which allows for clawbacks of bonuses received by executives if the company later must restate its earnings.