Judge Finds Bank covered up bad loan prior to sale. (Up Front).

A jury's recent decision to award L.A.-based Far East National Bank $9 million in a dispute over a loan transfer is causing headaches for the losing side in the case, San Francisco-based United Commercial Bank.

UCB, the operating unit of San Francisco-based UCBH Holdings Inc., has had a growing presence in Southern California, and draws more than 50 percent of its new customers from the area. The bank, which caters to Chinese American customers, recently said it would purchase the 75 percent of San Francisco-based Bank of Canton that it didn't already own. That deal will add four branches to UCB's Los Angeles network.

UCBH has also held discussions with GBC Bancorp, parent of another L.A.-based ethnic Chinese bank. General Bank. However, sources said those discussions have cooled recently, as General Bank disclosed a series of embarrassing loan losses.

Far East National, now a member of SinoPac Holdings of Taiwan, accused UCB of failing to fully disclose the creditworthiness of an El Monte based borrower which switched its $2.2 million loan to Far East in 1998. After Far East took over the loan, the customer, Top 1 International Trading & Investment Co., failed to make any payments.

Within three months, Far East was investigating the loan as a possible fraud. Top 1's owner, Martin Pan of Arcadia, allegedly defaulted on an $853,526 loan owed to General Bank and a $2.1 million loan owed to Sumitomo Bank of California during the same time frame. He has since fled the country, said one of Far East's lawyers, Kyle Fisher.

In late July, a jury sided with Far East National, awarding the bank $3 million for its losses on the loan, and another $6 million in punitive damages. On Aug. 12, the judge issued a tentative decision supporting Far East National on a separate part of the case, involving violations of California Business & Professions Code and the accusation of unjust enrichment.

The Top 1 loan was secured by accounts receivable on shipments of motorcycle parts to Asia. When Far East took it over, the loan appeared to be secured by valuable collateral, the court said in its ruling. However, in more than one year prior to the transfer of the loan to Far East, only two of 116 accounts receivables had been paid through the standard collections process.

Accounts swapped

Throughout 1998, the judge said, "old accounts receivable were swapped for new accounts receivable" in the same or slightly different amounts, "without any payments having been received by UCB throughout the collections process."

A lawyer for UCB, William Hebert, said the bank was trying to work with the customer through a difficult period marked by a financial crisis in Asia.

"The dispute was, 'Is it OK to do it more than two or three times?' " Hebert said.

If the preliminary ruling stands, as expected, Hebert said UCB will seek a new trial.

Far East referred questions to its lawyers.

"A jury found that (UCB) had covered up the fraud of Martin Pan and actively facilitated the transfer of their loss to Far East," said John Friedemann, another Far East lawyer. "There's no way UCB could claim to be that naive when it's that obvious there's a fraud."

Investors have also taken notice of the case, in part because of some language in the judge's ruling. It was Far East's contention that the reason UCB allegedly covered up the loan's problems was that its disclosure could have disrupted UCBH Holdings' April 1998 "private capital offering" of $170 million. The offering was similar, in effect, to an initial public offering, but is a longer process lasting several months.

"We presented evidence to the jury that due to the pending (offering), the executives at UCB had reason to keep secret the true condition of the loan," Friedemann said.

Potential effect denied

Hebert, the UCBH attorney, said the loan was partially classified as substandard for a time, and even if the whole loan was declared non-performing, it wouldn't have had an effect on the offering. "The loan would have gone against the loan loss reserves, and it never would have touched net income," he said.

Institutional investors who follow ethnic Asian banks are also beginning to wonder whether UCBH has applied its unusual accounting techniques used with Top 1 to other loans in its to-date pristine portfolio.

Hebert said it hasn't. "UCBH hasn't done this with any other customer," he said. "It hasn't had to."

David Harvey, a hedge fund manager with Hot Creek Capital LLC, said he's inclined to give UCBH Chairman and Chief Executive Tommy Wu the benefit of the doubt, as long as the Top 1 loan was an isolated incident. "He's made some genuine progress in transforming the thrift's balance sheet to be more bank-like," Harvey said.

At a recent price of $38, UCBH's stock still trades near its 52-week high of $43.44. Friedemann, for one, isn't likely to be buying any soon.

"These people concocted a cover up. That became clear in the jury's ruling," Friedemann said.