An American Savings Bank senior vice president rewrote an in-house report last year on a bank employee's alleged theft of $600,000 from an elderly customer to delete any reference to the customer losing money.

Corporate governance experts say it is unusual for a bank to remove information from a report intended to alert top executives to potential problems.

In February 2005, American Savings Bank security director Bert Corniel learned that a supervisor at the Hawai'i Kai branch took hundreds of thousands of dollars from a 92-year-old customer, Ada Lim. Corniel wrote a 150-word report alerting bank officials of the incident.

Corniel's supervisor, Abel Malczon, the bank's senior vice president of operations, reduced Corniel's report to 65 words, taking out the part about a bank employee taking money from Lim.

The short version was submitted to the bank's disclosure committee, which reviews cases of possible fraud.

"This has the appearance of someone trying to downgrade the gravity of the situation," said banking consultant Tom Tarter, a former president of the Bank of Los Angeles who now advises financial institutions on corporate governance issues. "This is a totally inappropriate action and makes you wonder how other frauds and other problem areas are treated by the bank."

American Savings Bank, the state's third-largest financial institution, said it did nothing wrong, but cannot comment on specifics of the case because of a pending lawsuit and a federal grand jury investigation into the matter.

Dawn Dunbar, American Savings' spokeswoman, said last week the company acted properly. Malczon declined comment and referred all questions to the bank.

American Savings CEO Constance Lau said in a written statement on Aug. 16, after news broke that a bank employee took money from an elderly customer, that the "bank did not in any way, shape or form cover up anything."

When asked about changes to Corniel's report, Dunbar said: "Unfortunately, we cannot respond fully to these allegations because this matter is still pending before the court."

"We are confident that when the facts do become known, it will be clear that American Savings Bank has acted lawfully and properly."

Corniel sued the bank on Aug. 2, claiming bank officials retaliated against him and passed him over for a promotion because of various disclosure reports he filed.

Lau, in her August statement, said Corniel was a "disgruntled former employee."

Corniel's report and Malczon's revisions are key exhibits in Corniel's lawsuit in state Circuit Court. In the lawsuit, Corniel alleges that an operations supervisor at American Savings' Hawai'i Kai branch, Marilyn De Motta, took hundreds of thousands of dollars from Lim between August 2004 and December 2004, and that the bank later tried to cover up the fraud to avoid reporting the losses to its regulators.

To back up Corniel's contention, he filed with the court copies of e-mail messages from Malczon, his supervisor, about the edited report.

"Here is the revised report talked about in management," Malczon wrote in the e-mail to Corniel on Feb. 25, 2005. "Management would prefer no names (of the victim or bank employee) be used."

Malczon added, "If you are not comfortable submitting this under your banner, I understand and will submit it under my name."

Lim, the 92-year-old customer, also filed suit against American Savings on Aug. 2, but the bank settled that lawsuit in September for undisclosed terms.

A federal grand jury recently opened an investigation into the alleged fraud and the bank's handling of the case.

The audit committee of the Hawaiian Electric Industries Inc. board also has opened an investigation into the matter. HEI is the parent company of American Savings.

Founded in 1925, American Savings has about $6.9 billion in assets, 64 branches and about 1,400 employees.

The in-house reports on the Lim incident weren't the only reports bank officials changed.

In sworn testimony taken by Corniel's attorneys, bank officials said they amended a "suspicious activity report" written by Corniel on the Lim matter and filed with federal regulators. The bank officials did not say in their testimony why the report was amended or what was changed.

The bank's CEO, Lau, said in a deposition she gave in the Corniel lawsuit that Malczon directed a staff attorney to change Corniel's initial report. Lau did not provide details on the changes.

Bank spokeswoman Dunbar declined to comment on Lau's testimony and the changes to the report, citing federal laws prohibiting the disclosure of the contents of such reports.

Suspicious activity reports are required of all banks, stock brokerages and casinos when they suspect fraud, money laundering or any other illicit activity involving $5,000 or more.

If the alleged abuse involves a company insider, the financial institution has to file a suspicious activity report regardless of the amount of the loss. A false suspicious activity report could result in criminal prosecution and fines for a company, said Sarah Welling, law professor at the University of Kentucky and an expert on money laundering. Failure to file such reports also can lead to civil penalties.

Banking consultant Tarter, who reviewed American Savings Bank e-mails and disclosure committee reports at the request of The Advertiser, said the way the bank reported the Lim case to its internal disclosure committee fell well below "industry standards that require full disclosure."

Tarter said American Savings' disclosure committee should have been given all of the facts surrounding the alleged fraud against the elderly customer. Full disclosure would allow the bank's senior management and its board to decide whether the bank had to reimburse the customer and whether to set aside reserves for the potential loss, Tarter said.

American Savings' disclosure committee, whose members include senior bank managers, was created in response to the Sarbanes-Oxley corporate reforms several years ago. The committee reviews corporate governance issues for the bank.

American Savings spokeswoman Dunbar declined to discuss the duties and makeup of the bank's disclosure committee.

James Spindler, a corporate governance expert and law professor at the University of Southern California, said amending Corniel's original report probably did not violate any laws from a corporate governance standpoint, because the losses involved aren't material to the bank's earnings.

But Spindler said investors don't look too kindly when managers shift "numbers around to cover up bad things" and don't inform the company's board of such problems.

"This is something that raises some red flags," said Spindler.

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.