M&T Bank Corp. had a curious disclosure in its quarterly report today: It said the Securities and Exchange Commission issued a so-called Wells notice on Aug. 5 to its Wilmington Trust unit, saying that the agency may file a lawsuit "relating to the financial reporting and securities filings of Wilmington Trust prior to its acquisition by M&T."

The Justice Department has a separate probe focusing on the same issues. M&T said "either of these investigations could lead to administrative or legal proceedings resulting in potential civil and/or criminal remedies, or settlements, including, among other things, enforcement actions, fines, penalties, restitution or additional costs and expenses." Buffalo, New York-based M&T said both investigations began before it completed its 2011 acquisition of Wilmington.

It's no secret that Wilmington Trust's books were cooked. That's why M&T paid so little money for it. When the companies first disclosed their deal in November 2010, Wilmington agreed to sell itself for $351 million, which was 46 percent less than its stock-market value at the time. (The final purchase price wound up being slightly higher.) That same day, Wilmington also disclosed that its third-quarter 2010 loss had widened to $365.3 million from $5.9 million a year earlier, and that M&T had identified $506 million of additional, previously undisclosed credit losses at Wilmington.

In short, M&T knew that the loan values on Wilmington's balance sheet were a joke. M&T cared what Wilmington's assets and liabilities were worth in real life, not what the company's book value showed. Had M&T not done the take-under, Wilmington Trust very well may have gone belly up.

So why sue Wilmington Trust now that it's owned by M&T? That's what I'm wondering. There has been no sign that M&T did anything wrong. (Due diligence isn't a crime.) Yet M&T shareholders could get penalized because of offenses committed by the bank that M&T acquired. Surely the SEC could bring such a lawsuit if it so desired: If a company violates the law and then gets bought, the acquirer ultimately is on the hook from a liability standpoint. But it's hard to see what the point would be here or how this would serve the interests of justice.

M&T didn't say if the SEC or Justice Department might be targeting any individuals. If there truly was a fraud here, the government shouldn't have any difficulty finding some former Wilmington Trust executives to take to court.

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To contact the author on this story:
Jonathan Weil at jweil16@bloomberg.net