FDIC Prevails in Suit Blaming IndyMac Execs for Construction Losses

By Horwitz, Jeff | American Banker, December 11, 2012 | Go to article overview
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FDIC Prevails in Suit Blaming IndyMac Execs for Construction Losses


Horwitz, Jeff, American Banker


Byline: Jeff Horwitz

IndyMac became infamous for lending to homeowners with such abandon that it ended up in a multi-billion dollar bankruptcy. On Friday, a jury agreed with the Federal Deposit Insurance Corp.'s contention that its residential construction division also acted recklessly.

The verdict, in U.S. District Court for the Central District of California, declared three former IndyMac execs culpable for more than $168 million in loan losses. The decision may prove pivotal to the FDIC in recouping a small portion of the more than $12 billion of losses it suffered in the wake of the lender's bankruptcy. The men's liability for the bank's mistakes allows the FDIC to pursue insurance claims involving policies protecting them against findings of negligence.

The case was litigated on behalf of the FDIC by Nossaman LLP, a Los Angeles-based law firm. It is the first suit to go to trial among 39 that the regulator has brought against the directors of failed banks.

Attorneys for the FDIC claimed during trial that the worst of the IndyMac homebuilding division's excesses began in 2004. That, they argued, was when the three defendants a division chief executive Scott Van Dellen, chief credit officer Richard Koon and chief credit officer Kenneth Shellem a concluded that lender competition for blue-chip residential construction loans was driving down margins. The three executives responded by shifting their division's focus to targeting "smaller, less price competitive builders," the FDIC argued.

Meanwhile, the executives failed to put in place the controls required to manage this business, the regulator added. Instead the FDIC claimed that the homebuilder lending unit: gave underwriters control over credit risk decisions; ignored borrowers' lack of construction experience and high debt loads; failed to demand adequate collateral; and paid underwriters premiums for arranging high-yield loans.

Attorneys for the defendants, by contrast, argued during the trial that top IndyMac executives, rather than the three former executives on trial, were at fault for setting overly aggressive targets. They also pinned blame for the division's troubles on the unprecedented size of the housing bust.

Attorneys for Koon and Shellem added during trial that the Office of the Comptroller of the Currency had repeatedly signed off on the division's operations.

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FDIC Prevails in Suit Blaming IndyMac Execs for Construction Losses
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