FDIC Battles Failed-Bank Execs Who Take Files

Article excerpt

Byline: Joe Adler

WASHINGTON - As directors and officers of failed banks brace for Federal Deposit Insurance Corp. lawsuits, an intense legal battle is developing over accessing files at their former institutions.

Before regulators locked the doors, board members and senior officers at numerous troubled banks made copies of their institution's internal documents, which included sensitive customer information, and fed them to outside defense teams to prepare for potential litigation.

But now, as the FDIC prepares to seek billions from executives, the agency is demanding the documents back, calling their release a significant security breach. The former bankers and their lawyers, meanwhile, argue the FDIC is trying to restrict their access to evidence that could exonerate them.

"You have a tug-of-war over whether or not the bank's records are solely the property of the bank, and therefore property of the FDIC as the party taking it over, or whether those individuals have a right of access to those records, even though they are not technically their records," said Kirby Behre, a partner at Paul, Hastings, Janofsky & Walker LLP.

Three pending court cases may decide the issue. Two filed in the northern U.S. District Court of Georgia involve law firms -Bryan Cave LLP and McKenna Long & Aldridge LLP - that were hired to advise directors and officers before their banks' closures, and were privy to extensive internal records, including loan files.

The third targets a banking company, Liberty Financial Group Inc. in Eugene, Ore., that, according to court papers, fed records to its outside counsel just before its LibertyBank subsidiary was closed.

Attorneys said that possessing copies of such records - as opposed to original bank documents - is legally justified, and that the FDIC's argument that it violates privacy policies cloaks the agency's desire to gain an upper hand in upcoming litigation. They said firms have taken steps to ensure confidentiality of the material. "It's a chilling situation for directors to be put in a situation where they don't have any access to information that can be used to defend themselves in these blunderbuss claims that are being made by the FDIC," said James Rockett, a partner at Bingham McCutchen. "Directors should be entitled to make use of that kind of information in their defense. Once the FDIC gets ahold of that, getting access to it in the future is going to be almost impossible."

But the FDIC argued the data collection poses risks beyond the lawsuits, threatening the protection of information that was not meant to see the light of day, including confidential customer information, exam reports and suspicious activity reports. Agency officials said defense lawyers could enter agreements with the FDIC over controlled use of the data, rather than simply keeping material that is not theirs. "There is a right way to go about doing this in terms of getting the documents to these folks. But what's happening here is indiscriminate copying of documents and taking them out before the bank fails," said Richard Osterman Jr., a deputy general counsel at the FDIC.

"Most of the time we don't bring an action" against an officer or director, Osterman added. "Imagine with over 300 failures, and everybody making copies of all these documents before a bank fails and taking them outside the bank what that means in terms of opening and exposing all of that confidential information to a non-accountable entity where it might be shared further."

The three cases are a prelude to what many expect will be a flurry of FDIC court action starting this year. The agency has filed only two official suits claiming monetary damages against former managers for alleged roles in the downfall of their banks.

But that is only the beginning. On Jan. 4 the FDIC announced it had authorized suits against 109 defendants the agency believes were negligent, seeking nearly $2. …