First the Failures, Then the Litigation

By Adler, Joe | American Banker, July 13, 2010 | Go to article overview

First the Failures, Then the Litigation


Adler, Joe, American Banker


Byline: Joe Adler

WASHINGTON - The pace of bank failures might be peaking, but for the directors and officers of failed institutions, the pain and suffering is far from over.

The Federal Deposit Insurance Corp. has begun laying the groundwork for potentially years of lawsuits against senior executives and directors it claims may have been responsible for their bank's collapse-a process that netted the agency $2.5 billion in the aftermath of the last banking crisis.

The FDIC has sent hundreds of demand letters warning officers and directors of possible civil charges, announced formal investigations of individuals and subpoenaed directors' financial statements and other documents.

The agency said the actions are necessary first steps in both assessing accountability for the heavy failures and replenishing the Deposit Insurance Fund. They set the stage for monetary settlements and civil lawsuits, though sometimes they will result in no further action.

But some industry representatives wonder if the FDIC is targeting individuals with the financial means-including hefty insurance policies-to pay the damages more so than those it believes were responsible for a failure.

In some cases, observers say, the amount of damages the FDIC asks for mirrors what is covered in an insurance policy.

If there's insurance, "and there's money to go after, I believe that the inclination of the FDIC is to try to go after it, whether there is a good case or not," said David Baris, a partner at Buckley Sandler LLP and the executive director of the American Association of Bank Directors.

Senior FDIC officials strongly dispute that claim, saying directors will not receive a demand letter without cause, and the bluntly worded letters-which include the amount of potential damages-are required by the insurance carrier to begin the claims process. Typically the letters must be issued before an insurance policy expires, which can be right after the failure.

"Everybody thinks that they're being pursued because they have money or there is some other reason," but "in reviewing the claims, we're looking at whether we have a meritorious and a cost-effective claim," said Richard Osterman, a deputy general counsel at the agency."

He continued: "How far we go will depend on the facts and circumstances in each case. We send in investigators and attorneys to look at the facts. If they find on the face of it there's nothing there, then we close out the investigation."

The FDIC typically begins gathering information that can be used in a suit as soon as it takes over a failed bank.

After it has determined an insurance policy exists, and there is reasonable suspicion someone was responsible for the failure, the agency will issue a demand letter as the first step in the process. The letters, often sent by outside counsel it hires, outline all the possible allegations a board member or officer could face.

"It's a starting point for targeting them down the line for eventual lawsuits," said Joseph Lynyak, a partner at Venable.

For example, a March 26 letter to board members of BankFirst in Sioux Falls, S.D., which failed in July 2009, listed everything from poor risk management to violating loan approval policies.

The letter demanded payment of over $77 million for "Director and Officer Wrongful Acts. …

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