Losses Spur Spate of Suits against Managers
Bennett, Andrea, American Banker
CHICAGO -- Angry shareholders are increasingly hauling top managers into court over losses in their banks.
Most recently, BankAmerica Corp. announced a shocking $338 million loss in the second quarter, and just two days later, almost like clockwork, officers and directors of the nation's second largest bank holding company were slapped with a derivative shareholder lawsuit for their role in the debacle.
Derivative lawsuits are brought by shareholders on behalf of a corporation, usually against its officers and directors. Others, such as bank auditors, are sometimes also named. Any damages recovered in the suit are awarded to the corporation.
Bankers and lawyers say that the filing of the Bank of America derivative lawsuit was part of a trend that has emerged in recent years. As banks increasingly -- and with increasing publicity -- run into problems with loan losses, subsidiaries, and earnings, shareholders are going to court to hold management responsible for those problems.
Banking lawyers say that while derivative shareholder suits are nothing new, their application against banks is.
"I think the banking world was a simpler place" in the past, said Richard Greenfield, a lawyer with the firm of Greenfield & Chemicles, which specializes in derivative lawsuits. "You didn't have these kinds of cases against banks unless you had an officer dipping into the till."
But in the 1980s, shareholders are going to court not only because of criminal activities, but because of what they feel is recklessness on the part of bank officers. Among those hit by derivative lawsuits in recent years are officers and directors of BankAmerica, Chase Manhattan Corp., Continental Illinois Corp., Seafirst Corp., and First Chicago Corp., all of which have had highly publicized problems at one time or another.
They differ from shareholder suits, which are brought by shareholders who have bought or sold stock based on financial information put out by the company. Shareholder suits usually claim the company did not fully disclose its current situation or gave out false information, said Robert A. Holstein, a lawyer with Holstein, Mack & Associates, which is handling a derivative shareholder suit against First Chicago. Any damages recovered are awarded to the shareholders, not the corporation.
Mr. Greenfield said that he believed that derivative suits in banking have flourished as the strategies that banks undertook in the 1970s -- emphasizing growth and placing increased stress on risk-taking -- turned sour. Problems have started "to come home to roost."
Claims Follow Industry Problems
A high incidence of derivative shareholder suits follows problems within a specific industry, according to Mr. Holstein. "You're seeing more financial management problems, and therefore you are seeing more mismanagement and waste claims surfacing by way of derivative actions," he said.
A greater availability of information about banks has ripped away their "shroud of secrecy" and is also causing more opportunity for the filing of derivative lawsuits, said Mark Rosen, an attorney for the Federal Deposit Insurance Corp. The FDIC is handling a derivative suit filed against former officers and directors of Continental Illinois. …