FDIC waging legal battle against hundreds of former bank leaders


Martin Gruenberg, chairman of the Federal Deposit Insurance Corp. (FDIC), speaks during a Senate Banking Committee nomination hearing in Washington. (Andrew Harrer/Bloomberg)

As the clock runs out on a three-year statute of limitations, the Federal Deposit Insurance Corp. has filed a flurry of lawsuits to recoup losses tied to the largest wave of bank failures during the financial crisis.

The agency is waging legal battles against hundreds of directors and officers that it claims had a hand in their bank’s demise, failures that cost the deposit insurance fund billions of dollars. These cases, however, may take years to play out in the courts, as the judicial process has been slow-going.

The FDIC has filed 76 lawsuits against 574 former bank executives since 2008. Thirty-two of those cases were filed in the first eight months of 2013, nearly triple the number filed during the first eight months of last year, according to the agency. The surge in filings correlates with the peak of bank failures rooted in the crisis, which reached 157 in 2010.

Cleaning up the financial wreckage of 483 shuttered banks, many small community banks, has depleted the insurance fund by $89 billion over the past five years, according to the FDIC. In that time, the agency has recovered $727 million from individuals associated with the failed banks.

Officials at the FDIC anticipate the number of new lawsuits will crest after this year, but there is no clear end in sight for putting the cases to rest. Only one of the agency’s lawsuits has reached a jury, while 10 have been settled out of court.


There have been repeated delays as defendants seek to have cases thrown out and argue that their bank was the victim of a bad economy — not negligence.

Critics say the FDIC should have moved faster to bring cases to the courts.

But agency officials argue that a thorough examination of misconduct is not quickly, or easily, achieved.

“We generally don’t have people come in saying, ‘We’re really sorry we caused the bank to fail, here’s a check,’ ” said Richard Osterman Jr., acting general counsel at the FDIC. “We have to investigate, uncover information, subpoena records, do depositions and often file actions.”

It usually takes the FDIC about 18 months to investigate a bank failure. If investigators identify misconduct by officers or directors, they must receive approval from the FDIC board before taking action. Osterman said the agency tries to settle with executives, which can take time, rather than go through expensive litigation. But many cases end up in court.

“Federal litigation is inherently a slow process,” said Mary Gill, a partner at Alston & Bird, who specializes in director and officer, or D&O, litigation. “There have been discovery disputes that have arisen in many of the cases, which has somewhat slowed the pace of the litigation.”

Cases that were filed at the height of the financial crisis are now at the stage where attorneys are presenting expert reports or filing motions for summary judgement, Gill said. That means, she said, “in the next year, we can expect a number of cases coming to trial and key decisions from the courts.”

The longer it takes some of these cases to move through the courts, however, the less likely the FDIC will get all it’s asking for. Many claims are covered by liability insurance that banks take out for their directors and officers, but ongoing legal expenses will eat away at those policies.

“The insurance policies are wasting,” Osterman acknowledged. “The longer we litigate, the more those funds dissipate and there may be less available.”

Insurance companies have also become wary of settlement payouts in the face of rising bank failures. More carriers now won’t pay civil damages tied to a bank failure. This has made it more difficult for the FDIC to recover on some claims, though the agency can still seek redress by tapping personal assets of former bankers.

Industry experts and others following the FDIC’s litigation say the agency faces more challenges in bringing cases than it did during the savings and loan crisis of the 1980s. Back then, the FDIC filed lawsuits or reached settlements in roughly 24 percent of the more than 2,000 failures.

“Unlike the last crisis where there was clearly recklessness that directors should have been held liable for, this time it’s more poor judgment or inability to manage risk,” said Christopher Cole, senior regulatory counsel for the Independent Community Bankers of America, a trade group.

There was more blatant fraud involved in a lot of the bank failures during the thrift crisis, he said, making the path toward settlement a little easier. This time around, many directors say their banks were victims of the deteriorating economic conditions, not negligence.

They are also pointing fingers at bank examiners, including the FDIC, for endorsing their business plans in the run-up to the recession. Regulators considered the majority of the banks that collapsed healthy within two years of their demise, said David Baris, a partner at Buckley Sandler and the executive director of the American Association of Bank Directors, a trade group.

“It strikes me as very odd that the FDIC sues directors for things the examiners had reviewed thoroughly before the bank failed,” he said. “If these professionally trained examiners looked at the same loans as the directors and didn’t say, ‘You’re totally screwed up,’ that suggests that maybe it wasn’t so obvious.”

However, agency attorney Osterman said, “while regulators examine institutions for safety and soundness, the director is responsible for this on a day-to-day basis.”

In the lead-up to the crisis, many community banks relied on their boards to give the final okay on a number of loans, a move that some observers say placed directors in peril. Baris advises banks to keep those decisions in the hands of credit officers but says directors usually give their approval after the loans have been vetted.Baris said he is concerned that in its aggressive pursuit of former bank directors, the FDIC will inevitably discourage people from serving on bank boards.

Executives of community banks have borne the brunt of these lawsuits because of the sheer number of small bank failures. Community banks were more often felled by heavy concentrations in real estate, whereas risky bets on exotic derivatives and toxic pools of mortgages crippled big banks.

“When you sue directors like this, it could have a chilling effect on directors who remain in the industry in how they decide to make loans,” Baris said.

The FDIC has been judicious in filing lawsuits against former bank leaders, said banking attorney Ron Glancz of Venable. Its role as a bank receiver sets the FDIC apart from other banking regulators, many of which have come under fire for failing to hold executives responsible for their involvement in the financial crisis . Besides, banking attorneys say, it can be easier to pinpoint individual misconduct when an institution collapses.

“There’s a balance. They don’t sue in every case where there is a failure. They look for cases where there’s serious wrongdoing or breach of fiduciary duty or just neglect,” Glancz said.

Danielle Douglas-Gabriel covers the banking industry for The Washington Post.
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