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Board Issues : Liability

FDIC Lawsuits Trending Upward

May 8th, 2013 |

4-8_Cornerstone.pngIf the current pace of Federal Deposit Insurance Corp. (FDIC) lawsuits against directors and officers of failed institutions continues, 39 lawsuits will be filed in 2013—more than any year since the financial crisis began. As the number of filed lawsuits increase, the number of new failures has decreased. The most commonly named defendant in an FDIC lawsuit continues to be the chief executive officer.

These are some of the Cornerstone Research authors’ findings in their fifth in a series of reports that analyze the characteristics of FDIC professional liability lawsuits filed against directors and officers (D&O) of failed financial institutions.

In brief:

  • At least 12 FDIC D&O lawsuits have been filed in 2013, 10 in the first quarter and at least two in the first three weeks of April. The pace of filings in the first quarter of 2013 slowed slightly in comparison with the 12 filed lawsuits in the fourth quarter of 2012, but is higher than any previous quarter in 2010, 2011, or 2012. If the filing of new lawsuits continues in 2013 at the pace observed through the third week of April, 39 lawsuits will be filed this year—more than any year since the financial crisis began.
  • FDIC seizures of financial institutions continued to decline so far in 2013 compared with 2012. Eight institutions have been seized as of April 22, 2013. Since 2007, 476 financial institutions have failed.
  • Institutions that are subject to D&O litigation have historically been larger (in terms of assets) and have had higher estimated costs of failure than the average failed financial institution. While this was not true in the second half of 2012, the FDIC’s recently filed D&O lawsuits have again, on average, targeted larger failed institutions.
  • Chief executive officers continue to be the most commonly named defendants. They have been named in 88 percent of all filed complaints and 10 of the 12 lawsuits in 2013. Chief financial officers, chief credit officers, chief loan officers, chief operating officers, and chief banking officers are other commonly named defendants. Outside directors have been named, frequently along with inside directors, in 75 percent of all filed complaints and nine of the 12 lawsuits filed in 2013.
  • The FDIC has recently begun to publish settlement agreements related to its professional liability cases. Based on the settlement agreements we have reviewed, the FDIC has obtained aggregate settlements of $601 million—$115 million attributable to filed D&O lawsuits, $216 million attributable to claims involving D&Os that did not result in a filed complaint, and $270 million attributable to claims against professional firms and non-D&O individuals associated with failed financial institutions.
  • Since the December 7, 2012, trial verdict of three former officers of IndyMac’s Homebuilder Division resulting in a $169 million award, the parties have filed post-trial briefs on the applicability of pre- and post-judgment interest. The court has ordered that both are appropriate. A mediation to address remaining issues is scheduled for May. The D&O insurance carrier will participate in the mediation. 

Abe Chernin is a senior manager in the San Francisco office of Cornerstone Research.

Catherine J. Galley is a senior vice president in Cornerstone Research’s Los Angeles office.

Yesim C. Richardson is a vice president in Cornerstone Research’s Boston office.

Joseph T. Schertler is a senior consultant in Cornerstone Research's Menlo Park office.

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