This is the second in a series of articles that examines statistics and offers commentary on the characteristics of professional liability lawsuits filed to date by the Federal Deposit Insurance Corporation (FDIC) against directors and officers of failed financial institutions. Here is a summary of some of our findings. For a full report with charts, click here.
Seizures of banks and thrifts by regulatory authorities have subsided in 2012 relative to the levels in 2011 and 2010. From January through late April 2012, 22 financial institutions have been seized. If the current pace of seizures continues throughout the year, 69 financial institutions will be seized in 2012, compared to 92 seizures in 2011 and 157 seizures in 2010. In contrast, the FDIC has been intensifying its litigation activity associated with failed financial institutions, filing 11 lawsuits through late April 2012, compared with 16 lawsuits in all of 2011. If filings continue at the current pace, an additional 24 lawsuits will be filed this year.
Overall, from July 2, 2010, through April 20, 2012, the FDIC filed 29 lawsuits against directors and officers of 28 failed institutions. As we observed previously, these lawsuits continued to target the officers and directors of financial institutions that had a large asset base and a high estimated cost of failure. Aggregate damages claimed in the complaints totaled $2.4 billion and were typically based on losses related to commercial real estate (CRE) lending, and acquisition, development and construction (ADC) lending.
Summary of Findings
- To date, 6 percent of financial institutions that have failed since 2007 have been the subject of FDIC lawsuits. The 28 financial institutions targeted in lawsuits had median total assets of $973 million, compared with median total assets of approximately $241 million for all failed institutions. Six of these institutions had total assets of more than $3 billion. An additional seven had total assets between $1 billion and $3 billion. None had assets less than $100 million.
- Geographically, the largest concentration of financial institution failures between 2007 and April 2012 occurred in Georgia, Florida, Illinois and California. The percentage of FDIC lawsuits targeting failed institutions in Georgia, Illinois and California is similarly high and in fact, slightly higher than the percentage of failed institutions in these states. Florida is currently the exception, with only one FDIC lawsuit related to the failure of a Florida institution.
- Defendants named in the 29 filed lawsuits included 239 former directors and officers. In nine of these cases, only inside directors and officers were named as defendants. Outside directors were named as defendants in addition to inside directors and officers in the remaining 20 lawsuits. CEOs were named as defendants in 26 cases. Other officers commonly named as defendants included CFOs (five cases), chief loan officers (nine cases), chief credit officers (nine cases), chief operating officers (six cases), and chief banking officers (two cases). In addition, three lawsuits named insurance companies as defendants, and one case identified a law firm as a defendant. Three cases also included spouses of the directors and officers as named defendants. Although we do not address separate suits that may be brought only against other associated parties, such as accountants, appraisers or brokers, these parties are also potentially subject to litigation by the FDIC.Allegations of negligence, gross negligence, and breach of fiduciary duty were made in 26, 26 and 23 of the lawsuits, respectively.
Losses on CRE and ADC loans were the most common bases for alleged damages. Seventeen of the complaints identified CRE loans as a basis for the damages claim and fifteen identified ADC loans as a basis. Despite the widespread problems in residential lending and residential real estate markets, fewer lawsuits focused on those types of lending.
As of April 27, 2012, three of the 29 lawsuits have settled:
FDIC as Receiver of Corn Belt Bank and Trust Company v. Stark et al. settled on May 24, 2011, with settlement details remaining undisclosed.
FDIC as Receiver for First National Bank of Nevada v. Dorris and Lamb, which claimed damages of $193 million, settled on October 13, 2011, with the two officers and director defendants each agreeing to pay $20 million. The defendants assigned their rights to collect from the insurer to the FDIC. The FDIC’s success in collecting from the insurer is unknown.
FDIC as Receiver for Washington Mutual Bank v. Killinger et al. agreed to settle in late-2011 with three former executives agreeing to pay $64 million in total. The case was dismissed by the court on April 26, 2012.
About the Authors
Abe Chernin is a senior manager in the San Francisco office of Cornerstone Research; Catherine J. Galley is a senior vice president of Cornerstone Research in the firm’s Los Angeles office; Yesim C. Richardson is a vice president in the firm’s Boston office; and Joseph T. Schertler is a senior consultant in the firm’s Menlo Park office.