FDIC Lawsuits Trending Upward


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. 

Fewer Directors and Officers Get Sued; Pace of Bank Failures has Slowed


cornerstone-0912-wp.pngThis is the third in a series of reports that examines statistics and offers commentary on the characteristics of professional liability lawsuits filed to date by the Federal Deposit Insurance Corporation against directors and officers of failed financial institutions.

  • In our May 2012 report, we had observed a decline in the seizures of banks and thrifts by the FDIC in 2012 relative to 2011 and 2010 levels. This decline has continued during the past four months. In the past four months, the FDIC seized 19 financial institutions. The pace of seizures in May through August is slightly less than the first four months of 2012, when the FDIC seized 22 institutions.
  • FDIC seizures in 2012 continue to be concentrated in the Southeast. Nine of the 41 institutions that failed this year were in Georgia. Since 2007, 84 institutions in Georgia have been seized, representing 18 percent of all failures. Florida has the second highest financial institution failure rate, with five failures in 2012 and 63 failures since 2007. Illinois and California follow, with 53 and 39 failures, respectively, since 2007.
  • Based on the FDIC’s estimates at the time of seizure, California—where financial institution failures have cost $21 billion since 2007—has the highest total estimated failure cost. Florida and Georgia each have more than $10 billion in estimated failure costs, followed by Illinois, Puerto Rico, and Texas.
  • While the pace of D&O lawsuits has increased in 2012 relative to previous years, the FDIC has filed new lawsuits in the past four months at a significantly slower rate than in the first four months of the year. Only three lawsuits were filed in the last four months compared with 11 in the first four months of the year.
  • To date, 7 percent of financial institutions that have failed since 2007 have been the subject of FDIC lawsuits. These lawsuits generally have targeted larger failed institutions and those with a higher estimated cost of failure. The 31 financial institutions targeted in lawsuits had median total assets of $836 million, more than 3.5 times the median size of all failed institutions and more than five times the median size of institutions active at mid-year 2012.
  • Defendants named in the 32 lawsuits the FDIC has filed since 2007 included 266 former officers and directors.

For a full copy of the latest report, click here.