FAST Act Extends Popular JOBS Act Registration Threshold to S&Ls

Written by


JOBS-Act-2-1-16.pngOn December 4, President Obama signed the Fixing America’s Surface Transportation Act, or the FAST Act, which included several amendments to federal securities laws. Among the changes, the law amended Section 12(g) of the Securities Exchange Act of 1934 so that savings and loan (S&L) holding companies will be treated in the same manner to banks and bank holding companies for the purposes of registration or suspension of their Exchange Act reporting obligations. Not too long ago, the Jumpstart Our Business Startups (JOBS) Act raised the threshold under which a bank or bank holding company may terminate its Securities and Exchange Commission (SEC) registration and reporting requirements to 1,200 shareholders of record from 300.

One thrift, Alpena, Michigan-based First Federal of Northern Michigan Bancorp, which has $338 million in assets, has already taken advantage of the new ruling and voluntarily deregistered and de-listed its stock from the NASDAQ stock market on December 18. The company’s stock now trades on the OTCQX market, the top tier of the over-the-counter markets operated by OTC Markets Group Inc.

In its press release about the rule change, the bank said that “the continuing increased costs and administrative burdens of public company status, including our reporting obligations with the SEC, outweigh the benefits of public reporting.”

The bank said it will continue to file quarterly interim financial statements and provide its shareholders with an annual report with audited financials, among other items, all of which are requirements on the OTCQX market.

The JOBS Act Deregistration and De-Listing Wave
Twenty banks and bank holding companies have deregistered and de-listed from a national stock exchange since the passage of the JOBS Act. Approximately half have moved to the OTCQX market.

Most banks have cited the high costs and regulatory compliance of being an SEC reporting company as the reason for their decision, as well as the ability to focus more of management’s time and resources on growing the business.

In a letter to shareholders following its de-listing, First Federal of Northern Michigan Bancorp said that deregistering and de-listing it shares would allow its management team to “spend more of its time focused on the core operations of the bank, including strategic planning and market expansion, thereby helping to create shareholder value.”

Wheeling, VA-based First West Virginia Bancorp, Inc., with $347 million in assets, said in an October 26 press release that deregistering and de-listing its securities from the New York Stock Exchange’s NYSE MKT market would allow its senior management “to devote more time and resources to focus on customers and profitable growth of the [c]ompany as opposed to the considerable time and effort necessary to manage compliance with SEC reporting requirements.”  The company’s stock now trades on the OTCQX market under its same symbol, FWVB.

Attorney’s fees, printing costs and exchange listing fees aren’t the only expenses banks stand to save from by de-listing from an exchange. Directors and officers (D&O) liability insurance is also higher for SEC-registered companies than for non-SEC reporting companies and can provide a significant cost savings to smaller banks.

Trading on the OTC Market Versus on a National Stock Exchange
The unique structure of the OTC market, which is based on a network of broker-dealers rather than a centralized matching engine, can also help reduce volatility in the trading of small bank stocks and provide better visibility into trading activity.

“For a very thinly traded bank on NASDAQ, a trader may not want to commit capital to inventory 20,000 shares of stock when those shares may represent six weeks’ worth of volume, and computers are changing the bid and ask every few minutes. Maybe that capital is better committed someplace else. Don’t get me wrong, NASDAQ is a fantastic place to be but maybe not for some of the more illiquid banks,” says Tom Dooley, senior vice president of Institutional Sales at Boenning & Scattergood.

On OTCQX, banks are required to appoint a FINRA-member broker-dealer who can provide guidance on the trading of their stock, as well as help facilitate relationships with institutional investors, investment bankers and other key market participants. OTCQX bank advisors can also help their clients handle changes in their shareholder base and correct imbalances between the number of buyers and sellers of their stock.

Small S&L companies that are interested in taking advantage of the new law should examine the various costs and benefits to their business and their shareholders. There is much to be gained from deregistering and de-listing your securities if you do it the right way.

Underwriters Focusing on Rising M&A Claims and BSA Enforcement

Written by


Serving on a bank board comes with a lot of liability. State courts have decided that even independent, part-time directors can be guilty of gross negligence when their banks fail, for example. Directors often get sued by shareholders following an acquisition. And regulatory authorities can levy their own fines against individuals who serve on bank boards for the bank’s violations of regulatory rules. Bank Director magazine talked to Dennis Gustafson of AHT Insurance about the trends of particular interest to the board, such as directors and officers (D&O) liability insurance and cyber policies.

What trends are you seeing in claims?
We are seeing a shift. Last year at this time, the number one D&O claim was from the Federal Deposit Insurance Corp. (FDIC) relating to failed banks. A lot of these banks failed three to six years ago, so we are starting to see a decrease in those claims and M&A claims are on the rise as M&A activity heats up and as attorneys find opportunities to sue. If you are a public company getting acquired and have a market cap of greater than $100 million, there is a 97 percent chance of a lawsuit. The allegations are you didn’t do enough due diligence, you didn’t get a high enough price or you didn’t notify [shareholders] in an appropriate manner. Typically, the only impact of the lawsuit is an updated proxy statement but $500,000 to $1 million could be spent, mostly on legal fees. For those banks with more than $1 billion in assets, if there is any likelihood of the bank being acquired, the underwriter may require a separate, and higher, deductible for M&A claims.

Another shift in claims trends is in the cyber liability arena. It used to be the most frequent cyber claim was for notification costs after a breach of cybersecurity, because state laws require you to notify your customers of a breach. However, since more states are allowing for e-mail notification, the notification costs are decreasing and as such, so is the claim severity related to those notifications. In lieu of notification costs, we are seeing more and more claims relating to forensics, where the bank has to investigate the breach, why it happened and how, and sometimes hiring consultants to do these investigations can get very expensive.

What coverages are afforded in a typical cyber insurance policy?
In addition to coverage for notification costs and forensics, the typical cyber liability policy reacts to a lawsuit or demand from a customer or group of customers arising from a breach in network security. From there, coverages can differ based on the policy form and options offered. Some additional extensions of coverage include:

  • when a hacker accesses your client information and requests a ‘consulting fee’ or they will release the information
  • loss of revenue stemming from a network breach
  • a breach of physical security (i.e. dumpster diving or a lost laptop)

What changes are you are seeing from underwriters?
In previous years, most underwriter questions related to asset or loan quality. Now, we are seeing more questions related to the Bank Secrecy Act, wire transfer policies, and anti-money laundering programs. Common questions include: For wire transfers, what policies are in place relating to call backs [to confirm the authenticity of the transfer]? What controls do you have in place to protect the bank against money laundering? Are there any new hires or new procedures relating to bank secrecy?

What question do you hear most from bank directors?
The question I get most is about the gap in coverage for civil money penalties. The civil money penalty is assessed by the FDIC against the bank or against individuals if the FDIC perceived that those individuals did not work in the best interest of the customer. The most common allegation is gross negligence and more often than not, it is related to a loan or to a bypass in procedures. The FDIC put out a letter last October explicitly clarifying that if bank directors or officers were assessed a civil money penalty, they cannot be covered by the bank’s insurance or be indemnified by the bank. With that said, it would not be out of compliance with the guidelines if the individual were to purchase a policy on his or her own dime just to cover civil money penalties. The average civil money penalty was $51,250 and the median was $25,000 since 2012. The FDIC assesses the vast majority of these penalties.

Why should directors be worried about civil money penalties?
Most people do not join a board of a community or regional bank for the little or no compensation they may earn. The last thing they want is to have any of their decisions or activities possibly cost them out of pocket.

Getting Insurance for Civil Money Penalties

Written by


9-17-14-AHT.pngFor 20 years, banks have been buying insurance that covers civil money penalties (CMP) levied against directors and officers, the fines regulators sometimes impose on individuals and institutions for alleged wrongdoing. Commonly, this coverage is offered under the bank’s directors and officers (D&O) liability policy with a sub-limit of $100,000 per individual with a $1 million total limit and no deductible. Interestingly enough, the entire time this coverage was being offered, Part 359 of the FDIC Act has been in effect, stating that these penalties can’t be insured or indemnified by the bank. Then, in October of 2013, the Federal Deposit Insurance Corp.’s FDIC letter FIL-47-2013, made it explicitly clear that the bank can’t insure or indemnify civil money penalties on the bank’s D&O policy, leaving every bank director and officer exposed. This letter was sent by the FDIC to all institutions with total assets of less than $1 billion.

Insurance Reaction
The D&O insurance carriers came up with a solution at the time. They reiterated that the CMP endorsement was applicable to state and regulatory laws and that they would be happy to remove the endorsement at the request of the insured. Simply removing the CMP endorsement does accomplish two goals:

  • The bank’s D&O policy thereby becomes compliant with the FDIC letter.
  • Since a CMP would be considered a formal proceeding, the policy would offer legal costs coverage associated with the defense of the CMP. This extension of defense costs coverage would be available for the entire D&O policy’s limit of liability but only after the applicable deductible amount has been reached (which typically ranges from $25,000 to $100,000 for banks with less than $1 billion in assets).

Considering that the median CMP assessed against an individual D&O within the past 18 months was $25,000, there still was a demand for another option. Many carriers were willing to create a new CMP endorsement. The endorsement was similar to the original in that it continued to offer $100,000 of protection for each insured person with a $1 million aggregate for the entire board. The endorsement would specifically state that coverage was afforded for defense costs, but not for the penalty itself and it was available with either a $0 deductible or a very low deducible amount. The benefits of this type of endorsement is that it is in compliance with the FDIC letter since it specifically states that the penalty is not covered and it offers coverage after a very low deductible amount. The downside of this endorsement versus having no endorsement on your D&O policy is that there are lower limits for the CMP coverage ($100,000 per individual versus the full policy limits). Most banks I work with recognize that CMPs are much more likely to get resolved at a low dollar amount and thus they prefer the lower deductible/lower limit option. However, regardless the option, there was still a void of coverage for the actual penalty itself; that is until recently.

New Coverage Available
AHT and Lloyds of London recently began offering a third option: a separate policy that does cover CMP. What distinguishes this policy is that it is bought and paid for by the director or officer wishing to get insurance to cover his or her personal liability, not the bank. This new policy is structured as follows:

  • The policy will be in the name of the individual and would cover all of the bank boards he/she sits on
  • The policy is written with a $0 deductible and offers limits ranging from $50,000 to $250,000
  • The policy covers only the penalty and does not include defense costs coverage

The application must be completed by the individual. Coverage would not be in place until the premium is paid (by the individual) after which a policy will be issued to either the individual’s home address or personal e-mail address. Here is a sample of the policy wording. So bank officers and directors do have options now if they want some kind of coverage for civil money penalties. The liability of serving on a bank board these days is significant, and it pays to research your options.

FDIC D&O Lawsuits Surge in 2013

Written by


2-19-cornerstone-research.pngFederal Deposit Insurance Corporation (FDIC) litigation activity associated with failed financial institutions increased significantly in 2013. The FDIC filed 40 director and officer (D&O) lawsuits in 2013, compared with 26 in 2012, a 54 percent increase from 2012. The pace of new lawsuits in 2013 slowed in the fourth quarter to only three, however, compared with 10, 15, and 12 in the preceding quarters. 

These findings are included in “Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial Institutions—February 2014,” a Cornerstone Research report.

Analysis
The surge in FDIC D&O lawsuits in 2013 stems from the high number of financial institution failures in 2009 and 2010. Of the 140 financial institutions that failed in 2009, the directors and officers of 64 (or 46 percent) have either been the subject of an FDIC lawsuit or have settled claims with the FDIC prior to the filing of a lawsuit. For the 157 institutions that failed in 2010, 53 (or 34 percent) have either been the subject of a lawsuit or have settled with the FDIC.

The FDIC’s D&O lawsuits in 2013 particularly focused on the largest institutions that failed in 2010. Of the largest 20 failures in 2010, 15, or 75 percent, have already been subject to FDIC lawsuits or settled claims with the FDIC.

Claimed Damages
From the beginning of 2010 to the end of 2013, the FDIC has filed 84 D&O lawsuits. It has explicitly stated damages amounts in 77 of the 84 complaints against directors and officers of failed financial institutions, for a total of at least $3.8 billion in claimed damages. While nearly half of the 84 lawsuits were filed in 2013, only $1.2 billion, or 32 percent of the FDIC’s claimed damages, is attributable to the lawsuits filed in 2013. This pattern mirrors the relatively smaller size of the institutions that that were the subject of 2013 D&O lawsuits.

Defendants and Charges
Inside and outside directors, together, have also routinely been named as defendants in FDIC D&O lawsuits. This pattern continued in 2013 (75 percent of lawsuits filed in 2013). Outside directors were exclusively named as defendants in rare instances and only in lawsuits filed in 2013 (8 percent). Somewhat more common were lawsuits in which only inside directors were named (15 percent of 2013 lawsuits, compared with 23 percent of lawsuits filed before 2013).

Chief executive officers continue to be the most commonly named officers in FDIC D&O lawsuits. The FDIC named CEOs in 83 percent of the complaints filed in 2013. In contrast, chief credit officers, chief loan officers, chief operating officers, or chief banking officers were named in 43 percent of the 2013 lawsuits.

All 40 lawsuits filed in 2013 included allegations of gross negligence, and 32 included additional allegations of negligence. Thirty-five of the 40 lawsuits included allegations of breach of fiduciary duty.

Settlements
Of the FDIC’s 84 D&O lawsuits, at least 17 have settled in whole or in part and one has resulted in a jury verdict. The FDIC has also settled disputes with directors and officers prior to the filing of a complaint. Settlement agreements published by the FDIC indicate that in at least 82 instances, the agency has resolved disputes with directors and officers. In these settlements, as many as 38 agreements, or 46 percent, required payments by the directors and officers. Directors and officers agreed to pay at least $34 million in these cases. 

Future Trends
While the FDIC’s filings of new D&O lawsuits hit a lull in the fourth quarter of 2013, new filings are unlikely to continue at such a slow pace in the first half of 2014. Three lawsuits have already been filed in January, and as motions and discovery unfold in existing lawsuits, this year will be interesting to follow. For example, a recent ruling in the U.S. Court of Appeals for the Eleventh Judicial Circuit pertinent to the many Georgia-based lawsuits allows directors and officers to assert defenses related to the FDIC’s post-receivership conduct that will directly affect loss causation and damages arguments. These types of judicial rulings may greatly influence the relative negotiating strength of the FDIC and defendants. How this ruling and others like it affect the likelihood of settlements may determine whether we see protracted litigation in the FDIC’s D&O lawsuits or movement to settle cases earlier.

Helping Protect Your Personal Assets as a Bank Director or Officer

Written by


12-17-13-Zurich.pngThe volume of bank failures and ensuing litigation arising from the financial crisis reminds us of the importance of understanding insurance policies that provide coverage for directors and officers. Specifically, a director or officer could be personally liable in shareholder lawsuits, state and federal actions and a wide range of other bank-related problems.

There are typically three types of directors and officers (D&O) liability insurance: Side A, B-side and C-side coverage. C-side coverage is for the company itself. B-side coverage provides insurance protection for directors and officers when the company indemnifies them, such as offering indemnification against shareholder lawsuits in the company’s by-laws. Side A D&O liability insurance covers directors and officers for loss and defense costs that are not indemnified by the company, perhaps because laws forbid indemnification or because the company is financially unable to provide indemnification. As a director or officer, your personal assets may become vulnerable in the event that the company fails or refuses to indemnify you. There are three main factors impacting the company’s willingness and ability to indemnify a director or officer for these costs:

  • The scope of indemnification provisions provided in the company’s own by-laws
  • The permissibility of indemnification of judgments and settlements pursuant to the law of the state in which the company is incorporated
  • The financial ability of the company to provide indemnification

Beyond the company’s by-laws, indemnification is not guaranteed. Each state has its own statute regarding the indemnification of judgments and settlements in derivative suits brought by shareholders against directors and officers. These statutes may override a company’s by-laws. In addition, if the company is financially impaired, it may be unable to indemnify its directors and officers. In each case, the directors and officers may be exposed. Side A coverage is an added layer of insurance protection for unforeseen circumstances.

Still, there are a variety of other exposures banks can buy insurance to cover. One viable option is an excess Side A/DIC (difference in conditions) policy, in addition to the base D&O policy. A DIC policy may provide coverage when an underlying insurer fails, refuses to indemnify or is not liable for the loss after applying the terms and conditions of its policy. Such excess policies are offered by a wide array of insurance carriers, and generally contain fewer exclusions than the base policy. The excess Side A/DIC policy includes various features of coverage that would be of particular interest to an individual serving on a bank’s board. A few highlights are as follows:

  1. Payment of compensation clawback costs if the company must clawback a portion of an executive’s pay as required by the Dodd-Frank Act or the Sarbanes-Oxley Act.
  2. Situations in which a DIC (difference in condition) trigger event occur, which would be clearly defined in the policy form.
  3. Coverage for derivative actions brought by shareholders against directors and/or management, as state law sometimes prohibits the company from indemnifying defense costs or settlements/judgments arising from derivative actions.

The use of a properly written Side A policy often serves as the extra layer of insurance protection to the members of a board, and in most cases the final safeguard of your personal assets. When discussing your D&O policy with your insurance broker, be sure to pay particular attention to the areas where you may be exposed without insurance at all.

This article is provided for informational purposes only. Zurich is not providing legal advice and assumes no liability concerning the information set forth above.

Civil Money Penalties: Figuring Out How Your D&O Policy Responds

Written by


Update from the author:
On Thursday, October 10, 2013, many Federal Deposit Insurance Corp. (FDIC)-supervised banks received a Financial Institution Letter regarding directors and officers (D&O) liability insurance. It brings up two distinct points:

First, the FDIC recommends that every director and officer is fully versed in the terms, conditions and exclusions of the D&O policy that is put into place for the bank. It also states that the individuals should be aware of any negative language changes from previous years’ D&O renewal. Second, the FDIC goes on to clearly and specifically prohibit any bank from including, as part of the D&O policy, any coverage grants that would be used to pay or reimburse for any civil money penalties (CMP). This explicit language on such a global scale is new and we are now recommending that banks do not include any CMP endorsements that specifically offer coverage or indemnification for civil money penalties or judgments. With that said, we have reviewed the entire statute, and it states that insurance can be used to cover expenses. It specifically says that insurance “…may pay any legal or professional expenses incurred in connection with such proceeding or action.” This is also consistent with our discussion with an FDIC representative. So we continue to recommend some type of affirmative coverage grant for defense costs associated with a CMP action, understanding that the coverage will not indemnify for the actual penalty or judgment.

The D&O Mess

For the past 20 years, directors and officers (D&O) underwriters have been offering civil money penalty endorsements to the D&O policies of their banking clients. This endorsement traditionally provides coverage for claims arising from civil money penalties against an insured person (director or officer) by a bank regulatory agency. Typically, it is offered with a sub-limit of $100,000 per insured person with a $1 million aggregate limit.

Interestingly enough, the entire time this coverage was being offered, since 1996, Part 359 of the FDIC (Federal Deposit Insurance Corp.) Act has been in effect. This statute basically states that the bank cannot purchase an insurance policy that would be used to pay a director or officer for the cost of any judgment or civil money penalty and that the individual cannot be indemnified by the bank for payment of such penalty or judgment.

The way some banks have addressed this was to charge each director and/or officer some small amount correlating to the cost of this coverage. This would allow the bank to show documentation that the individual paid for this coverage and thus the FDIC would not object.

This is how it progressed until the summer of 2011, when the FDIC issued citations against several banks in Louisiana stating that the civil money penalty endorsement on the D&O policy violated FDIC section 359. So it was the actual endorsement which was intended to protect the directors and officers for civil money penalties that caused the citations.

Impact on the Market

To get a real sense of the level of uncertainty, all you need do is look how the different insurance carriers are handling civil money penalty (CMP) coverage. Some carriers will no longer offer the CMP endorsement. Some offer an endorsement that pays for expenses (such as legal fees) but not the actual penalty and others are offering the same coverage grant they have been for the past 20 years, which is intended to cover the actual penalty and the associated expenses. Brokers are advising their banking clients to have the individual directors and officers pay their pro-rated cost for the endorsement. The cancelled personal checks should be saved as proof of personal payment.

The next logical question is how much is the allocated cost for the endorsement? This is a key piece of information for the CFO/risk manager so that he or she knows what to charge the directors and officers. Some carriers are unable to provide a cost, stating that it would violate their rating plans with the states. Other carriers are willing to provide an estimate, with an understanding that there would not be a reduction to their policy premium if the bank wanted to remove this coverage. As I talk with the underwriting community, I see costs for the CMP endorsement range from as low as $25 per director, to as high as $100 per director per year.

As far as alternative options, there was an initial thought that some carriers would create a standalone civil money penalty policy that can be purchased by the individuals looking for this coverage. In order for this solution to become reality, the carriers would have to go through the arduous process of getting it approved by the states and charge a price that is significantly higher than what the directors are paying now, which would limit the opportunity. Another interesting note is that since the initial citations began roughly 18 months ago, I have not seen any more circumstances where the FDIC issued fines relating to this coverage grants.

This article has been modified from an earlier version.

What to Ask About Your D&O Policy

Written by


Martin-Ernest.jpg

Ernest Martin
Haynes Boone LLP

The board must determine whether the company’s D&O policy was negotiated to provide the broadest coverage at the best price, since the policy is subject to negotiation. More specifically, the board should at least ask the following:

  1. Does it protect board members from having to pay the policy’s retention if the company fails to do so?
  2. Does it have broad definitions of key terms such as “claim,” “loss,” and “wrongful act?”
  3. Does it minimize the effect of exclusions such as “bad conduct,” “prior notice,” and “insured v. insured” exclusions, which reduce or eliminate coverage?
  4. Does it maximize coverage for board members even if the company goes bankrupt?
  5. Does it have unfavorable alternative dispute resolution clauses?
Porterfield-Scott.png

W. Scott Porterfield
Barack Ferrazzano

In a nutshell, ask if the policy limits match both your risks and your peers’ insurance coverage. Has a D&O insurance broker experienced with banks reviewed the policy and advised on the important limitations and exclusions in the policy and has experienced counsel done the same with both the broker and the board? Is the policy a duty to defend policy? (i.e. Who gets to select counsel to defend the directors and officers?) Because D&O insurance is a backstop for your corporate indemnification, is the company’s indemnification provision as broad as possible? Of particular note for any bank in dire capital position and, thus, a candidate for failure, does the policy contain a “regulatory exclusion” andor an “insured versus insured” exclusion that might exclude coverage for claims brought by the Federal Deposit Insurance Corp. (FDIC), as receiver of the bank?
Williams_Marcus.png

Marcus Williams
Davis Wright Tremaine LLP

Boards should be particularly focused on the coverage exclusions. For example, D&O policies have traditionally excluded coverage for securities fraud judgments, and ordinarily those exclusions will also provide for recoupment of the carrier’s prior payments of defense costs if there’s ultimately a finding that the carrier is not liable. More recently, we have seen policies that exclude securities claims altogether (as distinguished from final judgments), which may permit the carrier to avoid paying defense costs prior to a final judgment. Because of the extraordinarily high defense costs often associated with securities claims, the resulting burden can impose serious hardship on individual directors and executive officers, and even on the company (which usually will be required to indemnify the directors and officers until the entry of an adverse judgment). Regulatory actions are also increasingly excluded from policies, although in addition to policy limitations, directors and executives should be aware of laws that impose strict substantive and procedural requirements for indemnity and advancement of expenses for enforcement actions and resulting liabilities. Lastly, many of the more reputable insurance carriers—but not necessarily all of the best-known ones—will advance defense costs subject to what’s known as a “reservation of rights,” which allows the carrier to recoup prior advances if, ultimately, there’s a determination that the liability was not covered.
Robert-Monroe.jpg

Bob Monroe
Stinson Morrison Hecker LLP

The key questions for the board to ask are:

  1. What acts are excluded from coverage?
  2. Does coverage terminate on a change of control?
  3. What are limits for “tail” coverage or can you even buy it in the event of policy change or change in control?
  4. Do we have side A and B coverage?
  5. When and for what reasons can the insurer terminate coverage?
Vartanian_Tom.png

Thomas Vartanian
Dechert LLP

Directors should have the answers to the following questions about the company’s D&O policy:

  1. What are the current limits of liability, and are they sufficient to cover legal fees, judgments and settlements, given current standards for each?
  2. Are regulatory enforcement actions, civil money penalty assessments and securities litigation covered, or are there exclusions that impact these kinds of claims?
  3. How long has the policy been in place and what is the experience with the company on claims that have been made?
  4. What are the claims notification requirements of the policy?
  5. How does the policy dovetail with indemnification to directors and officers provided by the company in its bylaws so that there will not be gaps?
  6. How do the D&O policies work with regard to service on the board of the parent, one or more subsidiaries, or both?
Eichman-John.png

John Eichman
Hunton & Williams LLP

The D&O insurance world has changed since the financial crisis. Among many questions, directors should ask:

  1. What “wrongful acts” does the policy cover? Some carriers contend if there’s an adverse judgment for anything other than negligence, there’s no coverage.
  2. Are policy limits sufficient? Defense costs can consume limits.
  3. Is there a regulatory exclusion? Avoid this if possible.
  4. Is there protection for securities claims and cyber liability?
  5. Should our bank buy the extended reporting period under an expiring policy? Probably so, if you are changing carriers or the current carrier is issuing a narrower policy.

FDIC Lawsuits Increase in Fourth Quarter, Many Target Smaller Banks and Thrifts

Written by


cstone-dec12-wp.pngThis is the fourth in a series of reports that analyzes the characteristics of professional liability lawsuits filed by the Federal Deposit Insurance Corporation (FDIC) against directors and officers of failed financial institutions.

Report Summary

  • The pace of FDIC D&O lawsuit filings has increased in the fourth quarter of 2012 compared to earlier in the year. The number of lawsuits filed in 2012 exceeds the total filed in 2010 and 2011.
  • On December 7, three former officers of IndyMac’s Homebuilder Division were found liable for $169 million in damages in connection with 23 loans. This was the first FDIC D&O lawsuit associated with the 2008 financial crisis to go to trial.
  • While there has been a continued decline in FDIC seizures throughout 2012, the number of problem financial institutions has not declined as rapidly.
  • Institutions that are subject to D&O litigation have historically been larger (in terms of assets) with higher estimated costs of failure than the average failed financial institution. The FDIC’s recently filed D&O lawsuits have targeted smaller institutions.
  • Named defendants primarily continue to be CEOs, then (in declining order of frequency) chief credit officers, chief loan officers, chief operating officers, chief financial officers, and chief banking officers. Outside directors continue to be named along with inside directors in a large majority of the new filings.
  • Regulatory management ratings and composite CAMELS (capital adequacy, asset quality, management, earnings, liquidity, sensitivity to market risk) ratings of institutions that are subject to D&O lawsuits do not appear to have deteriorated until one to two years before failure.