FDIC Sues Directors of Failed Bank

From an Article on the bank failure…

“Officers and directors of the failed Chico-based Butte Community Bank are being sued by the Federal Deposit Insurance Corp. for ‘negligence, gross negligence and breach of fiduciary duty.'”

“The FDIC filed a civil lawsuit in U.S. District Court for the Eastern District of California, in Sacramento, charging eleven individuals and trying to recover at least $8.8 million.”

Other info from the article:

-the closing cost FDIC $17.4 million.

-FDIC is trying to recover $8.8 million.

-eleven individuals are being sued, two are not – one resigned in 2009, the other died in 2010.

-The FDIC’s charges are that the bank,  “negligently, grossly negligently and in breach of their fiduciary duties failed to maintain adequate capitalization of the bank, improperly caused the bank to transfer funds and property to its holding company, failed to direct the business and affairs of the bank to insure safe, sound, and prudent principles of banking, and caused or contributed to an unwarranted depletion of capital, as a result of a May 2008 dividend, partially funded by a sale-leaseback transaction … that was used to repurchase 13 million shares of bank holding company stock from the defendants and others.”

Here is a key quote – one that I understand is common when the FDIC actually goes after individuals: “the FDIC said it (the bank) had not responded satisfactorily to federal guidelines to improve the bank’s condition, including assurances of qualified management, meeting capital requirements, and providing a three-year strategic plan. The bank had tremendous loan losses, largely related to real estate investment and transactions.”

The FDIC reported the bank’s assets at  $499 million.

I do not claim to be an expert in bank closings.  I have worked on a few.  I have also read extensively.  The common issue seems to be that early on in the process the FDIC finds that the bank is in trouble.  The FDIC tells the bank what needs to be done. If the board does not do those things the FDIC tells them to do, and the bank fails, the FDIC often (not always) goes after the bank. I understand that the FDIC does not often go after directors who have diligently implemented the remedial actions regulators prescribe.  Perhaps I’m naive.

Regulator lawsuits seem to come not from the failure of the bank or even from inept management.  Businesses fail, and banks are businesses.  The lawsuits from regulators come from self-dealing by directors and failure to implement the “suggestions” of the regulators.

I again point readers to the American Association of Bank Directors book, FDIC Director Suits: Lessons Learned.

Comments welcome – email me at Scott@ScottSimmonds.com.