FDIC litigation activity associated with failed financial institutions has increased markedly in the fourth quarter of 2012, after a lull during the second and third quarters of the year, according to Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial Institutions—December 2012, a report authored by Abe Chernin, Catherine J. Galley, Yesim C. Richardson, and Joseph T. Schertler of Cornerstone Research. The report is the fourth in a series analyzing the characteristics of professional liability lawsuits filed by the Federal Deposit Insurance Corporation against directors and officers of failed financial institutions. As of December 7, the FDIC has filed 23 lawsuits this year—compared with 16 in 2011 and two in 2010.
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Nine 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, although the lawsuits filed in the second half of 2012 have been against smaller institutions.
Defendants named in the first 41 lawsuits filed since 2010 have included 324 former directors and officers. The FDIC has authorized litigation against 700 individuals and involving 84 institutions, with up to 392 former directors and officers awaiting a decision whether the FDIC will file a lawsuit against them. “This backlog of authorized lawsuits suggests that the FDIC is seeking to increase pressure on directors, officers, and their insurance carriers,” said one of the report’s authors, Katie Galley, a senior vice president of Cornerstone Research. “Unless the disputes are resolved during negotiations and mediations, this backlog of authorized lawsuits, the FDIC’s recent success in the IndyMac trial, and the approaching end of the statute of limitations for making a claim against the numerous institutions that failed in 2009 and 2010 suggest that substantially more FDIC cases may be filed in upcoming months,” added Galley.
The pace of failures and the pattern of litigation activity suggest that lawsuits related to the 2008 financial crisis will continue to be filed into 2013.The nine lawsuits filed this quarter have included allegations of negligence and gross negligence, and three included allegations of breach of fiduciary duty.
Trial Result in IndyMac Bank Case
On December 7, 2012, a jury in federal court in Los Angeles found three former officers of IndyMac Bank (IndyMac) liable for $169 million in damages in connection with 23 loans. This was the first D&O lawsuit filed by the FDIC after the 2008 financial crisis and the first to go to trial. The case was brought against four former officers of IndyMac. At the time of trial only three individuals remained in the case. The fourth settled with the FDIC earlier in the year for $4.75 million. Trial began on November 6, 2012, with 16 days of testimony, and concluded on December 6. The FDIC’s most recent estimate of the cost of IndyMac’s failure was $13 billion—the highest among the 467 banks that have failed since 2007.
On December 14, 2012, in a separate case the FDIC settled with the former CEO of IndyMac. The agreement called for the CEO to pay $1 million from his personal funds and for D&O insurance to pay $11 million. The insurers were not parties to the agreement. It is therefore unclear to what extent the FDIC will be successful collecting on the portion to be paid by insurance given numerous other claims to the limited insurance proceeds.
- On October 31, 2012, the FDIC, as receiver for Colonial Bank of Montgomery, Alabama, brought a lawsuit against PricewaterhouseCoopers, the bank’s external auditor, and Crowe Horwath, which provided internal audit services. This is the first FDIC lawsuit since the 2008 financial crisis targeting the auditors of a failed financial institution. The claims include professional malpractice, gross negligence, breach of contract, and negligent misrepresentation, with claimed damages in excess of $1 billion.
- Three settlements of D&O lawsuits have been publicly announced in the three months since Cornerstone Research’s previous report. As of November 20, 2012, six lawsuits have settled. Two others related to IndyMac were resolved in the intervening weeks. Details can be found in the full report. This report is also available on BankDirector.com.