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FDIC ramps up lawsuits against bankers: Dig inside the cases


By Flickr user Adam Fagen

The spate of 452 bank failures since 2007 left bankers from failed institutions more vulnerable to being sued by regulators than since the Savings & Loan Crisis of the 1980s and early 1990s.  Covering FDIC civil lawsuits can be tricky and complex, but very rewarding for reporters who want to dig into the details. While there have been few criminal cases, there are likely to be quite a few civil cases in the works.

The Federal Deposit Insurance Corp. sued directors and officers from about 24 percent of failed banks from 1985 to 1992. This time around, the agency has sued bankers from 32 collapsed institutions and approved lawsuits against a total of 73 banks, naming 617 former directors and officers as of August 14. Many more suits could be in the pipeline. The first step for reporters eager to dig into this area: check the FDIC’s list of authorized lawsuits to find local cases.

Philip van Doorn, a member of The Street’s banking and finance team, said most of the lawsuits will try to prove directors and officers are guilty of actual malfeasance rather than bad business judgment. “It’s a fine line,” he said.

As the agency responsible for insuring bank deposits up to $250,000 and managing the Deposit Insurance Fund, the FDIC has a mandate to recover money for the fund, van Doorn said. And bank closures are very costly — by some estimates the Deposit Insurance Fund lost nearly $90 billion from 2008 to 2011 on some 400 bank failures. The FDIC issued press release when a bank fails usually includes an estimate of how much the institution’s collapse will cost the Deposit Insurance Fund.

The Deposit Insurance Fund is financed by premiums banks pay for coverage, the profit it makes on investments in U.S. Treasuries, liquidating assets from lenders that have closed and by suing the former directors and officers of failed institutions. With so many bank failures, regulators are facing pressure to recover as much money as possible to build reserves for future closures. Van Doorn said the agency will try to recoup money in a cost-effective way. That means the agency will attempt to settle cases rather than going to trial.

It is unlikely most bankers will pay the civil fines out of their own pockets, he said. Instead, regulators are targeting the bankers directors’ and officers’ insurance policies. Bank directors and officers are required to have insurance to protect them from lawsuits tied to their performance, sort of like malpractice insurance for doctors. The policies also tend to have deeper pockets than individual directors and officers from failed banks.

When a bank failure costs the Deposit Insurance Fund more than $200 million, the Office of the Inspector General writes a report to determine causes of the bank’s failure.  The investigation also analyzes if regulators adequately worked to prevent the failure and the cost of the collapse. (Failures that occurred prior to January 2010 had a threshold of $25 million, rather than $200.) The OIG also writes a report on any failure it considers unusual or suspicious. These material loss reviews can provide great clues on whether a lawsuit may be authorized in the future.

Van Doorn said there has been a renewed focus on the quality of regulators’ appraisals , both going forward and in the years leading up to the financial crisis. “You can get a bank failure through no dishonest activity taking place,” said van Doorn, making it more difficult for regulators to separate bankers that were deliberately negligent from those that just made bad business decisions.

fdic headquarters

FDIC headquarters in Washinton D.C. Photo by FDIC.

There can be significant lag from the time a bank fails, the OIG report is written, and a lawsuit is eventually filed. That’s because as a receiver for failed banks, the FDIC has three years for civil claims and six years for breach-of-contract lawsuits from the time a bank is closed. Some states even have a longer statute of limitation on civil lawsuits.

If a lawsuit has been filed, reporters can find court documents by registering for an account with the Public Access to Court Electronic Records system. The court documents will often include exhibits that provide great clues for tracking down other sources. When I wrote a series on the FDIC lawsuit against former executives from First National Bank Holding Co. in Scottsdale, Ariz., I tracked down several sources using old newsletters and internal emails that were in the court exhibits. There were lots of rich details, like the fact that FNB had once advertised itself as the “Home of Alt-A Mortgage Lending.”

Contacting the lawyers involved in the case and the bankers named on the lawsuit is another good starting point. They’ll be listed on the court documents, along with their contact information. Reporters also will want to track down the directors’ and officers’ D&O insurance carrier to figure out how big the policy was at the time the bank failed. In a few cases, the FDIC has also sued D&O insurance carriers that refuse to pay out on their policies. These lawsuits can provide another window into the causes of the bank failure and sometimes have colorful details about the bank executives.

Academics who follow the FDIC, lawyers, and former employees can also make great sources. LinkedIn can be a great tool for tracking down former employees and co-workers. Filing public records requests with the Office of the Comptroller of the Currency, the FDIC, and the Federal Reserve to determine if the bankers had a past regulatory trail is a good plan if you’ve decided you want to pursue a longer enterprise story. Requesting past emails, private settlement agreements, and old letters are all possible ideas.

Sometimes, bankers will face separate civil fines and orders from the OCC that prohibit the bankers from working for any FDIC-insured institution for life. The orders are available to the public. Many of the bankers named in the lawsuits still are working in the industry — some at very high-level institutions.  Even bankers that have been banned from working for FDIC-insured institutions still can work in the mortgage industry and a broad swath of other finance-related companies.

What professionals named in FDIC-lawsuits and OCC orders are still working in the finance industry in your community? That could lead to other interesting angles for reporters to pursue in their own backyards.

In Story ideas.

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