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The FDIC has authorized more than 50 lawsuits against
former directors and officers of failed banks, according to an October 8, 2010 Bloomberg article. But merely
because the lawsuits have been authorized does not necessarily mean we will see
50 lawsuits, as it appears that the FDIC approval was calculated in part to
encourage pre-litigation settlements.
Since January 1, 2008, the FDIC has taken control of 294
banking institutions, as detailed here.
The FDIC has been a very active litigant seeking to assert its rights of
priority over other litigants' claims against the directors and officers of
failed banks, but the FDIC itself has filed only one lawsuit against the senior officials at a
Though the FDIC has to date pursued relatively little
litigation itself, it has asserted claims against individuals at failed banks.
These claims have come in the form of demand letters nominally addressed to the
individuals but also with copies to the failed institution's D&O insurers.
For example, as discussed here, the FDIC filed a November 24, 2009 motion in the BankUnited Holding
Company bankruptcy proceeding asserting its rights of priority to assert claims
against Company's bank unit's directors and officer. Attached to the motion was
a copy of a November 5, 2009 letter the FDIC's attorneys sent to
former directors and officers of BankUnited, in which the FDIC presented a
demand for civil damages and losses. Copies of the letter were sent to the
company's primary and first level excess D&O insurers.
With its recent litigation authorization, the FDIC may
now proceed to file more lawsuits against directors and officers of failed
banks. However, the authorization (and surrounding publicity) may have been
calculated to try to avoid litigation and encourage pre-litigation
settlement in connection with some of the claims the FDIC has previously
asserted in the form of demand letters like the one in BankUnited.
Along those lines, the Bloomberg article quotes an
FDIC spokesman as saying that "the goal is to reach as many settlements as
possible," adding further that "it's both in our interest and theirs
to try and settle this matter before it gets into court and we get into
expensive litigation." Thus, it appears that the authorization and
surrounding publicity is designed in part to encourage settlements before
available funds have been reduced by defense expenses.
The article cites the FDIC's estimate that the 50
authorized lawsuits would represent an effort to try to recoup more than $1
billion in losses. By way of comparison, and according to the NERA' August 2010
report on failed bank litigation (about which refer here), during the S&L crisis, the FDIC recovered about
$1.3 billion in D&O claims.
In terms of the number of lawsuits filed, the 50
currently authorized lawsuits would represent about 17% of the 294 banks that
have failed since January 1, 2008. During the S&L crisis, the FDIC filed
lawsuits in connection with about 24% of the 1.813 failed financial
institutions -- meaning roughly 435 lawsuits. Because the institutions failing
during the current banking crisis are larger than the institutions that failed
during the S&L crisis, the potential litigation recoveries in connection
with many of the current failed institutions are proportionately larger.
Even though the FDIC want to try to settle cases if it
can, it seems probable that it soon will be filing lawsuits, perhaps many of
them in the days ahead. The Bloomberg article quotes the FDIC's
spokesman as saying that "we're ready to go," adding that "we
could walk into court tomorrow and file the lawsuits."
As a loyal reader said, commenting on the reports of the
FDIC's litigation authorization, "Game on." Indeed.
Special thanks to the several readers who sent me copies
of the Bloomberg article.
Morgan Keegan Funds '33 Act Subprime-Related
Claims Survive Dismissal: In a September 30, 2010 order (here),
Middle District of Tennessee Judge Samuel
H. Mays, Jr. granted the defendants' motions to dismiss the '34 Act claims
but denied the motions to dismiss the '33 Act claims in the Regions
Morgan Keegan Open-End Mutual Fund securities class action litigation.
Plaintiffs are investors in three Morgan Keegan select
mutual funds. The defendants are the funds themselves, their corporately affiliated
asset manager, related corporate entities, as well as their corporate parent.
The defendants include individual officers and directors of the funds and
The plaintiffs' allegation is basically that the funds
invested in CDOs and other illiquid subprime mortgage-backed investments in
excess of stated restrictions on the funds' investments. The plaintiffs contend
that their investment losses are not the result of normal market factors, but
rather are due to the funds investment in lower-priority tranches of
asset-backed securities. When the market for the instruments began to decline
in 2007, the funds found themselves holding assets that quickly declined in
value and which they could not readily sell because of the limited market for
such investments. Two of the funds declined in value over 70 percent, the third
declined over 20 percent.
In reviewing the motions to dismiss, Judge Mays noted
that the plaintiffs' amended complaint "exceeds four hundred pages,
comprising 766 paragraphs and six appendices." This extraordinary length
may in the end have weighed against the plaintiffs. Judge Mays observed that
"when it is possible to ask legitimately, after reading a four-hundred
page Complaint, who is being sued for what on a particular count, Plaintiffs
have not met the PSLRA's pleading standards," adding that "it is not
for the Court or for Defendants to ask who is 'relevant' to a particular count.
It is the plaintiffs' duty to state clearly against whom they seek
damages." Judge Mays found that dismissal of the '34 Act claims on this
basis alone is sufficient.
Judge Mays went on, assuming for the sake of analysis
that the plaintiffs claims had been pled with sufficient particularity, to hold
that the plaintiffs had not sufficiently pled scienter. In attempting to
establish scienter, the plaintiffs had relied on the "group pleading"
doctrine. Judge Mays assumed for purposes of his opinion that group pleading
had survived the PSLRA, but nevertheless concluded that "plaintiffs have
failed to demonstrate that the inference of scienter is at least as compelling
as any opposing inference of nonfraudulent intent."
But while Judge Mays granted the defendants' motion to
dismiss the plaintiffs' '34 Act claims, he denied the defendants motions to
dismiss the plaintiffs' '33 Act claims, finding that the plaintiffs had
adequately identified the allegedly misleading statements in order to state a
I have added the Morgan Keegan ruling to my running tally
of subprime and credit crisis-related lawsuit dismissal motion rulings, which
can be accessed here.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.