In prior posts (most recently here), I have noted the growing numbers of lawsuits brought against the former directors and officers of failed or troubled banks. If the complaint recently filed in New York state court is any indication, the "dead bank" lawsuits apparently will also include claims against the directors and offices of failed banks from outside the U.S., too. As it turns out, the fallout from the Icelandic banking explosion includes claims filed in New York against former directors and officers of one of the largest Icelandic bank failures.


On May 11, 2010, the U.S. representative of the resolution committee of Glitnir Bank filed an action in New York (New York County) Supreme Court seeking to recover $2 billion in damages from Glintir’s controlling shareholder and his wife; two former directors and the former CEO of Glitnir; several of the controlling shareholder’s business associates, and the bank’s auditor, the Icelandic affiliate of PricewaterhouseCoopers. A copy of the complaint can be found here.


Though based in tiny Iceland (total population substantially smaller than that of Cleveland), Glitnir, which ultimately was one of Iceland’s three largest banks, grew to have over 1,900 employees in ten countries, with a market capitalization of over $7 billion and total assets of over $40 billion.


In October 2008, in the midst of the global financial crisis, Iceland’s Financial Services Authority took control of Glitner. Glitner ultimately filed a petition for bankruptcy in the U.S. under Chapter 15 of the Bankruptcy Code. According to the May 11 complaint, creditors have filed claims exceeding $26 billion.


Michael Lewis’s outstanding April 2009 Vanity Fair article, "Wall Street on the Tundra" (here) chronicles the astonishing and even inexplicable rise and spectacular collapse of the Icelandic banking bubble. ("Iceland instantly became the only nation on earth that Americans could point to and say, ‘Well, at least we didn’t do that.’ In the end, Icelanders amassed debts amounting to 850 percent of their GDP.")


The May 11 complaint alleges that Jon Asgeir Johannesson (typographical markings omitted) and his wife, Ingibjorg Stefania Palmadottir (typographical markings omitted), and businesses they owned or controlled, used improper means to "wrest control" of Glitnir and to "fraudulently drain over $2 billion out of the Bank to fill their pockets and prop up their own failing companies."


According to the complaint, beginning in 2006, Johannesson "engaged in a scheme" using his "web of companies" to take control of Glitnir in violation of Icelandic law. By April 2007, Johannesson and his companies owned about 39% of Glitnir’s stock. As a result, Johanneson was able to "stack" Glitnir’s board "with individuals who had connections with companies he controlled," and he also "had his inexperienced hand-selected candidate" replace the existing CEO.


Having taken control of the Bank, its board and its management, Johannesson and the other individual defendants "used their control over the Bank and funds raised in U.S. financial markets to issue massive ‘loans’ to, and a series of equity transactions with, companies Johannesson controlled, in an effort to stave off their eventual collapse," which "placed the Bank in extreme financial peril."


The complaint specifically alleges that the defendants "concealed the truth about their risk they had created for Glitnir when they turned to the United States markets to raise funds." The complaint specifically references a September 2007 transaction in which Glitnir issued $1 billion in medium term notes (MTN), alleging that the offering documents "understated Glitnir’s exposure to related and connected parties by $800 million."


The complaint also alleges that the individual defendants "could not have succeeded in their conspiracy to loot Glitnir without the complicity of Glitnir’s outside auditors at PricewaterhouseCoopers." (Jim Peterson has a particularly interesting commentary on the Glitnir bank claims against PwC on his Re:Balance blog, here.)


The complaint asserts nine separate claims against the individual defendants alleging violation of Icelandic statutory laws governing corporations. The complaint also asserts common law claims against the individual defendants for tort, conversion, and unjust enrichment. In addition, the complaint asserts negligence and breach of contract claims against PwC. The complaint seeks damages of $2 billion against the individual defendants and $1 billion against PwC.


The complaint’s allegations are fascinating, in the way that it is interesting to find out what events and actions preceded a train wreck or plane crash. In many critical ways, the events (allegedly) preceding Glitnir’s collapse precisely recapitulate the sequence Micheal Lewis described in summarizing what happened in Iceland; Lewis wrote in his Vanity Fair article that "a handful of guys in Iceland, who had no experience in finance, were taking out billions of dollars in short-term loans from abroad. They were then re-lending this money to themselves and their friends to buy assets – the banks, soccer teams, etc."


Though this lawsuit has its own peculiar Icelandic flavor, the lawsuit resembles in many ways any lawsuit that might be filed in the wake of a U.S. bank’s collapse. The specific U.S. variety of lawsuit this case most resembles is a claim brought by a bankruptcy trustee, as opposed to an investor lawsuit or a lawsuit brought by regulators.


But the resemblance to a variety of U.S. lawsuit notwithstanding, the obvious question about this case is: what the heck is it doing in state court in New York? We’ve got an Icelandic bank, Icelandic defendants, and even claims under Icelandic statutory law. The plaintiffs knew you were going to ask that question. The complaint helpfully points out that Johannesson and his wife reside in New York; that many of the acts in furtherance of the conspiracy took place in New York (including the September 2007 MTN financing); many of the transaction documents had New York choice of law provisions; and the bank and its key officials "had substantial interaction with New York."


The plaintiffs do their earnest best to justify their resort to a New York court for this case. They even try to exploit New York’s vain self-regard, asserting that the case belongs in New York because it is "the financial center of the world," and it not only has "a general interest in maintaining and fostering its undisputed status as the preeminent commercial and financial nerve center" but it also has "a keen interest in making sure its financial markets are not abused to facilitate massive illegal activity."


The plaintiffs do not mention, but we can assume, that they prefer New York over Iceland because U.S. courts offer a host of advantages over the courts of just about any other jurisdiction, including jury trials, pre-trial discovery, and contingent attorneys’ fees.


For all of the reasons the plaintiffs acknowledge, and perhaps even more so for the reasons the plaintiffs don’t explicitly mention, litigants from around the world may seek to access U.S. courts for redress of grievances in the wake of bank failures. I have long felt that the current wave of U.S. bank failures is going to produce a wave of lawsuits. The Glitnir case suggests that the litigation wave may well encompass claims relating to failed banks from around the world, not just failed U.S. banks.


One question I wondered while reading this complaint is whether or not Glitnir carried D&O insurance. The reckless way business was conducted in Iceland (at least as portrayed in Lewis’s Vanity Fair article) suggests the Icelandic financiers might not have slowed down long enough to consider any type of risk mitigation, much less anything as conventional as insurance. And even if Glitnir had insurance, it has likely long since lapsed, and so unless this new complaint relates back to some timely filed claim or notice, insurance might not be available anyway.


But whether or not there is D&O insurance available, this complaint, for all of its peculiar Icelandic features (including typographical symbols I am unable to reproduce here), in many ways represents the classic type of D&O claim that can follow a bank’s collapse, at least to extent it names two former directors and the former CEO as defendants. I had not anticipated that claims involving Icelandic banks would corroborate my position, but I will say that this case is at least consistent with my long-standing projection for litigation arising from the growing number of failed banks.


There are of course many more conventional cases also corroborating my position, including the investor lawsuit filed on May 7, 2010 involving First Regional Bancorp (about which refer here) and the lawsuit filed on May 12, 2010 involving BancorpSouth (refer here) – both of which involving U.S.-based banks.


The bottom line is that it is no longer quite accurate for me to continue to say that failed bank litigation is coming – it is here.


A Literary Interlude: The reference above to Michael Lewis’s Vanity Fair article reminded me that a copy of his latest book, The Big Short, is languishing unread on my bookshelf. Rather than reading yet another account of our dysfunctional financial system, I have been distracted by Maurice Lever’s excellent biography of Pierre-Augustin Caron de Beaumarchais.


Beaumarchais is now remembered mostly for having written The Barber of Seville and The Marriage of Figaro, though ironically he wrote those works essentially as a diversion from his many other hyperkinetic activities. Beaumarchais was a watchmaker’s son who managed to leverage music lessons provided to the French King’s daughters into court contacts and business opportunities from which he achieved wealth, notoriety and a life so full it almost can’t be summarized.


Variously an entrepreneur, inventor, author, royal agent, diplomat, spy, labor organizer, publisher and printer, arms merchant, and revolutionary, and throughout it all a tireless and effective self-promoter and compulsive litigant, Beaumarchais was at the center of many of the critical events in the events leading up to the French Revolution.


The vast sweep of Beaumarchais’s life encompasses enough to have filled several lifetimes. If we now remember him most for his plays, we should at least recognize how provocative and even seditious his plays were at the time. One excerpt from Figaro is particularly illustrative in that regard, and worth reproducing here. Though Figaro speaks the words, it is not too hard to imagine these same sentiments come from the mouth of one as talented and ambitious as Beaumarchais, chaffing against the unfairness of a system of aristocracy that delimited the upward range of his achievement:


Just because you’re a great nobleman, you think you’re a great genius! Being an aristocrat, having money, a position in society, holding public office – all that makes a man so arrogant! What have you ever done for all this wealth? You took the trouble to be born and nothing else! Apart from that you’re rather an ordinary man. And me, God damn it, a nobody, one of the crowd, and I’ve had to use more skill and ingenuity simply to stay alive than they’ve expended in a hundred years governing the whole of Spain! And you dare challenge me!