The number of bank failures has been winding down for a while now, but at same time the FDIC’s failed bank litigation has been ramping up. Through April 20, 2012, the FDIC has filed a total of 29 lawsuits against former directors and officers of failed banks, involving 28 different institutions. In a May 4, 2012 post (here), Cornerstone Research takes a detailed look at the failed bank litigation so far. Cornerstone Research’s related May 2012 paper entitled “Characteristics of FDIC Lawsuits Against Directors and Officers of Failed Financial Institutions” can be found here.


According to the paper, during 2012 the FDIC has been “intensifying its litigation activity associated with failed financial institutions.” So far, the FDIC has filed 11 lawsuits in 2012, compared with 16 during all of 2011. The 2012 filing activity is on pace for a total of 35 lawsuits this year.


Currently, about 6 percent of financial institutions that have failed since 2007 have been the subject of FDIC lawsuits. (That compares to about 24 percent of all institutions that failed during the S&L crisis.). According to the Cornerstone Research paper, the lawsuits filed during the current bank failure wave have targeted the larger institutions and those with a higher estimated cost of failure.


The median size of the 28 institutions targeted so far was approximately four times as large as the median size of all failed institutions and six times as large as the median size of currently active institutions. The 28 targeted institutions had median total assets of $973 million, compared with median total assets of approximately $241 for all failed institutions. The 28 institutions had a median estimated cost to the FDIC of $222 million at the time of seizure, compared to the median cost of failure of $59 million for all failed financial institutions. The median cost of failure for financial institutions that have been targeted in 2012 lawsuits was $355 million, compared with $158 million for institutions sued from 2007 through 2011.


The states with the largest numbers of bank failures during the period 2007 through April 2012 were Georgia, Florida, Illinois and California. With the exception of Florida, the percentage of FDIC lawsuits targeting failed institutions is slightly higher than the percentage of failed institutions in those states. Despite the large number of failed institutions in the state, there has only been one failed bank lawsuit filed in Florida so far.


The 29 lawsuits filed so far have targeted a total of 239 former directors and officers. Outside directors were named as defendants in 20 of the 29 lawsuits. The remaining lawsuits targeted only inside directors and officers. Three cases have also included insurance companies as named defendants, and one case included a law firm defendant. Three cases have included directors or officers’ spouses as named defendants.


Losses on Commercial Real Estate and Acquisitions, Development and Construction loans were the most common bases for alleged damages. 17 of the complaints identified CRE loans as the basis for claimed damages and 15 of the complaints identified ADC loans.


The most recent lawsuits have been filed just prior to the expiration of the three-year statutes of limitations. During 2012, the median time between an institution’s failure and the filing of an FDIC lawsuit was 2.97 years, compared with 2.26 years for the lawsuits filed during the period 2007 through 2011. Among the 11 lawsuits filed so far in 2012, five involved lawsuits that failed in 2010, five involve lawsuits that failed in 2008, and one involved a bank that failed in 2008.


The FDIC has indicated on its website that through April 25, 2012, the agency has authorized lawsuits involving 493 individuals at 58 institutions. As these figures are inclusive of the lawsuits already filed, the authorization figures imply a pipeline of as many as 30 additional lawsuits — which were they to be filed would represent another 7 percent of all failed banks. That is, the filed and authorized lawsuits together could involve as much as 13 percent of all failed institutions. These figures of course represent only the lawsuits authorized to date; the FDIC has been increasing the number of authorizations monthly over the course of the past several months.


The FDIC’s latest authorization figures on its website did not specify an aggregate damages figure that the authorized lawsuits represent, but the figure the agency used (for a lesser number of lawsuits) in January 2012 was $7.7 billion, which compares to the aggregate damages claimed so far of $2.4 billion – which suggests that the authorized lawsuits may include some very significant additional claimed damages.


The Cornerstone Research report notes that a number of the large and costly bank failures during 2008 (and 2009) have not yet been the subject of an FDIC lawsuit. The report notes that the directors and officers of these institutions may be involved in negotiations with the FDIC. Whether these additional large bank failures will become the subject of future FDIC lawsuits “will depend on the outcome of such negotiations, statute of limitations restrictions, and tolling agreements that may be agreed upon during such negotiations.”


Only three of the FDIC’s failed bank lawsuits have settled so far, as discussed on page 13 of the Cornerstone Research report. These settlements include the WaMu settlement (about which refer here) and the First National Bank of Nevada settlement (about which refer here).


On a final note, the Cornerstone Research report projects that given the current pace of bank failures this year, we are on track for about 69 bank failures in 2012, compared to 92 in 2011 and 157 in 2010. With the addition of another failed bank this past Friday evening, there have been a total of 23 bank failures so far this year.


CalSTRS Takes on Wal-Mart Over FCPA Issues: As I have previously noted on this blog, a frequent accompaniment of an investigation of a Foreign Corrupt Practices Act investigation is a follow-on civil lawsuit, in which investors alleged either that the company’s management failed to properly supervise the company’s operations or that the company issued misleading statements about its internal controls or financial condition.


Given the relative frequency of this type of litigation, it was hardly surprising that Wal-Mart’s recent announcements of FCPA-related concerns involving its Mexican operations attracted litigation. Just the same, as Alison Frankel points out in a May 4, 2012 article on her On the Case blog (here), the filing of a lawsuit against Wal-Mart, as nominal defendant, and 27 of its current and former directors and officers, by the California State Teachers Retirement System (CalSTRS) represents a significant and noteworthy development.


In its May 3, 2012 complaint, which can be found here, CalSTRS alleges, among other things, that “prolonged failure to address detailed and credible allegations of criminal activity undertaken with the tacit or express consent of current and former senior corporate officials, and the complicity of the Company’s highest level executives in shutting down any investigation into those allegations, is causing and will continue to cause the Company substantial harm.”


As Frankel comments, when an “800-pound gorilla” like CalSTRS gets involved in this type of follow-on civil litigation, things have definitely become “serious.” The CalSTRS lawsuit will also set up a potential conflict between the actions previously filed in Arkansas in connection the Wal-Mart’s FCPA revelations and the CalSTRS action, which was filed in Delaware.


From my perspective, the CalSTRS lawsuit not only reinforces the view that follow-on civil litigation is an almost invariable accompaniment of FCPA-related investigations, but the involvement of CalSTRS itself highlights that FCPA-related exposures are a matter of serious shareholder concern. Taken collectively, the risk of an FCPA investigation as well of the related follow-on civil litigation are increasingly important liability exposures for companies and their directors and officers. 


Judge Wants to Know About Lehman Executives Wealth Before Approving D&O Settlement: Last August when it was first announced that the parties to the shareholder suit arising out of the collapse of Lehman Brothers had agreed to settle the case for $90 million – the amount of the remaining limits of the company’s D&O insurance program – I knew there could be trouble, especially since the settlement did not contemplate any contribution from the individual defendants themselves.


I was not the only one that anticipated possible problems. The plaintiffs lawyers themselves foresaw there could be trouble, as well. Aware of a possible “hue and cry” about the Lehman executives “getting off the hook without paying any money,” the plaintiffs tried to head off controversy by hiring John S. Martin, Jr., a retired federal judge, in order to determine whether the executives had a combined net worth of $100 million. Judge Martin prepared a report in which he concluded that “I am satisfied that the Liquid Worth of the Officer Defendants taken together, is substantially less than $100 million.”


The parties submitted their proposed settlement – including Judge Martin’s report — to Southern District of New York Judge Lewis Kaplan. In a May 3, 2012 opinion that opens with a quotation from noted legal scholar Kenny Rogers, Judge Kaplan concluded that the information in Martin’s report was not sufficient to permit him to determine whether or not he should approve the settlement. Judge Kaplan’s opinion evinces full awareness of the fact that if the parties had failed to reach their agreement to settle the case for the remaining D&O insurance program limits, the amount of insurance remaining would rapidly have diminished, leaving the shareholders with perhaps an even smaller recovery.


Judge Kaplan’s concern has to do with the nature of the inquiry Judge Martin was asked to address. Specifically, Judge Kaplan was concerned with the fact that Judge Martin looked only at whether or not the defendants’ liquid net worth is less than $100 million. Judge Martin’s answer, Judge Kaplan said, “is not informative as is necessary and appropriate for this Court to consider” all of the requisite factors for class action settlement approval. In the end, Judge Kaplan called for the in camera production of all the information that had been submitted to Judge Martin, so that Judge Kaplan could consider all information (presumably including information about assets the defendants may have held that is not “liquid”) in order to determine how the settlement compared to possible available alternatives by assessing the extent to which the defendants could withstand a judgment in excess of the remaining amount of insurance.


Everything about this situation is highly unusual, starting with the fact that the case involved is perhaps the highest profile civil lawsuit arising out of the financial crisis and that the collapse of Lehman Brothers may have been the most critical development during the crisis. The fact that the case settled as it did may not have been all that unusual, as parties often reach compromises based on dwindling amounts of insurance. However, the plaintiffs, anticipating trouble, took extraordinary steps to try to substantiate the settlement, by hiring Judge Martin to assess the individual defendants’ net worth. By the same token, Judge Kaplan’s further consideration of the individual defendants’ collective net worth arguably is even more unprecedented.


The defendants have until May 10, 2012 to submit the information they had provided to Judge Martin to Judge Kaplan for in camera review.


Susan Beck’s May 4, 2012 Am Law Litigation Daily article about Judge Kaplan’s decision can be found here.