After a nearly three-month period in which the FDIC filed no new lawsuits against the former directors and officers of a failed bank, the agency has in recent days filed two new suits, both involving banks that were approaching the third anniversary of their closure. The FDIC’s latest lawsuit, filed in the Northern District of Georgia on October 17, 2012, against certain former directors and officers of the failed American United Bank of Lawrenceville, Georgia, which was closed by regulators on October 23, 2009. A copy of the FDIC’s complaint can be found here.


The FDIC’s complain, which it filed in its capacity as American United’s receiver, names as defendants two former officers of American United – T. Glenn Thompson, the bank’s former CEO, and Joel C. Taylor, the bank’s former Chief Lending Officer – as well as six individual members of the bank’s board of directors. The complaint asserts claims against the individuals for negligence and for gross negligence.


The complaint alleges that “rather than manage the Bank’s lending function in a sound and responsible manner, the Defendants took unreasonable risks with the Bank’s loan portfolio, allowed irresponsible and unsustainable rapid asset growth concentrated in high-risk and speculative acquisition development and construction and commercial real estate loans and loan participations, disregarded regulator warnings about lending activities, violated the Bank’s loan policies and procedures, and knowingly permitted poor underwriting in contravention of the Bank’s policies and reasonable industry standards.” The FDIC alleges that these actions caused damages to the bank “in excess of $7.3 million.”


The FDIC’s complaint against the former American United officials is the 34th lawsuit that the FDIC has filed as part of the current failed bank wave and the 16th that the agency has filed so far in 2012. The FDIC filed a considerable number of complaints in the first few months of this year, filing 12 new lawsuits in the first five months of the year. But then for two months, until mid –July, the agency filed no new lawsuits, and then after filing two on July 13, filed no further lawsuits until November.


The apparent slowdown in the FDIC’s new lawsuit filings during the period between May and October 2012 was surprising not only because of the more rapid pace of filings in the first five months of the year, but also as 2012 progressed, the third anniversaries of the closures of an increasing number of banks has been approaching. Given that the number of bank failures ramped up as 2009 progressed, it seemed likely that the number of new lawsuits would have increased during the year, as the three-year statute of limitations for increasing numbers of failed banks approached.


The slowdown is surprising for another reason as well, which is that while there have been a couple of very large gaps this year (together stretching over nearly a five month period) during which only a small number of lawsuits were filed, the agency has continued each month to update its website to show that an increasingly larger number of lawsuits have been filed. As the latest update on October 9, 2012, the agency has authorized suits in connection with 80 failed institutions against 665 individuals for D&O liability. These figures are inclusive of the now 34 lawsuits involving 33 institutions and  naming 280 former directors and officers that have been filed so far – suggesting an increasingly large backlog of as yet unfiled complaints.


As I have previously noted on this blog, knowledgeable persons have advised me that at least part of the explanation for the apparent filing slowdown is that the FDIC and the prospective defendants (and their insurers) have in some instances been involved in negotiations. In some instances, the FDIC has requested that the indivudals agree to a tolling agreement which stays the running of the statute of limitations while the negotiations continue. These negotiations have in at least some cases permitted matters that might otherwise have resulted in litigation to be resolved without a complaint being filed. While that might well account for some of the slowdown, the increase in the numbers of authorized lawsuits does suggest that there is still a backlog of cases to be filed. It still seems likely that as the third anniversary of bank failures from late 2009 and early 2010 approaches (which period was the high water mark of the current bank failure wave) we should be seeing an upsurge in new FDIC lawsuits, especially given the extent to which the number of authorized lawsuits exceeds the number of lawsuits filed


The FDIC’s suit against the former American United officers is the ninth lawsuit so far involving a failed Georgia bank, meaning that lawsuits involving banks from Georgia account for more that a quarter of failed bank lawsuits so far. At one level, this is not a surprise, since there have been many more bank failures in Georgia as part of the current bank failure wave than any other state. But the over 80 Georgia banks that have failed since August 2008 represent only about 18 percent of the over 440 banks that have failed during that period, meaning that the failed Georgia banks have been targeted at a disproportionately higher rate. By way of contrast, Florida, which also has experienced a very high bank failure rate so far, has only had one failed bank lawsuit. Georgia banks were very heavily represented in the earliest part of the current bank failure wave, so it  may be that these apparent mismatches will even out over time as more suits are filed.


There is one other interesting feature of the new American United case, which is that the FDIC has included allegations of ordinary negligence. This is interesting because of the recent decision in the Northern District of Georgia in the Integrity Bank case, applying Georgia law and holding that because of their protection under the business judgment rule, directors cannot be held liable of ordinary negligence. More recently (as discussed here), in the FDIC’s lawsuit against former directors and officers of the failed Haven Trust bank, Northern District of Georgia Judge Steve C. Jones affirmed that Georgia’s business judgment rule is applicable to the actions of bank directors and officers. Based on that determination, Judge Jones dismissed the FDIC’s claims against the directors and officers for ordinary negligence and breach of fiduciary duty. In light of that earlier decision, it would seem that the defendants in the new American United case have a basis on which to seek to have the negligence claims against them dismissed. (The FDIC, undoubtedly anticipating this argument, included in its complaint specific allegations asserting that the defendants are not entitled to rely on the business judgment rule, at paragraph 55 and following.) 


Very special thanks to a loyal reader for providing me with a copy of the FDIC’s American United complaint.


Welcome to the Blogosphere: The D&O Diary is very happy to welcome D&O Discourse, a new blog from the securities litigation group of the Lane Powell law firm. The new blog, which can be found here, will, according to the firm, “discuss select securities and corporate governance litigation developments of interest to public companies and their directors and officers, D&O liability insurance carriers and brokers, plaintiffs’ and defense lawyers, and economists, forensic accountants and other professionals whose practices involve securities and corporate governance litigation.” The new site looks good, and based on its early entries it will represent a welcome addition to the blogosphere. Everyone here at The D&O Diary looks forward to following the site in the future.


Regulatory ADD? : Francine McKenna, the author of the re: The Auditors blog, has an interesting October 18, 2012 article in Forbes Magazine entitled “Is the SEC’s Ponzi Crusade Enabling Companies to Cook the Books, Enron-Style?” (here). In the article, McKenna suggests that the SEC, eager to make up for its failure to catch Madoff, is disproportionately devoting resources to Ponzi-scheme prosecution and also to FCPA enforcement activities, to the detriment of its efforts to root out “fraudulent or misleading accounting and disclosures by public companies.” McKenna questions whether “a stretched SEC” might be “neglecting accounting fraud.” McKenna’s article looks at whether the reduced accounting fraud enforcement activity in recent years is the result of decreased fraud or a reduced emphasis on the issue from the regulatory agency.


In a concluding section that will be of interest to readers of this blog, McKenna’s article closes with a seven-point checklist to use to test for accounting risk at any particular company.  


More About Opt-Outs: I have written frequently about class-action opt-outs on this site (most recently here) In an October 18, 2012 Metropolitan Corporate Counsel article entitled “The Securities Class Action Opt-Out Plaintiffs: By the Numbers” (here), Neal Troum of the Stradley Ronon Stevens & Young law firm takes a closer look at class action opt-outs recoveries. Troum concludes that “institutional investors with significant losses on account of securities fraud may recover more as opt-out plaintiffs than class members in securities fraud actions.” He suggests that “institutional investors have their options and, with increasing frequency, they are choosing a different path.”