Posted on 17 Nov 2010
Former executives, directors and employees at U.S. banks that have failed since the start of the financial crisis are being investigated by the Federal Deposit Insurance Corp. (FDIC). The agency responsible for dealing with bank failures is stepping up its effort to punish alleged recklessness, fraud and other criminal behavior. More than 300 banks and savings institutions have failed since the start of 2008, but just a few have led to criminal charges being filed against bank officials.
Fred W. Gibson, deputy inspector general at the FDIC, which works with the Federal Bureau of Investigation to investigate crime at financial institutions, said in an interview the probes involve failed banks of all sizes in cities across the U.S. The FDIC is also ramping up civil claims to recover money from former bankers at busted lenders. He declined to identify any of the people or banks under investigation.
"We anticipate results from our investigations, although we cannot predict when a particular case will reach a stage at which disclosure of specifics would be appropriate," Mr. Gibson said.
Pressure is high on regulators to identify and prosecute bankers for any wrongdoing that contributed to the largest number of failures in nearly 20 years. The September 2008 collapse of Washington Mutual Inc. was the biggest ever, with seven times the value of the assets that Continental Illinois Corp. had when it failed in 1984. The current epidemic of bank failures, including 146 so far this year, has deepened the nation's lending drought and left the industry's survivors with more muscle to squeeze customers.
The S&L crisis of the 1980s and 1990s killed more than 1,800 institutions. From 1990 to 1995, federal officials prosecuted about 1,850 bank insiders. More than 1,000 officers, directors and other officials went to prison, and federal agencies collected $4.5 billion in professional-liability claims.
In the current mess, no high-profile banker has been criminally charged in connection with a financial institution's demise, as Charles Keating was for fraud after American Continental Corp. failed in 1989. He served four years in prison and became synonymous with the S&L crisis.
FDIC officials also are ramping up efforts to use civil litigation to recover money from former bank officials. Hundreds of "demand" letters have been sent to former executives, directors and other employees, as well as their professional-liability insurers, putting them on notice of potential claims, the FDIC says.
The agency's board has authorized the filing of lawsuits seeking to recover more than $2 billion from more than 80 officers and directors of failed banks. The total is up from about 50 approved suits as of last month, seeking more than $1 billion.
"These numbers will continue to increase as time goes on," Richard Osterman, acting general counsel at the FDIC, said in an interview. Authorization of a civil suit by the FDIC doesn't necessarily mean a case will be filed in court. Some former bank officers and directors could avoid being sued by negotiating settlements with the agency.
So far, the FDIC has filed just two civil lawsuits related to recent failures. The agency is seeking $300 million in damages from four former executives of IndyMac Bancorp, the Pasadena, Calif., lender that sank in 2008. Eleven former directors and officers of Heritage Community Bank are being pursued for $20 million in damages related to the Glenwood, Ill., bank's collapse last year.
In a statement through their lawyers, the Heritage directors and officers said the FDIC's suit is "regrettable and wrong," adding that the agency is blaming them "for not anticipating the same market forces that also caught central bankers, national banks, economists, major Wall Street firms and the regulators themselves by surprise."
The former IndyMac executives have denied wrongdoing. Kirby Behre of law firm Paul Hastings, who is acting for two of the former IndyMac directors, said: "Not only weren't they negligent, they were very diligent, and forces beyond their control were responsible for any losses."
Michael W. Fitzgerald, of Corbin, Fitzgerald & Athey LLP, which is representing the other two former IndyMac executives, said the "charges by the FDIC are completely false and we will vigorously defend them."
The few criminal prosecutions of failed banks so far include Integrity Bank, which opened in Alpharetta, Ga., in 2000 and was seized by regulators in 2008. In July, two former executives pleaded guilty to fraud-related charges.
Prosecutors alleged that the executives helped the bank's biggest customer use a construction loan to buy a private island in the Bahamas.
Mr. Gibson, the FDIC's deputy inspector general, said the roughly 50 criminal investigations under way typically relate to loan officers at the vice president or senior vice president level. Some of the probes involve higher-ranking officials, including former directors of failed institutions, he added.
Suspected criminal activity is handled by the FDIC's office of investigations, usually working with the FBI. Recommendations for prosecutions are referred to the Justice Department. It often takes at least 18 months for legal action to be brought after a bank fails, meaning the surge in scrutiny is likely to continue for years. FDIC officials expect the failure wave to peak this year.
Some lawyers predict it will be hard to win convictions in many cases. "To prove criminal fraud and get a conviction, you really need the equivalent of stealing money from the vault,'' said Thomas Vartanian, a partner at law firm Dechert LLP. As a result, many civil and criminal defendants are "eventually likely to settle for money,'' he said.
Federal officials also will have to overcome the likely defense that bank failures were caused by an unforeseeable real-estate bust. Samuel Buffone, a partner at law firm BuckleySandler LLP, said the most striking part of the FDIC's civil suit against former Heritage officers and directors is "the call for 20/20 hindsight.'' Mr. Buffone isn't involved in the case.
Mr. Osterman, the FDIC's acting general counsel, noted that the "same argument'' was used by defendants during the S&L crisis. "The courts didn't agree that time, and we don't expect they will this time,'' he said. "People are allowed to exercise business judgments. As long as they comply with their legal duties, they don't have anything to worry about.''