Federal Deposit Insurance Corporation litigation activity in 2013 associated with failed financial institutions could outpace that of the prior three years, according to "Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial Institutions-April 2013", a report by Cornerstone Research. As of April 22, 2013, the FDIC has seized eight institutions and filed at least 12 lawsuits. If this pace continues until the end of the year, the number of suits will total 39, more than the number filed in any of the three preceding years in which the regulatory agency has taken actions related to the 2008 financial crisis.
The FDIC has recently begun to publish settlement agreements related to its professional liability cases. According to the information available so far, the FDIC has obtained aggregate settlements of $601 million-$115 million attributable to filed D&O lawsuits, $216 million attributable to claims involving D&Os that did not result in a filed complaint, and $270 million attributable to claims against professional firms and non-D&O individuals associated with failed financial institutions.
"A review of the settlement data indicates that the FDIC is actively working to settle a number of suits that have been authorized but not yet filed," said one of the report's authors, Katie Galley, a senior vice president of Cornerstone Research. "Given the number of failures of institutions in 2010, we would expect more such settlement activity alongside an increasing number of lawsuits."
Several trends together suggest that substantially more FDIC cases may be filed in upcoming months. These include the FDIC's success in the IndyMac trial and the approaching end of the statute of limitations for making a claim against the numerous institutions that failed in 2010. Furthermore, the number of lawsuits authorized has continued to exceed the number filed by the FDIC. The difference between the two has been increasing since the beginning of 2012 and has widened further in 2013. The FDIC has filed just under half of the lawsuits authorized against 888 individuals in connection with 109 failed institutions. Key Findings: Of the 476 financial institutions that have failed since 2007, 55, or 12 percent, have been the subject of FDIC D&O lawsuits. These lawsuits generally have targeted larger failed institutions and those with a higher estimated cost of failure.
Chief executive officers continue to be the most commonly named defendants, named in 88 percent of cases, including 10 of the 12 lawsuits filed so far in 2013. Outside directors have been named, frequently along with inside directors, in 75 percent of all filed complaints and nine of the 12 lawsuits.
All 12 lawsuits included allegations of gross negligence and breach of fiduciary duty. Nine of the 12 lawsuits included allegations of negligence. Overall, of the 56 lawsuits filed since 2010, allegations of gross negligence, negligence, and breach of fiduciary duty were made in 53, 50, and 42 lawsuits, respectively.
Of the 44 settlement agreements involving directors and officers (regardless of whether a lawsuit was filed), as many as 17 agreements, or 39 percent, required out-of-pocket payments by the directors and officers. Directors and officers agreed to pay $8 million out of pocket in these cases. These payments were frequently in addition to amounts to be paid by insurance carriers.
Details can be found in the full report. This report is also available on BankDirector.com. About the Authors and Cornerstone Research Abe Chernin, Catherine J. Galley, Yesim C. Richardson, and Joseph T. Schertler are authors of the report. Abe Chernin is a senior manager in the San Francisco office of Cornerstone Research, Catherine J. Galley is a senior vice president in the firm's Los Angeles office, Yesim C. Richardson is a vice president in the firm's Boston office, and Joseph T. Schertler is a senior consultant in the firm's Menlo Park office.
For more than twenty-five years, Cornerstone Research staff have provided economic and financial analysis of complex issues arising in commercial litigation and regulatory proceedings.