IndyMac Bancorp's former chief executive says a federal judge erred when he ruled the failed bank's insurers didn't have to pay for his defense costs in a legal fight with government regulators over allegations of fraud and securities violations.
Lawyers for Michael W. Perry told a federal appellate court in California on Thursday that a so-called interrelated wrongful acts exclusion provision in IndyMac's $80 million directors' and officers' insurance policy shouldn't let insurers off the hook for his defense costs in his legal fight with the Securities and Exchange Commission.
The SEC sued Mr. Perry along with IndyMac's former finance chief, alleging the failed thrift didn't properly disclose the risks of its subprime-mortgage holdings to investors. But a federal judge last year ruled in favor of Mr. Perry, saying IndyMac's public disclosures about its capital ratios were accurate and that IndyMac had no duty to disclose details about a separate supplemental ratio it had reported to its bank regulator.
The SEC litigation was just one of the suits facing Mr. Perry and other IndyMac managers, who denied wrongdoing in connection with IndyMac's failure. The Federal Deposit Insurance Corp., which is wrapping up IndyMac Bank's affairs as the bank's receiver, won a $169 million judgment against officers at IndyMac home builder's division, for losses suffered by the bank.
Meanwhile, the bankruptcy trustee overseeing the liquidation of IndyMac Bancorp Inc. also sued Mr. Perry and other company directors and officers, accusing them of mismanaging IndyMac and contributing to its collapse. That suit was settled for $35 million, but again the district court ruled insurers didn't have to pay because the case was related to another 2007 securities fraud case.
The insurers successfully argued that wrongful acts exclusion prevented IndyMac from double dipping by presenting the same claim in multiple policy years. Because the district court ruled their lawsuits were sufficiently connected to the earlier securities suit, the SEC, FDIC and trustee, along with Mr. Perry, couldn't collect from the later policy.
The FDIC, the trustee and Mr. Perry all appealed the coverage decision to the U.S. Court of Appeal for the Ninth Circuit.
The insurance coverage dispute is but a reminder of regulators' efforts to clean up the aftermath of the financial crisis of 2007 and 2008. Federal regulators seized the company's thrift, IndyMac Bank, in the summer of 2008 in one of the largest bank failures in U.S. history.
IndyMac was once among the largest mortgage lenders in the country, specializing in high-risk loans known as Alt-A mortgages. Based in Pasadena, Calif., the company was at the center of the housing market's collapse and faced ballooning losses starting in 2007.
The banking operations, now known as OneWest Bank FSB, were sold to an ownership group whose members included hedge- fund managers John Paulson and George Soros. IndyMac Bancorp filed for Chapter 7 protection in July 2008 to liquidate its assets after the bank was seized.
At the time of the bank's takeover by the FDIC, it was the third-largest bank failure in U.S. history. The FDIC has estimated IndyMac's failure will cost its deposit-insurance fund $13 billion.