January 21, 2011
Authored by: Bard Brockman
The FDIC filed its third lawsuit against selected former directors and officers of a failed financial institution on January 14, 2010. The defendants in the lawsuit are certain former directors and officers of Integrity Bank (Alpharetta, Ga.), which the FDIC placed into receivership on August 29, 2008. The complaint, which was filed in the U.S. District Court for the Northern District of Georgia, asserts claims for negligence, gross negligence and breach of fiduciary duty.
The central theme of the complaint is that the defendants served on the bank’s Director Loan Committee, and in that capacity they pursued an “unsustainable growth strategy designed to exploit the then-expanding ‘bubble’ in the residential and commercial real estate market.” Directors who did not serve on that committee were not sued. The FDIC alleged a variety of misdeeds by the defendants, including the following:
- the adoption of a loan policy that set a lending limit in excess of the statutory legal lending limit;
- the abdication of the credit and lending functions to a Senior Lender who was compensated based on the volume of loan originations, without regard to the quality of the credit; and
- an over-concentration in speculative ADC loans that ultimately represented nearly 80% of the bank’s total loan portfolio
However, the more than $70 million in damages alleged focus on twenty-one (21) specific ADC loans approved by, or subject to the oversight of, the Director Loan Committee.
There are three interesting side notes that are not apparent from a reading of the FDIC’s complaint. First, in April 2010, federal prosecutors indicted two former executives of Integrity Bank (including one of the director defendants in the FDIC civil suit) on charges of conspiracy, bribery, bank fraud and securities fraud. In public statements following the indictments, the prosecutors alleged that these executives had conspired with a major borrower to essentially “rob the bank from the inside.” However, the losses alleged in the Complaint do not involve the borrower involved in the fraud loses. It will be interesting to see if the other director defendants point to that alleged criminal conduct as the true proximate cause of the bank’s failure.
The second notable item is that one of the former Integrity Bank directors sued by the FDIC, Jack S. Murphy, is the current chairman of the Georgia Senate Banking Committee. It does not appear that Sen. Murphy has any plans to resign his chairmanship, and he has received strong public support from fellow Republicans in the Georgia Senate.
The third item worth noting is that while there are numerous allegations of negligence, it is alleged that virtually every specific loan involved a loan to one borrower or specific loan to value limitation.