On January 18, 2012, the FDIC filed a complaint against former directors and officers of R-G Premier Bank of Puerto Rico, which was closed and put into receivership on April 30, 2010.  A copy of the FDIC’s complaint is available here.

The roots of R-G Premier’s failure, the FDIC contends, can be traced to the 2001 strategic decision to increase its commercial real estate lending.  According to the complaint, the board of directors appointed a new Chief Lending Officer, Victor Irizarry, and it structured the Bank to give Irizarry “free rein” to make commercial real estate loans.  Among the board’s alleged failings was its decision to give Irizarry supervisory control of the Bank’s credit risk management department.  This reporting structure, the FDIC alleges, effectively squelched the credit risk personnel from voicing any concerns about the underwriting of loans or creditworthiness of borrowers.  Internal audits and banking regulators both warned that the credit risk management function should be segregated from the loan department, but the board ignored those warnings.

The FDIC further alleges that the board itself essentially turned a “blind eye” to the Bank’s lending function.  Specifically, the FDIC alleges that the board failed to institute effective loan reviews, which in turn “undermined its own ability to monitor the health and quality of its rapidly expanding commercial loan portfolio.”  The board’s failure to institute appropriate procedures and controls, combined with its resistance to recommended reform, resulted in the Bank’s extension of over $350 million in loans that a “prudent banker should have known would probably never be repaid.”

The FDIC asserts two claims for gross negligence against the D&O defendants.  First, it asserts a claim against the director defendants (except for the advisory directors) for their grossly negligent failure to adequately supervise the Bank’s lending function.  And second, it alleges a claim for gross negligence arising from the approval of risky and imprudent loans by the officers and directors, including the advisory directors who voted for those loans.  The FDIC prays for damages in excess of $257 million for loan losses arising from 77 specific failed credits.