On May 23, 2012, the FDIC filed an action against the former directors and select former officers of Innovative Bank (“Innovative” or the “Bank”).  Innovative was based in Oakland, California, and it had four other branches in the state when it was closed by the FDIC in April 2010.  For a copy of the FDIC’s lawsuit, click here.

The FDIC’s complaint in this case contains the same hallmark claims for negligence, gross negligence and fiduciary breach that we have come to expect from its D&O suits.  But this case is unique in that the FDIC also asserts a direct claim for fraud.

The alleged fraud was rooted in the Bank’s high-volume SBA lending program.  According to the complaint, the senior vice president in charge of SBA lending, Jimmy Kim, had free rein to originate, recommend and approve SBA loans, all with virtually no supervision by senior management or the board of directors.  The SBA loans generated huge commissions for Mr. Kim, and he reportedly received monthly commissions in excess of $100,000.  In order to continue the flow of high commissions, the FDIC alleges, Mr. Kim colluded with borrowers and loan brokers to cause the Bank to extend millions of dollars of loans that absent fraud would not have qualified for the SBA lending program.

The SBA loans also generated origination premiums for the Bank, which became heavily reliant on that source of income to drive earnings.  The Bank’s reliance on the origination premiums contributed to its lax supervision of the SBA lending program.  To compound matters, the allegedly fraudulent SBA lending continued unabated even after the FDIC and state banking regulators specifically warned Innovative about management’s poor supervision of the SBA program.  Innovative ultimately suffered losses in excess of $3.3 million on forty-three (43) SBA loans, all of which were made in violation of the Bank’s own loan policy and underwriting standards.  All but seven of those SBA loans were made after the regulators’ specific warnings about the SBA lending program.

In its complaint, the FDIC asserts a direct claim for fraud against Mr. Kim, as well as a claim against the other former officers for negligence in connection with the hiring, supervision and retention of Mr. Kim as a senior lender.

The complaint also asserts claims against the former directors in connection with their alleged failure to adequately monitor and supervise the Bank’s overall lending function.  The claimed losses on those counts include the estimated $3.3 million of losses on the failed SBA loans, in addition to at least $3.8 million of estimated losses on eleven failed CRE and commercial loans.