Directors accused of contributing to the collapse of their banks are blaming their accusers.
As the Federal Deposit Insurance Corp. files more lawsuits against former directors of failed banks, a common theme has emerged from the defendants' legal arguments: The FDIC and other regulators are to blame because they repeatedly gave their blessing to the failed banks' business plans.
Mike Perry, a former IndyMac Bancorp chief executive and a defendant in a lawsuit brought by the FDIC, has blasted the agency for its "own failures," including the insolvency of the Deposit Insurance Fund.
Other defendants are making a different argument, asserting that the business decisions they made were expressly approved by the FDIC.
The defendants claim that if the FDIC, staffed by banking experts, was unable to forecast the real estate meltdown, how could community bank directors and officers.
"The FDIC repeatedly and consistently endorsed [Haven Trust Bank's] business plan, financial performance, policies, asset quality and management over the course of the five years preceding" its closure, wrote Theodore Sawicki, a lawyer at Alston & Bird who is representing the directors of the Duluth, Ga., bank, which was closed by regulators in December 2008.
Sawicki, in a Sept. 15 court document filed with the U.S. District Court for the Northern District of Georgia, wrote that the FDIC had even determined that the bank was "fundamentally sound and is in substantial compliance with all laws and regulations."
By itself, blaming regulators is not a legal strategy that should be expected to produce much success, said Tony Powers, a lawyer at Rogers & Hardin LLP who has represented individuals against claims from the Securities and Exchange Commission.
"It's typical that companies try to blame their regulators, but it doesn't work," he said.
Still, some industry observers said they believe the defense has some merit.
"It's unfair to hold outside bank board members accountable for a lack of clairvoyance into these trends when regulators who were better situated and better informed were also blindsided," said Brian Olasov, a managing director at McKenna Long & Aldridge.
David Barr, an FDIC spokesman, said the agency does not comment on pending litigation.
In most of the FDIC's cases in which the accused have submitted reply briefs, the defendants' lawyers do not rely solely on the argument that regulators are at fault.
Many defendants, for instance, have argued that the agency failed to demonstrate that board members were negligent or careless in making decisions on loan approvals.
Sawicki also argued that the FDIC failed to meet the standard of proving gross negligence, among several other points.
Powers and other lawyers expect the FDIC to file many new cases in coming months.
The agency has said that its board had given it permission to sue 109 former bank directors and officers. Since July 2010, the FDIC has sued dozens of former directors and officers in 14 separate lawsuits.
One recent case, filed by the FDIC against two former executives at First National Bank of Arizona, was settled earlier this month. Before the settlement, lawyers for the executives, Gary Dorris and Philip Lamb, argued that First National failed because of the collapse of the secondary mortgage market rather than negligence.
(First National Bank was consolidated into First National Bank of Nevada, a sister bank, before the Nevada bank failed in July 2008.)
The executives' lawyers also asserted in documents with the U.S. District Court for Arizona that regulators encouraged Dorris and Lamb to get involved in subprime mortgages. "Government regulators encouraged nontraditional lending in general," lawyers at Venable LLP, wrote in a Sept. 1 briefing.
The Office of the Comptroller of the Currency gave the Scottsdale, Ariz., bank high ratings for both its asset quality and capital levels before the mortgage market collapsed, the briefing said.
"The FDIC's claims … are barred because its alleged damages [if any] were the result of one or more … causes, including … the acts and omissions of the FDIC and other bank regulators," according to a legal brief.
Dorris and Lamb earlier this month settled with the FDIC for $20 million each, while denying the accusations.
Lawyers for former directors of Wheatland Bank of Naperville, Ill., made a similar argument in a July 12 briefing in the U.S. District Court for the Northern District of Illinois. (Regulators shuttered Wheatland in April 2010.)
"The FDIC attempts to hold the defendants to an unreasonably [and improperly] high standard," wrote Chicago lawyer Robert Coleman on behalf of the former Wheatland directors.
Coleman said that the FDIC's case implies that the directors "had to foresee and prevent risks in the real estate market that even the most sophisticated banks and regulators missed."
