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A Chicago entrepreneur is suing the Federal Deposit Insurance Corp. to win back capital he invested in a bank in the months before it failed.
February 4 -
The FDIC charged executives of the failed Silverton Bank with squandering millions on planes, posh digs, and island retreats.
August 23
A year before Mutual Bank in Harvey, Ill., failed, management doled out $250,000 for what was described as a bank function. Federal regulators say that function was an over-the-top wedding for the top brass' son, complete with entrance in a Rolls-Royce.
The lavish affair was one of several eyebrow-raising events in a 47-page complaint filed last week by the Federal Deposit Insurance Corp. in the U.S. District Court for the Northern District of Illinois.
The FDIC is seeking $127 million from nine directors and officers, including Arun Veluchamy, a director and the groom in the July 2008 wedding held at the Chicago Sheraton. Others include Amrish Mahajan, the bank's president and a board member; and directors Anu Veluchamy, Steven Lakner, Ronald Tucek, Patrick McCarthy and Paul Pappageorge. The suit also names former chief credit officer, Thomas Pacocha, former senior vice president Richard Barth and former general counsel, James Regas.
The bank's chairman, Pethinaidu Veluchamy, and his wife and fellow director, Parameswari Veluchamy, were listed as interested parties rather than defendants, because they have filed for bankruptcy. The suit says their bankruptcy precludes them from being named as defendants unless the stay is modified or lifted.
Daniel McKay, a lawyer at Vedder Price in Chicago, who is representing the Veluchamy family said in an interview that his "clients believe the suit is misdirected and without merit and they plan to vigorously defend themselves."
The FDIC lists 11 counts against the defendants, from gross negligence to breach of fiduciary duty. The $1.6 billion-asset bank failed in July 2009, and its failure is on track to cost the Deposit Insurance Fund $775 million.
The wedding was part of a $1.1 million claim for wasted corporate assets. Other abuses include $495,000 paid to Mahajan to cover his wife's legal fees in a Medicaid fraud case, $250,000 of home renovations and a $300,000 board meeting in Monte Carlo.
Most of the money stems from $115 million in losses on 12 loans. The FDIC said the bank grew too fast, didn't heed warnings, and was too lax with underwriting and credit administration.
"Defendants routinely failed to assess the repayment abilities of borrowers and guarantors … violated the bank's loan policies, allowed use of interest reserves without adequately considering borrowers' repayment abilities, made loans out of area without sufficient staff to monitor performance, failed to monitor the use of loan funds, renewed loans without adequate underwriting or obtaining additional security," the lawsuit claims.
In one loan the borrower's wife signed the documents because he was in jail awaiting trial for the alleged murder of his daughter-in-law. The suit says the directors never discussed how the borrower would fulfill his loan obligations while incarcerated.
The FDIC is also looking to reclaim $10.5 million in dividends paid in 2007 and 2008, with nearly all of that going to the Veluchamy family, which owned 95% of the bank. The balance sheet had been showing signs of weakness since as early as 2005, and the payouts came "at a time when Mutual Bank was in poor financial condition and in need of conserving its capital bases," according to the lawsuit.
Pethinaidu Veluchamy sued the FDIC in early 2010 to recover $23.6 million that he and his family invested in the bank in an effort to keep it solvent before its failure. Veluchamy claimed in his lawsuit that the FDIC's actions were "arbitrary, capricious [and] an abuse of discretion." The district court dismissed the case, but the family has appealed to the U.S. Court of Appeals, Seventh Circuit.
