Shareholder Settlement Bars Synovus Board from Approving Loans

Synovus Financial Corp. (SNV) settled a shareholder lawsuit over more than $200 million in bad loans to Georgia luxury resort Sea Island Co. that the investors say were approved with a "golf course handshake" between executives of the two companies.

The bank's shareholders sued in federal court in Atlanta in 2009 after the real estate market collapsed and tourism declined, damaging Sea Island's business. The 85-year-old resort filed for bankruptcy the following year. The investors accused current and former Synovus directors and executives of gross mismanagement in their handling of the loans and of making false and misleading statements to investors.

Under the settlement, which was given preliminary approval Jan. 9, the Synovus board will no longer be allowed to approve loans and agreed to adopt other policies to prevent "excessive risk."

"What is especially interesting is that the directors won't be able to participate in the approval of any loans, whether large or small," said Mark Chen, an associate professor of finance at Georgia State University who specializes in corporate governance. "That does seem to be unusual."

James Blanchard, the former chairman of Columbus, Georgia- based Synovus, owned a house on Sea Island and was also a friend of resort Chief Executive Officer Bill Jones III, according to the investors' complaint, which said the pair were hunting and golfing partners. Blanchard was on the Sea Island board and Jones was a Synovus director until 2008. Both men were named as defendants in the shareholder suit and, in the settlement, deny any wrongdoing.

'Pebble Beach'

Privately held Sea Island was attempting to transform itself into the "Pebble Beach of the East" in the mid-2000s, when it turned to Synovus for loans to update its signature Cloister Hotel and other properties, the shareholders said in court documents.

With tourism and the real estate market declining in 2007, Synovus officers "said next to nothing about Sea Island and, when asked about Sea Island generally assured investors it was not a problem," the shareholders alleged.

The Sea Island loans are also the focus of securities fraud lawsuits against Synovus by three pension funds accusing the bank of providing false information to investors. While the shareholder suit was a so-called derivative case filed against directors and executives on behalf of Synovus, the pension fund suits were filed against the bank, as well. The pension fund cases are still pending.

'Worst' Allegations

In July, U.S. District Judge J. Owen Forrester called the complaints in those suits "probably the worst set of allegations I've ever seen in a securities case." He urged the attorneys to "think about mediation as soon as you can."

Under the terms of shareholder settlement, the Synovus board "shall not approve loans" while it will have "oversight of management's lending and credit policies." The bank will pay $900,000 in shareholder attorney fees. Forrester set another settlement hearing for Feb. 26.

Synovus also agreed to consolidate 30 of the company's bank charters into one. The Sea Island loans were made by various banks owned by Synovus with each bank having its own board, making oversight of the Sea Island loans more difficult, according to court documents.

Eight Synovus directors, including Blanchard, have left the company and new members with expertise in risk management and auditing have been added, according to court documents.

Neither Corey Holzer, an attorney for the shareholders, nor John Latham, an attorney for the defendants in the case, immediately returned phone calls seeking comment on the settlement. Synovus spokesman Greg Hudgison declined to comment.

Howard Coffin

Sea Island, on the southeast coast of Georgia just north of the Florida border, began as a small hotel built in 1928 by automobile executive and engineer Howard Coffin. Today, the Cloister Hotel features villas with ocean views and a spa that is larger than an American football field.

Sea Island was the site of the Group of Eight Summit in 2004 that brought then-President George W. Bush and dignitaries including Afghanistan President Hamid Karzai to the resort.

In August 2010, Sea Island Co. filed for bankruptcy and was sold that year to Oaktree Capital Management LP, Avenue Capital Group, Anschutz Corp. and Starwood Capital Group for $212.4 million, according to court documents.

In 2008, Synovus received $968 million from the federal Troubled Asset Relief Program. It remains TARP's largest single bank investment, according to the U.S. Treasury Department. The company hopes to return the TARP funds no later than the fourth quarter of this year, Hudgison said.

The case is City of Pompano Beach General Employees' Retirement System v. Synovus Financial Corp., 09-cv-01811, U.S. District Court, Northern District of Georgia (Atlanta).