FDIC files more D&O suits: What it means for GCs

In the current environment, no one called “officer” should feel too safe

In 2014, lawsuits by the Federal Deposit Insurance Corporation (FDIC) that named the directors and officers of failed financial institutions greatly exceeded the annual totals of the previous three years.

There were 40 D&O suits in 2013, compared to annual totals of 26 in 2012, 16 in 2011, and two in 2010, according to a recent study by Cornerstone Research titled “Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial Institutions—February 2014.”

The pace of D&O litigation fell off in the fourth quarter, but that seems temporary. Cornerstone SVP Katie Galley advises that three suits were filed in January 2014 and states that the result of legal strategies on both sides will determine “whether we see protracted litigation…or movement to settle cases earlier.”

So what does this mean for corporate legal officers?

At first blush, there seems to be minimal exposure for most GCs. In fact, Galley found in her databank only one 2011 case of a complaint against a GC. The lawyer was a board director and a member of the Directors’ Loan Committee that approved the loans at issue in the complaint.

If we know anything at all about regulatory strategies, we know they’re all about expanded purviews, fresh targets, and, of course, the numbers game. In such an environment, no one called “officer” should feel too safe.

The recent FDIC activity has relevance beyond whatever individual exposure it represents for lawyer/officers. If, as one corporate lawyer advises us, the FDIC is saying that “anything the SEC can do, we can do better,” it only confirms that we live in an era of ever-accelerating parallel regulatory litigation. The legal officers of Chase and Citigroup already know that, I’m sure, but here we have dramatic evidence that such fervid competition among regulators is hardly confined to Wall Street.

There's another important take-away for all legal officers. The FDIC lawsuits that caused the 2013 to 2014 uptick resulted from institutional failures in 2009 and 2010, when such failures occurred at a rapid pace. The rosy view is that the current high volume is therefore anomalous; institutions have cleaned up their act, and the number of D&O suits three years hence will be smaller.

Actually, as Paul Ferrillo advises, statutes of limitation were likely about to run out, and tolling agreements were likely about to expire. So the suits were brought to preserve the claims against the alleged “bad bank,” says Ferrillo, counsel in the litigation department at Weil, Gotshal & Manges LLP. “Where the rubber meets the road, however, is whether indeed these institutions have learned from the past, have focused on robust compliance programs, and have strengthened lending practices so that past ‘failures’ in this sector don't repeat themselves down the road.”

The FDIC's lawsuits thus provide new cause for GCs to think a little more imaginatively about their job descriptions and how best to advise their companies on the litigation burdens ahead—and, at the same time, to think self-interestedly in terms of personal liability. According to the data, 46 percent of directors and officers at institutions that failed in 2009 were targeted in lawsuits or settled with the government before the case was filed.

Even more eye-opening, Cornerstone's data shows that 46 percent of the settlements required payments of at least $34 million by directors and officers. That seems to indicate glaring deficiencies in risk management during the critical years when these institutions foundered—even so simple a risk expedient as adequate D&O insurance.

“Having a good D&O insurance policy has been important for the defense of the D&Os in these cases,” Galley offers, raising the question of whether financial institutions have, in fact, learned anything. Are they now buying adequate policies? Are they now thinking in terms of risk management? Are their in-house lawyers now pondering what's next and providing longer-term counsel?

Ask us in three years.

Richard Levick

Richard Levick, Esq., is the chairman and CEO of Levick. Follow him on Twitter @RichardLevick.

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