Banking Law

More Evidence That Failed Bank Directors Are In FDIC's Crosshairs

If you're not reading FinCri Advisor, you should be. It's putting out some of the most useful commentary on the financial crisis to be found on the internet.

No, I have no connection with Fin Cri Advisor and this is an unpaid endorsement. I simply like their reporting. For those who loathe this blog, I may be damning them with my praise. Of course, if you loathe this blog, I doubt you're reading this recommendation.

One of the most recent posts discussed a topic that we've been pursuing, that being the not-so-subtle indications that the FDIC is gearing up to sue directors and officers of failed FDIC-insured financial institutions. According to FinCri Advisor's sources, the FDIC has been sending claims letters to former officers and directors of failed banks in order to preserve recourse against "claims made" D&O insurance policies. The fact that these letters are going out impacts not just the obvious persons involved, but every bank that has a D&O insurance policy; in other words, practically every commercial bank and thrift institution.

Such actions "impact everyone - not just failed banks, but all banks - in terms of D&O costs and provisions of the policies," says attorney Walt Moeling, co-manager of the Financial Institutions Group at Bryan Cave in Atlanta.

As the author of the article correctly observes, more claims activity means higher premiums for banks.

The ripples extend beyond existing FDIC-insured institutions, however.

That, in turn, leads to other issues, a 16-year investment banking veteran who blogs at www.capitalbeacon.com writes to FinCri Advisor. "I am aware of several people that have altered plans to raise private equity funds because D&O insurance was either too expensive or unavailable," he offers, adding that it affects mortgage companies, hedge funds and private equity firms, also.

Bryan Cave attorney Walt Moeling points out that while he's not aware of any suits having been filed to date, that doesn't mean that they won't be filed, and if they are, the effects won't be pleasant.

The statue of limitations to file typically is 1 to 2 years, depending on the D&O policy, but the actual litigation can last 6 to 12 years, "and it is very painful for an individual to defend it," Moeling says.

There's other useful information for directors and officers who are concerned about their coverage, including:

• A lawsuit is more likely if there is D&O coverage.
• Directors and officers sleep better at night knowing that they're covered and are more willing to settle if the settlement money is coming out of the insurance carrier's pocket.
• The "regulatory exclusion" (discussed here last week) can ruin the day of both the FDIC and the insureds, so read your policy carefully before you purchase it.
• Also, read the policy carefully for what acts and omissions are and are not covered.
• Renewal of coverage can be a painful process and is likely to become increasingly painful as the FDIC increases its claims activity.

One of the interesting (to me) sidelights of the story is the fact that Bryan Cave acts as independent counsel to the FDIC in suits against officers of failed banks and at the same time has clients that have received claims letters from the FDIC. I assume they'll have to pick either the FDIC or the recipients of the letters as clients if the claims letters ripen into litigation. I haven't looked into the conflict-of-interest policies of the FDIC recently, but when I acted as independent counsel to the RTC in the early 1990s, it used the FDIC's conflict-of-interest policy, which prevented law firms from representing parties whose interests were adverse to those of the FDIC "anywhere in the system" if they also represented the FDIC "anywhere in the system." For example, if you were acting as outside counsel to the FDIC in evaluating potential claims against directors and officers of one failed institution you couldn't represent the director of another failed institution in an action brought by the FDIC. I assume these policies remain essentially unchanged. For those who are interested, here's a link to the FDIC's Statement of Policies Concerning Outside Counsel Conflicts of Interest.

Don't even think about trying a "Chinese Wall" argument with the FDIC. It's not biting into that apple.

Full post as published by Bank Lawyers Blog on June 15, 2009 (boomark / email).