FDIC sues failed Ill. bank’s execs over losses

By Reuters
Posted Nov. 1, 2010 at 5:36 p.m.

The FDIC sued 11 former executives and directors at a failed Illinois bank on Monday, part of the regulator’s efforts to recover more than $1 billion of losses in its deposit insurance fund.

The lawsuit accuses former officials at Heritage Community Bank of negligence, gross negligence and breach of fiduciary duty.

The Federal Deposit Insurance Corp is planning to sue more than 50 officers and directors of failed banks to help replenish its deposit insurance fund, a spokesman for the regulator said.

On Oct. 19, the FDIC said bank failures would cost the fund $52 billion from 2010 through 2014. So far this year, 139 lenders have failed, compared with 140 in 2009.

In its complaint filed in U.S. District Court in Chicago, the FDIC accused Heritage officials including former Chief Executive John Saphir of trying to mask problems in the bank’s commercial real estate portfolio by making new loans, causing more than $8.5 million of losses.

It also accused the officials of awarding $11.08 million of dividends and incentive payments, including to Saphir and other senior management, rather than conserve cash that the Glenwood, Illinois-based lender needed.

“Defendants failed to preserve the bank’s capital and provide sufficient reserves to absorb losses that would inevitably result when poorly underwritten commercial real estate loans went bad,” the complaint said.

The defendants have retained attorneys from Chicago-based Katten & Temple LLC, which said in a statement Monday night that the FDIC’s action is both regrettable and wrong.

“With the advantage of 20-20 hindsight, the FDIC blames the former officers and directors of a small community bank for not anticipating the same market forces that also caught central bankers, national banks, economists, major Wall Street firms, and the regulators themselves by surprise,” the statement said. “The allegations in the complaint are utterly without merit.”

In July, the FDIC sued to recover $300 million from former executives of IndyMac Bancorp Inc., a large California mortgage lender prior to its July 2008 failure.

Heritage had roughly $232.9 million of assets and $218.6 million of deposits prior to failing. MB Financial Inc. acquired most of the assets and assumed all the deposits. The FDIC at the time estimated the failure would cost its deposit insurance fund $41.6 million.

The case is FDIC v. Saphir et al, U.S. District Court, Northern District of Illinois, No. 10-07009.

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  1. bob Nov. 1, 2010 at 7:05 pm

    Wow, if they only lost 40 million, then think of the corruption that must have existed at Broadway Bank! Oh, by the way, the Giannoulias family owns another bank in NY. Is anyone checking on the interaction between that bank and Broadway?

  2. jack (me) Nov. 1, 2010 at 8:17 pm

    I was thinking along the same line as you, bob. Don’t forget that they also withdrew capital from Broadway Bank, supposedly to pay estate taxes for Alexi’s poor but dead father. However, the FDIC said it was not reporting on Broadway Bank until after the election. Illinois voters, think about what bob said when you vote tomorrow.

  3. Shota Nov. 2, 2010 at 10:47 a.m.

    It’s astonishing that so many smaller banks have failed after the TARP initiative. The question is: did these smaller banks get any part of TARP or was TARP money mainly given to mega banks?


  4. Craig Roth Nov. 2, 2010 at 7:02 pm

    As I recall, but could be wrong, TARP was intended for the larger and mega institutions. You know, those handing out big campaign donations.

  5. R.U. Kidden Nov. 12, 2010 at 2:56 pm

    Privately owned banks were not eligible for tarp. The family owned banks were hung out to dry. They like to lend and hire on the “friends and family” plan and got caught with their pants down.