Government Targets Thrift Boards
THEY were the pillars of the community: a judge, a congressman, a dairy farmer, a manufacturer of airplane parts, a leading restaurateur. But suddenly they found themselves being sued for $50 million by the federal government because they were among the 19 members of the board of directors of Knox Federal, a failed Knoxville, Tenn., thrift. According to the government, the men should have detected questionable activity that lead to the bank's downfall. ``They breached their fiduciary duty. They were on the board to supervise the running of the bank and they failed to do that,'' says Dennis Klein, a lawyer with Hopkins & Sutter, a law firm that represented the government. Government pursues lawsuitsSkip to next paragraph
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But restaurant owner and former board member Bill Regas calls the government suit, ``Ridiculous, a ripoff.''
Mr. Regas served on the board, which settled with the government on September 1988, because he felt he was serving the community. ``I wanted to help make things grow,'' he says.
Increasingly, the government is bringing lawsuits against people like Regas. Today, it has 250 suits pending against directors, officers, and other professionals at failed banks and thrifts. The federal government's legal department that pursues these cases has increased from 24 lawyers in 1989 to 80 this year.
There are hundreds of investigations to determine if more suits should be brought. One of those investigations involves Neil Bush, President Bush's son. The younger Bush was on the board of Silverado Banking, Savings, and Loan Association, a Colorado thrift that regulators sold to another bank.
There is big money involved in the cases. In one suit, filed against the directors and officers of the Lincoln Savings Bank in California, the government is suing for $1.1 billion.
Although the government sues directors for large sums, most businessmen don't end up paying the money out of their pocket. They have directors' and officers' liability insurance to protect themselves from lawsuits. The directors of Lincoln, for example, are covered by less than $10 million in insurance.
``The government sees this as a way to recoup some of the money paid out to failed banks and put some of the expense on the backs of the insurance companies,'' says Ronald Glancz, who used to be an attorney at the Federal Deposit Insurance Corporation (FDIC), which insures banks. He is now in private practice representing insurance companies and directors.
However, John Thomas, associate general counsel for the FDIC, says the agency's role as receiver or liquidator ``is to pursue all viable claims including claims based on negligence by officers or directors. When insurance companies have insured officers and directors against whom we have claims, the FDIC will, of course, seek to recover from those insurance companies.''
Rarely do any of these cases go to trial. According to lawyers familiar with the practice, only about 5 percent do. Most are settled out of court by either the defendants or their insurance companies. This is in large part because the government has been extremely successful at winning cases.
Most of the decisions to settle are made during the process of discovery when lawyers question potential witnesses before the actual trial. During discovery, the government's lawyers question the board members at length about every loan that went bad. Trials are costly