(CN) – The liquidation trustee for Guaranty Bank, whose 2009 collapse cost taxpayers more than $1 billion, accuses its corporate parent, packaging giant Temple-Inland, of “fraudulently looting” the bank. In a separate complaint, the trustee claims the bank’s financial adviser, Keefe Bruyette & Woods / KBW, contributed to the collapse by using inside information to short the bank’s stock and charging the insolvent bank more than $20 million while the getting was good.
Kenneth Tepper, a trustee who represents Guaranty Bank’s creditors and the Federal Deposit Insurance Corporation, claims the bank’s failure cost U.S. taxpayers more than $1 billion.
In separate federal complaints in Dallas, he seeks more than $1 billion in damages from Temple-Inland, its affiliates and several former and current executives of the company and the bank, and $20 million from Keefe Bruyette & Woods / KBW.
Temple-Inland, an Austin-based building products and corrugated packaging manufacturer with more than 10,000 employees, owned Guaranty Bank from 1988 until 2007, when it was spun off as a separate entity.
Guaranty Bank, also known as Guaranty Financial Group Inc. (GFG), collapsed and was taken over by the FDIC in August 2009, in what Tepper describes as “one of the largest financial institution failures in U.S. history.”
The bank had 150 outlets in several states and more than $14 billion in assets.
Tepper claims that “GFG’s ultimate parent corporation, Temple-Inland, and its affiliates, several of Temple-Inland’s directors, and GFG’s directors caused the failure of GFG and the bank by fraudulently looting GFG and the Bank of assets exceeding $1 billion.”
Named as defendants are Temple-Inland Inc., TIN Inc., Forestar (USA) Real Estate Group Inc., former Temple-Inland CEO Kenneth M. Jastrow II, former Guaranty Bank CEO Kenneth R. Dubuque, Randall D. Levy, Arthur Temple III and Larry E. Temple.
Tepper says: “The defendants carried out this fraudulent scheme for the benefit of Temple-Inland. At relevant times, Temple-Inland was a publicly held corporation the core business of which included the manufacture and sale of building products used in the residential building industry, including lumber and wallboard. Temple-Inland exerted total control and dominance over its subsidiaries, including GFG and Guaranty Bank, and operated the Bank not as a traditional bank, but rather as a captive finance arm of Temple-Inland’s manufacturing operation and to provide support to, and create demand and generate profits for, its core building products business.
“Defendants’ fraudulent looting of GFG and Guaranty Bank included taking $170 million in dividends from the Bank and GFG in 2006 and 2007, just as the bank and GFG were facing historically bad market conditions and while they were being forced to borrow hundreds of millions of dollars from the Federal Home Loan Bank to support a highly-risky, highly-leveraged, mortgage-backed securities acquisition scheme (sometimes ‘MBS’); transferring approximately $335 million in real estate assets from GFG for little or no consideration; forcing GFG to incur over $305 million in debt obligations to trust preferred securities holders to fund the buyout of preferred stockholders to whom Temple-Inland had guaranteed payment; imposing tax restrictions on GFG’s right to carry back net operating losses on its federal income tax returns, forcing GFG to forego approximately $300-350 million in tax refund.”
Tepper says Temple-Inland provided capital support to GFG and Guaranty Bank only as long as they remained subsidiaries of the company, so that Temple-Inland could pay its own debt obligations.
“After fraudulently stripping GFG and the bank of assets beyond the point of solvency and adequate capitalization, defendants then attempted to avoid the clear and present danger of a disastrous cross-default on Temple-Inland’s own debt obligations and any potential liability for Temple-Inland’s capital maintenance obligation by spinning off the fatally crippled and doomed-to-fail GFG and its subsidiaries as separate stand-alone corporations, leaving GFG’s creditors, the FDIC, and the American taxpayers to suffer the enormous losses defendants created,” the complaint states.
“Temple-Inland, its affiliates, and the defendant directors, engaged in this scheme to strip GFG of its value and to avoid Temple-Inland’s capital maintenance obligation because they recognized that GFG and the Bank were headed for financial disaster. Temple-Inland caused the Bank to heavily invest in high-risk, private-label MBS collateralized by toxic residential mortgages known as Option ARMs. These MBS were dramatically overvalued on the Bank’s and Temple-Inland’s consolidated financial statements, as Temple-Inland well knew.
“In fact, shortly before the spin-off of GFG and the bank, the bank’s Director of Quantitative Analysis warned of the potentially disastrous nature of these high-risk, private-label mortgage-backed securities and the impending catastrophic consequences of the unsafe and unsound investment strategy Temple-Inland had imposed on the bank – the consumption of the bank’s entire stated capital of approximately $1 billion. These concerns were dismissed in curt internal emails that called the Director of Quantitative Analysis a ‘pussy.'”
Tepper adds that Temple-Inland forced the bank to make risky construction and real estate loans to Temple-Inland customers so they would buy the company’s products.
He says: “Temple-Inland was able to complete the spin-off despite the bank’s dire financial condition by misrepresenting and overvaluing the bank’s risky, homebuilder focused, loan and MBS portfolios. Had Temple-Inland disclosed the bank’s true financial condition, or had Temple-Inland retained ownership of GFG, Temple-Inland would have been ordered or otherwise required to provide additional capital support for the bank. That capital support would have reduced the catastrophic losses suffered by the bank, the FDIC, and GFG’s creditors.”
Tepper seeks damages for violations of the Texas Fraudulent Transfer Act, breach of fiduciary duty and breach of capital maintenance obligation, on behalf of GFG’s creditors.
In the second complaint, Tepper claims that New York-based financial broker Keefe, Bruyette & Woods Inc. and its parent company KBW Inc. contributed to the collapse of GFG through “improper and illegal use of material, non-public, confidential, inside information obtained from its clients Guaranty Financial Group Inc. (‘GFG’) and Guaranty Bank (sometimes, the ‘Bank’), deficient performance services, and the exorbitant $20 million in fees KBW fraudulently obtained from GFG at a time when, as KBW knew, GFG and the Bank were insolvent, inadequately capitalized, and were in danger of catastrophic failure. Using this information while engaged as GFG’s investment banker and financial advisor, KBW shorted GFG shares, thereby betting against its clients, undermining their capital raising efforts, and contributing to their demise.”
Tepper seeks recovery of the $20 million in fees paid to KBW, the profits obtained by shorting GFG stock, and damages for breach of contract and breaches of the duty of good faith and fair dealing.
Tepper’s lead counsel is Hersh Kozlov with Duane Morris of Cherry Hill, N.J. and Philadelphia.