About That $128 Million …

     CHICAGO (CN) – “Irresponsible” executives and board members of the collapsed Midwest Bank and Trust Co. blew off regulators’ warnings in a “fiasco” that cost the bank $128 million, the FDIC claims in court, and it wants them to pay it back.
     The Federal Deposit Insurance Corp. sued 18 former executives and board members of the bank in suburban Elmwood Park, which the FDIC took over in May 2010.
     It’s part of a recent trend in which the FDIC is trying to hold responsible, and claw back money from, officers of banks that collapsed during the financial crisis, allegedly because of fast-and-loose lending.
     The complaint states: “The FDIC-R [as receiver] brings this lawsuit in its capacity as Receiver for Midwest Bank and Trust Company, Elmwood Park, Illinois (‘Midwest’ or the ‘Bank’). Pursuant to 12 U.S.C. §1821, the FDIC-R succeeds to all the rights, titles, powers, and privileges of the Bank and its depositors, accountholders, other creditors, and stockholders, and seeks to recover over $128 million in damages caused by Defendants’ tortious conduct.
     “The FDIC-R seeks recovery of tort damages caused by the Defendants’ gross negligence, negligence, and breaches of fiduciary duties in violating the Bank’s policies and prudent, safe, and sound banking practices. In this lawsuit, the FDIC-R does not seek to collect upon outstanding loans, but rather seeks to collect damages flowing from the Defendants’ gross negligence, negligence, and breaches of fiduciary duties.
     “The facts alleged herein show that the Defendants exhibited an extreme departure from the standard of care and want of even scant care by agreeing to lend $100 million to six uncreditworthy borrowers and affiliated parties (collectively, the ‘loan transactions’) without adequately analyzing the creditworthiness of the borrowers and guarantors, without establishing that the borrowers’ proposed real estate projects were feasible or likely to result in repayment of the Bank’s funds, and without identifying any reasonably reliable and adequate source of repayment. This irresponsible conduct took place after the Federal Reserve Bank of Chicago (‘FRB’) and the Illinois Department of Financial and Professional Regulation (‘IDFPR’) had extensively criticized Defendants’ lending policies and practices, warned them expressly that their lending practices would lead to losses, and taken specific enforcement action in an effort to put the Bank on a safe and sound footing. While Defendants responded to the enforcement action by creating a new set of written loan policies designed to respond to the regulators’ criticisms and protect the Bank, their irresponsible practices never changed. Defendants knew or should have known that the Bank was unlikely to be repaid in the loan transactions, but their gross disregard of the Bank’s rewritten lending policies, as well as prudent lending practices, caused damages of at least $62 million.
     “The Director Defendants also disregarded prior experience, criticism, and the Bank’s specific policy when – after allowing more than $85 million of investments in certain preferred stock – they failed to follow or enforce established policies and practices that required securities to be sold if they became classified as ‘other-than-temporarily impaired’ (‘OTTI’). These policies and practices had been publically announced in 2005 following criticisms in the form of a ‘material weakness’ finding issued by Midwest’s independent accountants relating to significant earlier losses on the same type of securities – a situation that Defendant Giancola described publically as an ’embarrassment’ and internally as a ‘fiasco.’ Despite this prior experience and promise of reform, in 2008, the Director Defendants again exhibited an extreme departure from the standard of care and want of even scant care by ignoring the policies and practices designed to protect the Bank from the risk of holding OTTI stock. Instead of following the Bank’s specific policy requiring them to divest Midwest’s investment portfolio of securities that had become classified as OTTI – a simple, rational policy designed to protect the Bank – the Director Defendants pursued an uninformed gamble and held the stock until it had lost most of its value. This caused damages of at least $66 million that would have been entirely avoidable had they simply followed their publicly announced policies and practices.
     “On May 14, 2010, the IDFPR closed Midwest and appointed the FDIC-R as receiver pursuant to 12 U.S.C. § 1821(c).”
     Here are the defendants: James J. Giancola (CEO and board member), Jerome Jay Fritz aka J.J. Fritz (COO, acting CEO and board member), and board members Angelo A. DiPaolo, Barry I. Forrester, Robert J. Genetski, Gerald F. Hartley, Homer J. Livingston, Jr., Joseph R. Rizza, Egidio V. Silveri aka E.V. Silveri, Leon Wolin, Thomas A. Caravello, Sheldon Bernstein, Thomas H. Hackett, Mary H. Henthorn, Kelly J. O’Keeffe, Brogan M. Ptacin, John S. Spear, and William H. Stoll.
     The FDIC accuses them of negligence, gross negligence, and breach of fiduciary duties. It asks the court to determine the damage done, and order them to pay it.

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