FDIC Sues Advanta Bank Execs for $219 Million

(CN) – The FDIC sued two directors of the failed Advanta Bank for $219 million, claiming they ruined the bank by blowing off more than 35,000 customer complaints after “increasing credit card interest rates to unprecedented levels” during the financial crisis.
     The Federal Deposit Insurance Corporation sued Dennis J. Alter and William A. Rosoff – who held the joint position of “Office of the Chair” at Advanta – in Philadelphia Federal Court.
     It’s the latest in a string of lawsuits in which the FDIC is trying to claw back money from executives and directors whose banks failed during the financial crisis.
     “Until 2007, Advanta was a profitable bank with high levels of capital,” the complaint states. “In 2007, the bank began experiencing a spike in customer delinquencies and defaults due to the recession. To prop up the Holding Company’s collapsing stock price and to maintain the Bank’s dividends to its Holding Company, of which Alter was the largest shareholder, Alter and Rosoff implemented a plan to boost the Bank’s short term earnings at the expense of the bank’s long term health. Between January 1, 2008 and May 31, 2009, Alter and Rosoff implemented numerous, massive, and unprecedented ‘re-pricing’ campaigns (raising annual percentage rates (‘APRs’)) on its credit card customers, which destroyed the bank’s customer base.” (Parentheses in complaint.)
     The complaint continues: “Alter and Rosoff were grossly negligent and breached their fiduciary duties by failing to investigate or consider how their re-pricing campaigns would cost the Bank in terms of customer outrage, attrition, credit losses, and governmental sanctions. Alter and Rosoff rejected the bank’s long historical experience that re-pricing beyond a small group of non-compliant customers would be counterproductive because it would drive off customers (‘attrition’) or cause them to default resulting in a credit loss to the bank. Alter and Rosoff also rejected the repeated warnings of bank management that Alter and Rosoff’s expanded and reformulated re-pricing would cause, and was causing, much higher attrition and credit losses. Alter and Rosoff rejected the bank’s consultants’ repeated warnings that the bank was re-pricing many more accounts at much higher APR levels than its competitors, which was causing unusually high attrition. Alter and Rosoff ignored the bank’s own internal reports that showed statistically that attrition and credit losses were exploding because of the re-pricing. Finally, Alter and Rosoff completely ignored more than 35,000 customer complaints received by the bank in 16 months (over 20,000 in the last quarter of 2008 alone) regarding the re-pricing campaign.
     “Alter and Rosoff were also grossly negligent and breached their fiduciary duties by utilizing deceptive and misleading re-pricing ‘notices’ that failed to disclose either the fact or the amount of the interest rate increases, failed to state a customer-specific reason for the re-pricing, and failed to give customers an adequate time to opt out. “The Alter and Rosoff re-pricing notices resulted in an FDIC Restitution Order that cost the Bank $21 million. …
     “The Alter and Rosoff re-pricing campaign caused approximately 400,000 customers to close their credit card accounts and leave the bank (‘attrition’), which caused a net loss directly to the bank of at least $59 million. In addition, the Alter and Rosoff re-pricing campaigns caused more than 40 percent of the bank’s remaining customers to default on their credit card accounts, which caused the bank at least another $140 million in credit losses.”
     The FDIC seeks damages for gross negligence and breach of fiduciary duty.
     It is represented by Samuel Stretton of West Chester, Penn.

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