ATLANTA (CN) – The Federal Deposit Insurance Corp. sued 17 former directors and officers of Atlanta-based Silverton Bank, seeking $71 million to help recoup losses from the biggest bank collapse in Georgia history. The FDIC claims, among other things, that the bank went on a spending spree on corporate jets though the purchases left it below its capital requirements.
In its federal complaint, the FDIC says the defendants consistently disregarded the bank’s own policies when making loans, while directing the bank “on a course of expansive and extravagant spending on unnecessary items for the Bank after the economy began to decline.”
Among these items were two new corporate jets, a new aircraft hangar to house three large and expensive jets, and a “large and lavish new office building,” the FDIC says.
“The Bank also employed, at minimum, eight private pilots to carry directors and prospective clients to meetings and other locations.”
The board approved the purchase of a Falcon 20 jet for $3.5 million in April 2007, though the purchase caused the Bank’s capital to drop below the 11 percent required minimum set by the OCC [Office of the Comptroller of the Currency] just one month earlier. Simply stated, this was reckless activity by these defendants. The estimated loss for the funding of the Falcon 20 is $3,500,000,” the complaint states.
Then 7 months later, in November, the board bought another jet, for CEO Tom Bryan, for $1.35 million, though even before the purchase it was “still below its required risk-based capital ratio,” the complaint states.
“The purchase of this additional plane caused the Bank’s capital to remain below the required 11 percent minimum as set by the OCC in July 2007. The estimated loss for the funding of the King Air airplane is $1,350,000.”
The FDIC says the entire air division of the bank was run irresponsibly: “The Bank’s Board minutes do not contain any discussion of why the Bank funded SFSI’s [Silverton Financial Services, Inc., which owned all of the bank’s stock] purchase of these two airplanes. The minutes fail to reflect that the decision was made in a deliberate manner or on an informed basis or that any business judgment was exercised by these defendants in this regard. Despite the fact that Silverton provided the funds that were used to purchase these planes, SFSI took title to both airplanes. Moreover, Silverton had no lien on either airplane. Accordingly, when the airplanes were later sold, Silverton received nothing, and the $4,850,000 that Silverton advanced for these two purchases was a total loss to the Bank. Such loss was proximately caused by the conduct alleged herein. The decision to fund the purchase of these airplanes (which were not owned by the Bank) was reckless and demonstrates a complete disregard of the interests of the Bank. There was a total lack of diligence in connection with the decision to fund the purchase of these airplanes. This lack of diligence and care is amply demonstrated by the manner in which this transaction was structured. Simply stated, these Defendants were reckless and failed to make this decision in an informed and deliberate manner. The Defendants failed to exercise any business judgment in this regard or even exercise a slight degree of care. There was a complete disregard for the interests of the Bank in this regard.
“The detrimental impact on the Bank of the purchase of these two planes was exacerbated when combined with the purchase of the hangar and the eight or more full-time employees in the ‘aviation’ department. These expenses ran well over $1,500,000 in 2008.”
Other activities included extravagant spending on shareholders and board meetings at luxurious Cloister resort hotel on Sea Island, Ga., and at the Ritz Carlton on Amelia Island, Fla.
Even when it came to supposedly legitimate banking, “Silverton’s aggressive expansion plan was accompanied by significant weaknesses in loan underwriting, credit administration and a complete disregard of a declining economy,” the FDIC said.
The agency accuses the officers and directors of “robotically voting for approval of transactions without exercising any business judgment.”
The bank was declared insolvent in May 2009.
The damages sought by the FDIC represent less than a fifth of the $386 million the agency spent on Silverton, according to the complaint.
Begun in 1986 as a wholesale institution to serve small community banks with services such as wire-transfer systems, bond trading and credit-card operations, Silverton expanded into real estate development and acquisition loans and its assets grew from $1.7 billion in 2005 to $3 billion in 2008, the FDIC said.
The bank’s troubles began in early 2007, when it changed from a state to a national charter so it could accelerate its growth, according to a report by the Treasury Department’s Office of Inspector General, which reviews failures of banks regulated by the Office of the Comptroller of the Currency.
Silverton’s commercial real estate lending had risen to $1.2 billion at the end of 2008 from $681 million at the end of 2006, the report said. The bank had $4.1 billion in assets when it failed. At the time, the FDIC estimated the closing would cost the insurance fund $1.3 billion.
Defendants include former Silverton CEO Tom A. Byran, Chief Lending Officer Brian D. Bueche, Chief Credit Officer Brock Fredette and Chairman Christopher Maddox. Defendants also include former members of the bank’s board: Paul T. Bennett, Michael Carlton, W. Roger Crook, J. Michael Ellenburg, Brian R. Foster, Robert I. Gulledge, Charles F. Harper, R. Rick Hart, J. Edward Norris, Stephen L. Price, Bobby Shepard, Hunter Simmons and Tony W. Wolfe.
The FDIC claims Silverton’s losses were due to the defendants’ negligence, gross negligence, breaches of fiduciary duties and corporate waste.
The FDIC also seeks declaratory relief on whether two insurance policies held by the bank were in full effect at the time of the failure, or were voided through regulatory exclusion provisions.
The FDIC is represented by Henry D. Fellows Jr., with Fellows LaBriola of Atlanta.