LAS VEGAS (CN) – Federal regulators hit four officers of the failed Silver State Bank with an $86 million lawsuit, claiming they negligently approved wobbly real estate loans that led to the bank’s 2008 collapse.
The Federal Deposit Insurance Corp. sued Corey Johnson, the bank’s CEO and co-founder, and vice presidents Douglas French, Gary Gardner and Timothy Kirby, in Federal Court.
Johnson “abandoned the bank’s prior conservative lending strategy in favor of a high-risk ADC [acquisition, development and construction] lending strategy funded by brokered deposit,” the FDIC says in its 76-page complaint.
The high-risk ADC loans were made between January 2006 and February 2008, the FDIC says.
“All of the defendants were grossly negligent and breached their fiduciary duties in originating, recommending, approving and/or administering the loss loans in violation of Silver State’s loan policies,” the complaint states. “Ultimately, as one witness testified in a sworn statement, the bank’s failure was caused by land loans of this nature.”
The FDIC claims that under co-founder Tod Little’s guidance, the bank’s “growth was steady and controlled, with conservative lending focused on small business administration loans to qualified borrowers.”
After 10 years, the bank had $805 million in assets. But Little was forced out when “Johnson used Little’s marital problems to convince the board to remove him,” the complaint states.
Hoping to grow the bank into a $2 billion institution within 2 years, Johnson “abandoned the bank’s prior conservative lending strategy in favor of a high-risk ADC lending strategy funded by brokered deposits,” according to the complaint.
“At Johnson’s direction,” the bank increased its ADC loans by $345 million in 2006, $394 million in 2007, and $124 million in 2008: the bank failed on Sept. 5, 2008, the complaint states.
The bank continued to make ADC loans even “when other similarly sized banks in the same market had virtually ceased making such loans,” the FDIC says.
“Both Johnson and French pursued this program aggressively despite indications and other warnings, beginning in mid-2005 and continuing until the bank failed, of declining real estate markets in the bank’s principal lending areas – Las Vegas and Phoenix,” the complaint states.
The FDIC claims French testified that he knew the Las Vegas market “was a speculative bubble and that the economy was a ‘house of cards.'” He also testified that the bank should not have made any new loans on Las Vegas residential real estate developments after mid-2007, according to the complaint.
The FDIC says the men were paid commissions of up to 10 percent of the bank’s fee income on all loans they generated, providing them a “substantial portion of their compensation in commissions from 2006 through 2008.”
“By January 2007, however, a significant downturn in real estate values and construction activity had begun in the bank’s primary markets. Non-performing loans increased dramatically, and the bank began to experience significant losses. Despite this downturn, the defendants continued to make large loans, yet failed to take any measures to assure that the loans were credit-worthy, let alone that the proceeds were used for their intended purposes,” the complaint states.
The FDIC seeks $86 million for breach of contract and fiduciary duty.
Its lead counsel is Kerry Earley, of Las Vegas.