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Thursday, May 23, 2024 | Back issues
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Trust Demands $500 Million From Bankers

SEATTLE (CN) - Top officers of WMI, Washington Mutual Bank's parent company, wasted half a billion dollars by transferring assets to the doomed bank just two weeks before it was seized by federal regulators, unsecured creditors claim in court.

WMI Liquidating Trust, representing the Official Committee of Unsecured Creditors of Washington Mutual Inc., sued 16 former WMI officers and directors for breach of fiduciary duty and corporate waste, on Tuesday in King County Court.

Washington Mutual was placed into receivership in September 2008, becoming the largest bank failure in American history.

The Trust claims that WMI officials "responded out of panic rather than reason" when they transferred, or downstreamed, $500 million to the bank on Sept. 10, 2008.

September was the height of the "financial tsunami" and there was rampant speculation that Washington Mutual would soon collapse, according to the lawsuit.

"The prudent decision would have been to preserve WMI's assets at this critical time rather than to place them in the failing WMB [Washington Mutual Bank]," the Trust says.

Instead, the officer defendants and director defendants "responded out of panic rather than reason," according to the complaint. "They abandoned the interests of WMI and allowed the September Downstream, despite the complete absence of any evidence of deliberation as to whether a transfer should be made at that time. Half a billion dollars of WMI's capital, which otherwise would have been available for the benefit of WMI's creditors and shareholders, instead was transferred outside of creditors' reach to WMB, a distressed entity facing imminent seizure."

Regulators seized Washington Mutual on Sept. 25, 2008. It was sold out of receivership to JP Morgan Chase Bank.

The capital infusion was "utterly irrational" and did nothing to help the bank's liquidity, the complaint states.

"Because WMB was doomed to fail at the time of the September Downstream absent additional liquidity on a scale that WMI and WMB did not have and could not raise, the interests of WMI and WMB not only were dissimilar, but adverse. Had the defendants acted in the best interests of WMI, they would have preserved the funds for the benefit of WMI and its creditors and shareholders. Instead, the defendants squandered WMI's financial resources by causing the September Downstream, thereby breaching their fiduciary duties to WMI and committing corporate waste," according to the complaint.

The defendant former officers and directors are Thomas W. Casey, Kerry K. Killinger, Stephen J. Rotella, Robert J. Williams, Jr., Alan H. Fishman, Stephen E. Frank, Charles M. Lillis, James H. Stever, Margaret Osmer McQuade, Michael K. Murphy, Orin C. Smith, Phillip D. Matthews, Regina T. Montoya, Stephen I. Chazen, Thomas C. Leppert and William G. Reed, Jr.

The Trust seeks damages "not less than the amount of the September Downstream."

It is represented by Justin Nelson with Susman Godfrey.

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