FDIC lawsuits are a lagging indicator. That is to say, the number of FDIC actions against officers and directors of failed institutions will only peak long after the number of bank failures have already started to decline. How much do they lag?
Record Number of D&O Suits
The number of FDIC suits filed against the directors and officers of failed banks continues to accelerate. This is an important phenomenon to recognize because we are in the midst of it. Five years have passed since the financial crisis of 2008 and bank failures peaked in the third quarter of 2009. But it is only now, four years after the crest of wave of bank failures hit, that we are seeing a record number of FDIC suits against bank senior management.
Cornerstone Research, the financial, economic, and litigation consulting firm, released new findings in September. Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial Institutions forecasts that, if the pace set in the first part of this year continues, we will see 39 lawsuits filed this year. That compares to a mere two FDIC actions in 2010.
So is this the peak? Will lawsuits against bank officers taper off from here? Cornerstone does not speculate or extrapolate based on the past data. But what is clear is that regulators are continuing to feel substantial political pressure to bring claims against failed bank executives.
CEOs and Outside Directors Pay the Price
What the report does tell us is that, in the past five years, 12% of failed institutions have been subjected to FDIC D&O lawsuits, and that CEOs were the most commonly named defendants. We also learn that outside directors were not exempt. In fact, outside directors were named in three quarters of suits filed so far this year. Almost all the suits cite gross negligence, negligence and breach of fiduciary duty.
The bottom line is that, since the crisis, there have been 44 FDIC settlements; 17 of those cases have required out-of-pocket payments. Directors and officers have agreed to pay $8 million, frequently beyond amounts paid by insurance carriers. It remains to be seen how this trend continues based on the fallout from the financial crisis.