Enforcement Actions Against Directors & Officers

Transcription

1 Enforcement Actions Against Directors & Officers Michael D. Hockley, Esq Walnut Street, Suite 1400 Kansas City, Missouri Phone: (800) toll free Fax: (816)

2 OBJECTIVES Understand duties and responsibilities of directors, especially outside directors Describe circumstances which may lead to director liability Describe current regulatory enforcement environment and impact on liability claims against director and officer Describe steps to minimize personal director liability 2

3 STANDARD OF CARE Business judgment rule applies: Courts presume directors have made decisions on an informed basis, in good faith, and in the honest belief that actions taken are in best interest of organization Courts generally decline to second guess decisions, but only if directors have satisfied duties of care, loyalty, and good faith 3

4 STANDARD OF CARE (cont.) Business judgment rule protection is not available when Majority of directors involved on both sides of a transaction even if approved by majority of the disinterested directors Controlling stockholder of organization is on both sides of the transaction 4

5 STANDARD OF CARE (cont.) Breach of duty of care Gross negligence Reckless indifference to interests of bank, shareholders, or directors Breach of duty of loyalty Normally involves action in director s own self interest relating to confidentiality, conflicts of interest, or corporate opportunity 5

6 STANDARD OF CARE (cont.) Breach of duty of good faith Intentional dereliction of duty Conscious disregard for responsibility as a director (such a breach normally cannot be indemnified by the institution) 6

7 DIRECTOR LIABILITY May be personally liable/subjected to monetary penalties/sanctions for violation of banking law or regulation, engaging in unsafe and unsound banking practice, or breach of fiduciary duty Liability may be several or joint Held responsible alone Held responsible jointly with other board members 7

8 DIRECTOR LIABILITY (cont.) Liability may be imposed by Judicial action initiated by regulatory authorities, shareholders, or private individuals or corporations Administrative enforcement actions by regulatory agencies 8

9 TYPES OF ENFORCEMENT ACTIONS Informal enforcement (commitment letters, board resolutions, and memoranda of understanding) Not public Not enforceable in a court But typically include corrective actions (matters requiring attention) with deadlines 9

10 TYPES OF ENFORCEMENT ACTIONS (cont.) Formal enforcement actions Cease and desist orders (temporary and permanent) Most severe and may be issued with or without consent If without consent, only after issuance of Notice of Charges and administrative hearing Notice of charges, hearing, and agency decision available to public (normally posted online) 10

11 TYPES OF ENFORCEMENT Written agreement ACTIONS (cont.) Enforceable like cease and desist order but is contract normally signed by Board of Directors on behalf of the institution and the regulatory supervisor Contains same types of provisions found in cease and desist order but does not include recitation of facts that would be in Notice of Charges May be referred to as Written Agreements, Formal Agreements, or Supervisory Agreements Typically include extensive list of Matters Requiring Attention to address concerns prompting the action Board of directors normally held responsible for complying with requirements of written agreement 11

12 TYPES OF ENFORCEMENT ACTIONS (cont.) Civil money penalties Not corrective in nature simply a fine for various types of infractions Amount of penalty assessed by regulator tied to individual s or institution s level of culpability (knowing or reckless, caused a loss to financial institution, or resulted in gain to wrongdoer) 12

13 PROFESSIONAL LIABILITY LAWSUITS FDIC may sue individuals who played role in failure of an institution to maximize recoveries Individuals may include officers, directors, and professionals (attorneys, accountants, appraisers, brokers, or others) Liability claims may also include direct claims against D&O insurance carriers, fidelity bond carriers, or title insurance companies 13

14 PROFESSIONAL LIABILITY LAWSUITS (cont.) Decision to file lawsuit governed by policies adopted by FDIC board in 1992: Statement concerning the Responsibility of Bank directors and officers ( 14

15 PROFESSIONAL LIABILITY LAWSUITS (cont.) FDIC liability lawsuits require FDIC Board approval before actions may be brought against directors and officers Such suits pursued only if meritorious and cost effective FDIC conducts investigation into causes of failure Normally complete within 18 months from time institution closed prior to filing claim FDIC staff attempts to settle with responsible parties 15

16 PROFESSIONAL LIABILITY LAWSUITS (cont.) If settlement not reached, complaint filed in federal court FDIC time for bringing actions: 3 years for tort claims and 6 years for breach of contract claims from date bank is closed Approximately ¼ of bank failures between 1985 and 1992 resulted in director and officer lawsuits 16

17 RECENT STATISTICS FDIC LAWSUITS Authorized D&O Defendants Damage Claims ($ millions)* Authorized through 3 rd Quarter $1,358.3 October 17 $711.0 November 12 $84.1 December 27 $335.5 Authorized through 4 th Quarter $2,488.9 January $60.2 February $15.0 March $1,007.9 April $198.2 Total 187 $3,770.2 *Losses typically exceed these amounts and result in higher damage claims in filed lawsuits. 17

18 EXAMPLE OF RECENT FDIC LAWSUIT FDIC, as receiver for Heritage Community Bank v. John M. Saphir, et al. [11 former directors and/or officers] Filed November 1, 2010 in Federal District Court Northern District of Illinois (Chicago) Bank closed by regulators in February of

19 EXAMPLE OF RECENT FDIC LAWSUIT (cont.) Seeks to recover $20 million in losses from institution with $230 million in assets when closed Alleges 11 of bank s former directors/officers engaged in negligence, gross negligence, and breach of fiduciary duty by failing to properly manage and supervise bank s CRE lending program 19

20 EXAMPLE OF RECENT FDIC LAWSUIT (cont.) Failed to protect bank from substantial inherent risk of large scale CRE lending Deficient loan underwriting and monitoring Breached fiduciary duties by approving dividends/incentive awards to senior management when should have increased loan loss reserves and capital 20

21 EXAMPLE OF RECENT FDIC LAWSUIT (cont.) Significant because extends to outside directors and allegations include simple negligence based on lesser Illinois state law standard of liability Under Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA), a director/officer of insured institution may be sued for personal liability in civil action by FDIC for gross negligence 21

22 EXAMPLE OF RECENT FDIC LAWSUIT (cont.) But Supreme Court interprets FIRREA to allow liability based on lower standard of care if state law provides for a lesser showing of culpability (i.e. simple negligence) Atherton v. FDIC, 519 U.S. 213 (1997) 22

23 EXAMPLE OF RECENT FDIC LAWSUIT (cont.) This action particularly significant because of recent glut of bank failures caused by economy downturn and substantial loan losses in recent years 23

24 BANK CLOSING STATISTICS Between 1994 and 2006: 57 banks and 13 thrifts failed Record of 26 consecutive months without failure as of August 31,

25 BANK CLOSING STATISTICS (cont.) Beginning with 2008 economic downturn, bank closings on the rise failures involving banks and thrifts with assets ranging from a low of $16 million to a high of $25 billion 27 failures involved banks with greater than $1 billion in assets, including 11 with greater than $4 billion in assets Most involved banks with several hundred million dollars in assets Two in Missouri and one in Kansas 25

26 BANK CLOSING STATISTICS (cont.) failures ranging from a low of $16 million to a high of $25 billion in assets Five in Missouri and two in Kansas ranging from low of $20 million to a high of $1.2 billion 2011 (through April) 39 failures with none in Missouri or Kansas 26

27 MINIMIZING INDIVIDUAL LIABILITY Steps to demonstrate the exercise of due care, loyalty, and good faith Be diligent devote the time and attention necessary to be aware of bank s condition and knowledgeable enough to make meaningful contributions to board s work Attend board and committee meetings Frequent failure to attend or participate in board or committee meetings raises red flags 27

28 MINIMIZING INDIVIDUAL LIABILITY (cont.) Request and review materials in advance of board and committee meetings Not expected to monitor day-to-day operations, but need sufficient information to have a current and concise picture of bank and issues requiring board s attention or action Ensure materials are provided with sufficient time to review carefully before meetings Ask questions and seek explanations of problems 28

29 MINIMIZING INDIVIDUAL LIABILITY (cont.) Ask management to provide more information if questions are raised from review of materials or at meetings If questions raised at meetings, ensure that meeting minutes reflect the questions or issues raised Communicate with other directors or management outside of formal board meeting as needed Ensure questions are satisfactorily answered before making a decision or casting a vote on a particular issue Ask to postpone board decision until adequate information available or for more time for discussion if needed 29

30 MINIMIZING INDIVIDUAL Be Diligent LIABILITY (cont.) Understand bank examinations/audits and supervisory communications Personally review all reports and significant communications from bank s auditors/regulators If need help understanding findings or recommendations, contact bank s management, audit committee, examiners, auditors, or outside consultants who prepared the report Ensure management takes needed corrective actions identified in such audits/examinations Exercise independent judgment 30

31 MINIMIZING INDIVIDUAL LIABILITY (cont.) Be objective and independent when overseeing bank s affairs Ask management questions and determine facts necessary to determine if management s recommendations are in bank s best interest If director disagrees with Board action after considering the information presented, formally state view and explain reasons for disagreement and request position be recorded in Board minutes If vote against a board decision, ensure the dissenting vote is recorded in Board minutes 31

32 MINIMIZING INDIVIDUAL LIABILITY (cont.) Be loyal to bank s interests Must deal fairly with bank in business transactions Ensure that personal interests do not bias Board decision or otherwise harm bank Even if not actual conflict of interest, avoid even the appearance of a conflict Ensure bank has written insider policies that address codes of conduct, conflicts of interest, and other such issues 32

33 MINIMIZING INDIVIDUAL LIABILITY (cont.) Obtain indemnification from institution Although a director cannot be indemnified for engaging in illegal actions, ensure that the institution agrees to indemnify the director to the extent legally permissible Before agreeing to be a director, determine the financial stability of the institution Obtain directors and officers liability insurance for the Board But understand, not all policies are equal Review policy and determine whether coverage is adequate, with special attention to exclusions 33

34 OBTAIN AND READ The Director s Book published by OCC Download and Read Pocket Guide for Directors (FDIC website) Attend training sessions and report lessons learned to Board 34

35 QUESTIONS? 35

36 If you have any questions regarding this presentation, you are welcome to contact: Michael D. Hockley, Esq Walnut Street, Suite 1400 Kansas City, Missouri Phone: (800) toll free Fax: (816)