FDIC seeks damages from three former IndyMac executives
Trial begins on a civil lawsuit that accuses them of negligence in approving loans that developers and home builders never repaid.
When the Federal Deposit Insurance Corp. seized Pasadena housing lender IndyMac Bank four years ago, the scene resembled the grim bank failures of the 1930s.
Panicked depositors, seeking to reclaim their money, lined up outside branches of the big savings and loan, whose collapse under the weight of soured mortgage and construction loans helped usher in the financial crisis and biggest economic downturn since the Great Depression.
As those memories fade, the government’s effort to reclaim losses stemming from the financial debacle grinds on, with one IndyMac case winding up this week before a federal jury in Los Angeles.
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The civil lawsuit seeks damages from three former IndyMac executives, accusing them of negligence in approving 23 loans that developers and home builders never repaid, costing the bank almost $170 million.
The executives approved ill-advised loans because they earned bonuses for beefing up lending to developers and builders, said Patrick J. Richard, a lawyer representing the FDIC.
“They violated their duties to the bank,” Richard said in his opening statement to the jury Tuesday. “They violated standards of safe and reasonable banking.”
The bankers deny wrongdoing, contending that they made solid business decisions, which at the time were well-considered and approved by regulators and higher-ups at IndyMac.
“This case,” defense attorney Damian J. Martinez said in his opening statement Wednesday, “is about the government evaluating these loans with 20/20 hindsight after the greatest recession we’ve had since the Depression in the 1930s.”
The defendants — Scott Van Dellen, Richard Koon and Kenneth Shellem — ran IndyMac’s Homebuilder Division, a sideline to the thrift’s main business of residential mortgage lending. Court filings show the FDIC settled its case against a fourth former executive at the builder operation, William Rothman, by agreeing to a $4.75-million settlement to be paid by IndyMac’s insurance companies.
The trial, playing out before U.S. District Judge Dale S. Fischer, highlights how federal authorities — often stymied at bringing criminal cases against major players in the financial crisis — have pursued civil damages on a number of fronts.
One high-profile example involved the Securities and Exchange Commission‘s investigation of Countrywide Financial Corp. of Calabasas. The SEC exacted a $67.5-million settlement from former Chief Executive Angelo Mozilo, who ran Countrywide as it expanded to become the nation’s largest purveyor of subprime and other high-risk mortgages.
A Justice Department probe of Mozilo had found too little evidence to support a criminal prosecution. Admitting no wrongdoing, Mozilo paid $22.5 million of the SEC settlement himself, with corporate insurance policies covering most of the balance.
On another front, federal and state prosecutors have filed a series of civil lawsuits accusing major home lenders including Bank of America Corp., Wells Fargo & Co., Citigroup Inc. and JPMorgan Chase & Co. of fraud and recklessness that cost taxpayers and investors billions of dollars.
Taking a different approach, the FDIC suits aim to recover losses in its insurance fund, which compensates depositors when banks fail. The agency says it has authorized lawsuits against 665 insiders at 80 institutions seized during the recent crisis, with 33 suits already filed.
The IndyMac case now going to trial, filed in July 2010, was the first of those suits.
Recoveries typically are modest compared with the losses.
IndyMac’s failure cost the federal insurance fund more than $13 billion, the largest loss among the 463 banks that have failed since 2008. But the FDIC is seeking only $170 million in the suit that has gone to trial in L.A., plus $600 million in a separate suit against former IndyMac Chief Executive Michael Perry.
(Perry contends that the pending lawsuit, accusing him of negligently allowing $10 billion in dicey mortgages to pile up on IndyMac’s books, is without merit.)
The FDIC is proceeding with the IndyMac case despite a setback in its efforts to collect from IndyMac’s insurance. U.S. District Judge Gary Klausen ruled July 2 that IndyMac officer and director insurance policies at the time of its failure cannot be used to cover any damages the agency wins against former bank insiders.
An appeal of that ruling is before the U.S. 9th Circuit Court of Appeals. If the ruling stands, the FDIC could only try to recover damages by attaching the defendants’ personal assets.
The IndyMac defendants’ earnings were modest by the standards of executives running large financial firms, such as Mozilo, whose take during the housing bubble has been estimated at nearly $470 million. But their compensation — in the $500,000 annual range for Koon and Shellem and well over $1 million for Van Dellen, who headed the Homebuilder Division — merited note by the FDIC.
Richard, the lawyer making the FDIC’s opening statement, noted that Van Dellen had rejected a suggestion by Perry in July 2006, as cracks appeared in the housing markets, that IndyMac take a cautious approach in its lending to home builders.
Van Dellen replied in an email that “now is the time to pounce,” Richard told the jury. “So what was his motivation? His bonus for 2006 production was 4 1/2 times his base salary — $914,000 — tied to production” of more builder loans.
