Federal Deposit Insurance Corporation (FDIC) litigation activity associated with failed financial institutions increased significantly in 2013, according to Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial Institutions—February 2014, a new report by Cornerstone Research. The FDIC filed 40 director and officer (D&O) lawsuits in 2013, compared with 26 in 2012, a 54 percent increase.
The surge in FDIC D&O lawsuits stems from the high number of financial institution failures in 2009 and 2010. Of the 140 financial institutions that failed in 2009, the directors and officers of 64 (or 46 percent) either have been the subject of an FDIC lawsuit or settled claims with the FDIC prior to the filing of a lawsuit. Of the 157 institutions that failed in 2010, 53 (or 34 percent) have either been the subject of a lawsuit or have settled with the FDIC.
From the start of 2010 to the end of 2013, the FDIC has claimed damages of at least $3.8 billion in lawsuits filed against directors and officers of failed financial institutions. In lawsuits filed in 2013, the federal agency claimed $1.2 billion in damages.
“While FDIC filings of new D&O lawsuits hit a lull in the fourth quarter of 2013, new filings are unlikely to continue at such a slow pace in the first half of 2014,” said Katie Galley, a senior vice president of Cornerstone Research and one of the report’s authors. “Three lawsuits were already filed in January, and as motions and discovery unfold in existing lawsuits, this year will be interesting to follow.”
Galley added: “For example, a recent ruling in the Eleventh Circuit pertinent to the many Georgia-based lawsuits allows directors and officers to assert affirmative defenses that will directly affect loss causation and damages arguments. These types of judicial rulings may greatly influence the relative negotiating strength of the FDIC and defendants. How this ruling and others like it affect the likelihood of settlements may determine whether we see protracted litigation in the FDIC’s D&O lawsuits, or movement to settle cases earlier.”
More Key Findings:
The FDIC seized 24 financial institutions in 2013, the lowest number since 2007. The median size of failed financial institutions has declined steadily over the last six years.