Mortgage Meltdown

The Heightened Risk Of Doing Business With The Government

One risk for directors and officers of banks or other financial institutions in taking money and support from the Federal Government is the potential increase in exposure for criminal liability for statements made in applications for TARP money or other assistance.  If the financial institution that receives money later fails, there will be heightened scrutiny of that institution's paperwork.  The result could be allegations that any inaccuracies in those papers, with the benefit of hindsight, were recklessly or intentionally made.

A potential example of this was reported today by Marketwatch (here), where the CEO of Park Avenue Bank, which was closed by bank regulators on Friday, was arrested for allegedly making false statements on a TARP application, among other charges.

Here Come The Failed Bank D&O Lawsuits

The State of Georgia is leading in one financial category in which it would rather not lead -- it has seen one of the highest incidents of failed banks in the Country.  Now, it may also be at the leading edge of litigation against directors and officers following the bank failures.  As reported yesterday in the Atlanta Journal Constitution (here), investors in the failed Georgia bank, Alpha Bank, have filed a suit against its former officers and directors alleging that they failed to disclose that the bank had deviated from its original business plan by engaging more aggressively in subprime mortgage lending.  Investors also allege that management hid details of a review by bank regulators that raised issues with the bank's lending practices and programs.

Thus far, there has been relatively few suits against directors and officers, but the storm clouds have been gathering.  The FDIC has been gathering information about D&O insurance from failed banks as a precursor to litigation or issuing demands prior to litigation.  This lawsuit, by investors in a bank rather than the FDIC as receiver for a failed bank, may be just the tip of the iceberg.