FDIC sues former officers of Silver State Bank

The Federal Deposit Insurance Corp., quickening its pace of litigation to recover money from failed banks, has sued four former top officers of the failed Silver State Bank alleging that they were responsible for $86 million in bad loans.

But experts who have tracked similar cases question whether the bankers will have to pay anything in the end.

In the complaint filed late Thursday in U.S. District Court in Las Vegas, the FDIC contended that "grossly negligent" real estate lending practices -- even as warning signs emerged of a deflating market -- led to the collapse of the Henderson-based bank in September 2008. The bank had grown at a conservative pace in the decade after its opening in 1996, according to the FDIC, but then more than doubled in size from $806 million in assets at the end of 2005 to $1.9 billion in March 2008.

The lawsuit targets Corey Johnson, a bank co-founder who engineered the growth spree after he became CEO in January 2006; Douglas French, executive vice president of lending; Gary Gardner, senior vice president and loan officer; and Timothy Kirby, assistant vice president and loan officer. In court papers they are accused of engaging in varying combinations of unsafe banking practices such as doing weak analysis of the repayment prospect, requiring too little collateral, loaning too much against value and making improper cash disbursements.

The lawsuit cites missteps on 14 different loans.

Patrick Egan, the attorney for French, called the allegations "overstated and overblown."

"The bank was caught up in a national recession, so you can't just single out one market," Egan said. "Vegas, in particular, has grown so fast that it could have crashed at any time in the past 30 years."

Other attorneys in the case could not be reached for comment.

The complaint places a special focus on French because he wrote in several real estate and financial publications well before the real estate debacle gained full force that problems were on the horizon. Egan dismissed this as "cherry picking" lines from articles that dealt with macroeconomics and not Southern Nevada.

But industry experts question whether the four will pay any more than a tiny fraction of the requested amount, if anything at all.

"These cases are almost always about the insurance policies for the directors and officers or the institutions," said Boston attorney Gregory Pendleton, who has tracked similar lawsuits.

Before going to court, he said, the FDIC looks carefully for what are known as "towers of insurance," including the sizes of the policies.

Kevin LaCroix, a partner with OakBridge Insurance Services in Beachwood, Ohio, predicted that many bank officers and directors will opt to settle "in order to extricate themselves from an FDIC lawsuit."

He cited a deal last September involving two top executives at the failed First National Bank of Nevada who agreed to a $20 million settlement, but then signed over their rights to recover the money from their insurance carrier to the FDIC in return for not being held personally liable.

A similar case against Washington Mutual resulted in a $40 million settlement, with $39.6 million covered by insurance and $425,000 split among three former executives.

According to a January study by economic and financial consulting company Cornerstone Research, the FDIC has filed 21 lawsuits naming 178 bank directors and officers in the past three years, mainly because of bad real estate loans. The average request for damages ran $104 million, with the median at $40 million, putting the Silver State case roughly in the middle.

At the time the FDIC seized Silver State, the agency estimated that its reserve fund would absorb a loss of $450 million to $550 million to cover all the insured deposits.

In enforcement legal actions, Gardner agreed to pay a $1,000 fine and never again serve as a bank officer. French paid $35,000. An action against former Senior Vice President Steven Haynes is still unresolved.

Contact reporter Tim O'Reiley at toreiley@reviewjournal.com or 702-387-5290.