Alert July 12, 2011

FDIC Brings Suit Against Former CEO of IndyMac; Former Washington Mutual Senior Officers Seek Dismissal of FDIC Suit on Grounds That They Should Be Protected by Business Judgment Rule

In the aftermath of the financial crisis of 2008 and the significant losses suffered by the FDIC’s Deposit Insurance Fund, the FDIC has brought eight director and officer (“D&O”) liability suits against former institution-affiliated parties of failed financial institutions and the FDIC has asserted that it intends to file more D&O suits over the next few years.  There have recently been developments in two high-profile D&O claims brought by the FDIC as receiver of failed banks, claims against the former CEO of IndyMac Bank FSB (“IndyMac”) and claims against three senior executives of Washington Mutual Bank (“WaMu”).

IndyMac claim.  The FDIC filed a lawsuit as receiver for IndyMac against Michael Perry, former CEO of IndyMac, seeking $600 million in damages on the grounds that Mr. Perry negligently allowed IndyMac to generate and purchase $10 million in risky residential mortgage loans when, the FDIC alleges, Mr. Perry knew, or reasonably should have known, that the market had become unstable and illiquid.  When IndyMac was unable to sell the loans, it had to retain them in IndyMac’s investment portfolio, and as a result of retaining these loans, the FDIC, as receiver of IndyMac, allegedly suffered $600 million in losses.  The FDIC stated that “Instead of enforcing credit standards, Perry chose to roll the dice in an aggressive gamble to increase market share while sacrificing credit standards.”  FDIC v. Perry, case number 11-5561, U.S.D.C. Central Dist. of CA (2011).

WaMu Claim.  In March 2011, the FDIC, as receiver of WaMu, filed a suit against former WaMu CEO, Kerry Killinger, former WaMu COO, Stephen Rotella, and former WaMu Home Loans President, David Schneider (and their spouses) alleging that the former executives negligently and in breach of their fiduciary duty to WaMu, allowed WaMu “to take extreme and historically unprecedented risks with WaMu’s held-for-investment home loan portfolio.”  On July 1, 2011, the defendants filed a motion seeking dismissal of the FDIC’s suit on grounds that the business judgment rule is a shield that prevents the FDIC from second guessing the executives’ allegedly good faith business decisions, which led to losses for WaMu.  The former executives’ motion also asserts that the OTS’ on-site examiners at WaMu concurred in the business decisions that came out poorly as they “knew about and approved the challenged business decisions in real time.”  FDIC v. Killinger, case number 2:11-CV-00459 MJP, U.S.D.C. Western Dist. of WA (2011).