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UPDATE 2-FDIC sues failed Illinois bank's execs over losses
* Ex-Heritage Community officials accused of negligence
* FDIC plans to sue over 70 officials at multiple banks
* Defendants call lawsuit meritless (Adds defending lawyers' statement)
By Jonathan Stempel and Dave Clarke
NEW YORK/WASHINGTON, Nov 1 (Reuters) - The Federal Deposit Insurance Corp has sued 11 former executives and directors at a failed Illinois bank as part of its effort to recover as much as $2 billion of losses suffered by its deposit insurance fund during the financial crisis.
The lawsuit, filed Monday in the U.S. District Court in Chicago, accuses former officials at Heritage Community Bank of negligence, gross negligence and breach of fiduciary duty.
The FDIC has authorized the pursuit of lawsuits against more than 70 officers and directors of failed banks, a spokesman for the regulator said late on Monday. In early October, the FDIC had said it might sue more than 50 officers and directors to recover $1 billion.
On Oct. 19, the FDIC said bank failures would cost the fund $52 billion from 2010 through 2014. So far this year, 139 lenders have failed, compared with 140 in 2009.
In Monday's complaint, the FDIC accused Heritage officials including former Chief Executive John Saphir of trying to mask problems in the bank's commercial real estate portfolio by making new loans, causing more than $8.5 million of losses.
It also accused the officials of awarding $11.08 million of dividends and incentive payments, including to Saphir and other senior management, rather than conserving cash that the Glenwood, Illinois-based lender needed.
"Defendants failed to preserve the bank's capital and provide sufficient reserves to absorb losses that would inevitably result when poorly underwritten commercial real estate loans went bad," the complaint said.
In a statement, lawyers for the defendants said the lawsuit lacked merit.
"The FDIC's action is both regrettable and wrong," the statement said. "With the advantage of 20-20 hindsight, the FDIC blames the former officers and directors of a small community bank for not anticipating the same market forces that also caught central bankers, national banks, economists, major Wall Street firms, and the regulators themselves by surprise."
Heritage had roughly $232.9 million of assets and $218.6 million of deposits prior to failing.
MB Financial Inc (MBFI.O) acquired most of the assets and assumed all the deposits. The FDIC at the time estimated the failure would cost its deposit insurance fund $41.6 million.
In July, the FDIC also sued to recover $300 million from former executives of IndyMac Bancorp Inc IDMCQ.PK, a large California mortgage lender that failed in July 2008.
The case is FDIC v. Saphir et al, U.S. District Court, Northern District of Illinois, No. 10-07009. (Reporting by Jonathan Stempel in New York and Dave Clarke in Washington; Editing by Richard Chang, Gary Hill)
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