U.S. News

FDIC sues failed Illinois bank's execs over losses

NEW YORK/WASHINGTON (Reuters) - The Federal Deposit Insurance Corp has sued 11 former executives and directors at a failed Illinois bank as part of its efforts to recover as much as $2 billion of losses that its deposit insurance fund incurred during the financial crisis.

The lawsuit accused former officials at Heritage Community Bank of negligence, gross negligence and breach of fiduciary duty.

The FDIC has in recent months authorized the pursuit of lawsuits against more than 70 officers and directors of failed banks, a spokesman for the regulator said late on Monday.

On October 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.

The amount the FDIC wants to recover has increased since early October when it said it was looking to sue more than 50 executives and officers to recover $1 billion.

In its complaint filed in U.S. District Court in Chicago, 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.

It was unclear whether any of the defendants had retained counsel. Saphir could not immediately be reached for comment. He lives in Chicago, according to the complaint.

In July, the FDIC sued to recover $300 million from former executives of IndyMac Bancorp Inc, a large California mortgage lender that failed in July 2008.

Heritage had roughly $232.9 million of assets and $218.6 million of deposits prior to failing. MB Financial Inc 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.

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