The Federal Deposit Insurance Corp. has authorized lawsuits against 70 officers, directors and employees of failed banks, in an effort to recover $2 billion.
The bank, which failed in 2009, cost the FDIC's insurance fund an estimated $41.6 million. The suit seeks to recover at least $20 million.
Heritage had four offices, $232.9 million in assets and $218.6 million in deposits
The bank leaders allegedly "failed to properly manage and supervise Heritage and its commercial real estate lending program" and exhibited "gross negligence, and breach of fiduciary duty," according to the suit.
The next court date isn't until Jan. 6, when the parties will appear before a federal judge for a status hearing. The defendants have not yet responded to the suit.
The FDIC's complaint against the former Heritage insiders is known as a professional liability suit. This particular type of claim has been used by the FDIC since the savings and loan crisis in the 1980s. As receiver of failed institutions, the FDIC can sue professionals for losses that stem from their alleged breach of duty. More than $5 billion have been claimed on professional liability claims to date.
In July, the FDIC filed suit against four individuals from IndyMac Home Builders Division, the first suit of this type during the current financial crisis.
The Heritage suit attributed the bank's failure to a commercial real estate lending program that began in the early 2000s and focused on projects in the greater Chicago area, including condo conversions, strip malls and speculative single-family residences.
The FDIC accused the Heritage executives and directors of failing to protect the bank from the risks of large-scale commercial real estate lending. The suite alleged that they financed projects "without any meaningful analysis of their economic viability" and without properly evaluating the creditworthiness of borrowers.
Making matters worse, the bank lacked reserves to absorb losses from the bad real estate loans. "Instead, defendants depleted the bank's capital by making millions of dollars in dividend payments to Heritage's holding company and paying generous incentive awards to senior management," the FDIC wrote in its suit.
The lawsuit also paints the defendants as clueless about the business of commercial real estate lending, saying they had "virtually no experience" in the field and little idea about the risks involved. Meanwhile, they didn't consult with outsiders about how to run a commercial real estate program, the FDIC wrote in its suit.
"Although defendants were aware of the existence of a real estate 'bubble,' they pushed the bank headlong into CRE lending, based on the unsupportable assumption that real estate values would rise or remain stable," the FDIC wrote in its suit. And once things went south, the defendants sought to mask the damage rather than curtail it, the FDIC says.
The regulator says the bank suffered damages of at least $20 million after Dec 1, 2006, including $8.5 million in losses on commercial real estate loans and more than $11 million in unjustified dividends to the bank holding company and incentive payments to the defendants.
The defendants include:
- John Saphir -- Chairman and Chief Executive Officer
- Patrick Fanning -- President
- Stephen Faydash -- Chief Financial Officer
- William Hetler -- Vice President of Retail Lending
- Thomas Jelinek -- Commercial Real Estate Lending Officer
- Lori Moseley -- Vice President of Loan Operations
- Stephen Anthony -- Director
- Jerry Brucer -- Director
- James Champion -- Director
- Andrew Nathan -- Director
- Mary Mills -- Director