Written by Teresa Zink for HB Litigation Conferences LLC

Professional liability and, more specifically, directors and officers liability arising out of what has come to be know as the new banking crisis is an area where many see more questions than answers.  In an effort to answer some of those questions, HB Litigation Conferences in mid-January brought together a distinguished panel of lawyers who, according to moderator Ronald Glancz “lived through the 1980s and represented a number of directors, officers, and professionals.” 

Glancz, who chairs the Financial Services Group at Venable, LLP in Washington, D.C. was joined by John Gerstein, a partner with Troutman Sanders, LLP in Washington, D.C. who has handled a number of accounting liability cases; Thomas Richey of Bryan Cave Powell Goldstein, LLP in Atlanta who represented the FDIC for many years and has a distinguished reputation representing the government in D&O cases, and John Villa of Williams & Connolly, LLP in Washington, D.C. who Glancz said “wrote the book on D&O liability and attorney liability.”

Recordings and materials from the event are available.  Go to LitigationConferences.com for more information and sample clips.

Criminal Actions?

Glancz commented that it is also probably too soon to tell what kind of criminal prosecutions might arise.  However, he noted that in the 1980’s “there was a lot of congressional pressure and just the public outrage … that ‘the crooks have to go to jail now.’”

Villa noted that while there is outrage and anger directed at investment bankers and banks he is not hearing the same kind of rhetoric this time.  “My prediction is that some of the regulators are going to take the position that they were misled, even as to a very small thing, and use that as a basis for coming after individuals.  Even though we haven’t heard it yet, I would expect that there will be a substantial uptick in criminal prosecutions, financial institution-related crime.”

However, he said, “Fifteen years from now, I think if you were to go back and look at this time period, look at the prosecutions, and ask whether they prosecutions had anything to do with the losses that the financial sector actually sustained, you’ll say ‘no.’  People will be prosecuted and people will go to jail; but there will be no correlation.  There is a need on behalf of our society to find somebody at fault, and they’ll do it in this one like they did in the last one.  However, I don’t think that criminal conduct is any substantial part of the losses.”

Practical Advice

Glancz posed a hypothetical situation, “Let’s assume a bank failed and the Board of Directors – or one or more directors – has come to you today and said, ‘My institution went down.  There may be an investigation.  What do I do now?  Do I just sort of sit back here and wait for the government to knock on the door?  Or is there something I should be doing?  First of all, should I retain a lawyer?’”  The panel answered the last question with a resounding “yes.”

Villa noted that, coincidentally, he had received a similar inquiry from a client just that morning.  “I said, keep your head down.”

Villa said he would give clients in such a situation two pieces of advice.  First, “Don’t make public statements.  Don’t talk to people in an unguarded way.  Don’t send emails.  Basically assume that anything and everything you say or do can be recorded in this world; so use complete discretion.  Trust nobody but your lawyer.”  Second, he said, “Don’t make any fancy transfers of money.  If you give your kids $10,000 or $20,000 a year, or whatever your family can give them as a gift under the Gift Tax guidelines, I’m not saying that you don’t do that.  However, don’t all of a sudden gift your children six houses, a million dollars in jewelry, or something like that.  That will become the focus of some attention as time goes on.”

Documentation

What about documents?  Glancz noted that because “regulators usually require that bank examination reports be kept in the bank or be sent back” directors often have very little in the way of documentation.  “The government really is way ahead of you.  First of all, they’ve usually done two years of investigations.  They’ve got all the documents and it’s been a long time since you were actually in the bank.”

Villa concurred, “It’s a question of what you can do.  If you don’t have the documents, you don’t have the documents. If you can get your hands on some of the documents, you should try to do that.”

Richey added that, while he doesn’t speak for the FDIC, “I don’t think there’s any harm prior to the closure of the bank in making some copies of some key documents like insurance policies, indemnification provisions, or whatever is there that may later become important in some way; and perhaps even minutes,” keeping in mind requirements for confidentiality of bank borrowers’ information is fairly sacrosanct and has gotten more over the years.”

Further, he added, “I think one thing that everybody on either side of the litigation would appreciate is that everybody who needs to give notice to their insurance carriers should do so.”  He noted that once the regulators get into the bank and look at policies, they will give notice as well.  “However, that doesn’t mean that the process of helping to protect yourself as a director or a bank shouldn’t start in advance.”

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