Bank Agrees to Settle J. David Suits : First National of San Diego, Insurers to Pay $6.9 Million

First National Bank of San Diego formally agreed Tuesday to settle out of court for more than $6.9 million all lawsuits filed against it by former J. David & Co. investors.

The settlement, one month to the day before trial on the suits was to begin, followed a last-minute flurry of closed-door negotiations that included prods from both federal and state jurists.

“This case had the potential of being tried into the next century,” state Superior Court Judge G. Dennis Adams said Tuesday. Adams, who coordinated the negotiations, had brought in federal judge Harry McCue on Monday to help make the agreement a “global settlement,” encompassing all present and future J. David-related claims against the bank.

Terms of the settlement call for First National itself to pay the plaintiffs $1 million, with the balance to be paid by five of the bank’s insurance companies. They are Harbor Insurance, $4.3 million; Great American Insurance, $700,000; Chubb Insurance Group, $500,000; Insurance Co. of North America, $250,000, and Fidelity Insurance, $175,000.

As part of the negotiated settlement, the bankruptcy trustee in charge of liquidating J. David & Co. will receive 20% of the $6.9 million on behalf of the bankrupt entity.

First National Bank was sued both by former J. David investors and by bankruptcy trustee Louis Metzger, who alleged that the bank allowed unauthorized transfers of J. David funds between various accounts. Metzger claimed that J. David lost about $22.6 million because of the transfers.

Interestingly, one of the insurance companies will also receive some of the funds in the settlement. Chubb Insurance, which once insured J. David against fraud, will get some of the money paid to Metzger under terms of a 1985 agreement. In that settlement, Chubb paid $4.75 million to the trustee as an out-of-court settlement of a $10-million claim against it.

Metzger said Tuesday that the bankrupt entity is still likely to net more than $600,000 from the settlement.

The J. David bankruptcy has already resulted in the liquidation of more than $12 million in assets. Metzger is also seeking, under provisions of the bankruptcy law, to collect more than $25 million that J. David paid to investors in the 90-day period just before the February, 1984, bankruptcy filing.

Bank President Robert D. Richley and Chairman Malin Burnham have maintained that the bank did nothing improper in its relationship with J. David.

Richley spearheaded the effort to gain approval of the settlement by the bank’s board of directors, according to one source familiar with the agreement. In a prepared statement Tuesday, Richley said that the bank settled the case because of the anticipated expensive legal fees and the “disruption to our normal business.”

He said First National personnel were “simply transaction providers” for J. David.

However, according to internal bank documents filed as part of the civil litigation, at least some of the bank’s employees may have known that J. David (Jerry) Dominelli’s supposed financial wizardry was nothing but an investment scam.

In one memo, Dominelli told bank officials in late 1983 that his firm’s cash-flow problems were to be solved soon because he was going to use new investor funds to cover withdrawal requests from existing clients--a typical Ponzi-type scheme.

J. David & Co. promised investors up to 40% returns on their money because of Dominelli’s purported knack for playing the volatile and unregulated international currency market. After the firm was forced into bankruptcy, Dominelli pleaded guilty in 1985 to fraud and tax evasion charges. He was sentenced to a 20-year federal prison term.

The bank will write off the settlement as an extraordinary item that will have a negative impact on its fourth-quarter earnings, Richley said. Despite the writeoff, the bank expects to report a small profit this year, he added. For the nine months ended Sept. 30, the bank reported a 30% increase in earnings to $536,000.

First National Bank’s settlement brings to four the number of outside professional firms to settle with former J. David investors.

Earlier this year, the Rogers & Wells law firm settled lawsuits for $40 million, the largest out-of-court agreement ever by a U.S. law firm; the Chicago law firm of Abramson & Fox settled for $7 million, and the national accounting firm of Laventhol & Horwath settled for $6.5 million.

Efforts to settle the lawsuits against the La Jolla law firm of Wiles, Circuit & Tremblay have failed, and the trial, which began in June, continues today in El Cajon Superior Court.