Regulators Spending Big for Posse of Lawyers : Banks, S&Ls; Are Targets for Barrage of Suits

Banks and savings institutions face a growing number of lawsuits, and the regulators are not making matters any better.

Scattered among those suits are a growing number of actions filed by the regulators against directors and officers, mostly of failed institutions.

Director and officer litigation is the most expensive for both the agencies and the insurers that cover executives.

The Federal Deposit Insurance Corp., for instance, spent roughly 20% of its $40-million legal bill for outside law firms in 1985 on litigation against directors and officers. And that litigation--up to 70 cases--is a fraction of the nearly 26,000 lawsuits pending. One law firm alone earned $1.7 million for its work on the failed Heritage Bank in Anaheim and two other cases.

‘Evaluate Every Suit’

The agency has collected $56 million in the last 33 months from directors and officers or, mostly, from their liability insurers. The Federal Savings and Loan Insurance Corp. has picked up $60 million in the last five years from such suits.

“There’s a perception that we sue everybody in sight,” said Harry Quillian, general counsel of the Federal Home Loan Bank Board, which oversees FSLIC. “But we’re not overly litigious. We evaluate every suit. We do a cost analysis. . . . If the return outweighs the cost, we’ll sue.”

Quillian said the lawsuits name only individuals whose conduct “is egregious enough,” but, he said, that generally includes all the directors. “Occasionally we make an exception if we look and see some director who has come out and tried to stop the egregious conduct,” he said.

With a staff of 108 bank board lawyers, all based in Washington, the FSLIC expects to continue on its litigation course, he said, even though it worries that its tactics might scare away experienced executives at a time when it is trying to attract more outside directors to the boards of savings and loan associations.

At the FDIC, Chairman L. William Seidman said last spring that his agency would curtail its legal actions against directors and officers by as much as 25%. The cuts were intended to eliminate possibly weak lawsuits and to encourage more insurers to provide coverage for directors and officers, which should entice outside directors to rejoin bank boards.

Fraud and Negligence

But agency sources said Seidman has since changed his view because he has decided that the lawsuits that are being filed are aimed at gross negligence and outright fraud.

A staff of 250 FDIC lawyers spread throughout the nation handles matters involving closed banks, and 75 others work on the affairs of banks still open. The agency also hires about 600 private law firms to help with its caseload.

Of that caseload, the FDIC initiated about half the lawsuits and was named as a defendant in 10% of the cases. The agency took over the rest of the suits on behalf of banks it closed, said Carroll Shifflett, an FDIC staff lawyer.

The FSLIC paid $11.5 million in fees to 23 outside law firms in 1985 to help with its 250 major cases and “hundreds of other actions,” said Patrick McKelvey, an agency spokesman. Last year, he said, the FSLIC had 53 outside firms helping it. McKelvey said the agency could not provide a breakdown of its caseload.