Paradise Lost in Wake of FDIC Lawsuit

Paradise, to Harvey Ferguson, was living and working in Northern California’s Butte County where he has family and friends. He was overjoyed last year at the prospect of moving there to head up a new bank that community business leaders were forming.

The veteran banker sold his Anaheim Hills home, moved into a small vacation house he had near the city of Paradise and eventually bought a larger house in the community.

“Everything was going pretty good,” Ferguson, 54, said in a recent interview. “The job sounded like a challenge to me. It was a great opportunity.”

But two days after he moved into his new home in Paradise, he got the bad news.

The Federal Deposit Insurance Corp. told him he wasn’t considered acceptable yet as president of Butte Community Bank because the agency was still suing him and other directors and officers at the defunct Valencia Bank in Santa Ana for negligence over the bank’s 1986 collapse.

Butte Community, which had already delayed soliciting stock and opening its doors, was forced to find a new president quickly. Ferguson returned to Orange County.

The sad irony is that even regulators concede that Ferguson was not part of the problem at Valencia.

He didn’t work in the loan or trust departments where bad loans and alleged mismanagement caused the bank to lose nearly $10.5 million in three years. He was executive vice president for operations--making sure that the day-to-day activities of everyone from tellers to data processors were functioning well. Ferguson was promoted in an attempt to salvage the bank. He and his team of rescuers almost pulled it off.

“Harvey was not one whom the FDIC considered to be at blame. He was part of the cleanup crew,” said Ken Fraser, the agency’s chief examiner of the bank in its last year.

Fraser, now in private industry, called Ferguson an “up-front guy” whose candor and openness with regulators about Valencia issues impressed his top aides and created a bond of trust in the otherwise adversarial relationship between banker and regulator.

Characteristically, friends say, Ferguson did not display any bitterness over the snub last fall from the FDIC.

“Certainly, I was very disappointed,” he said. “My family was very disappointed. But I have to go on with a positive attitude and not beef about it. I can see their point. If they’re suing you, they’re not going to approve you as a bank president.”

While Ferguson doesn’t appear angry, many of his friends and supporters are.

Shotgun Approach to Suits

The FDIC’s shotgun approach to litigation--naming all top officers and directors as defendants, regardless of the evidence against them--ruins reputations for no reason and discourages good bankers from staying in the industry, they charge.

“It does not make sense,” said Gary Findley, a Brea banking lawyer who recommended Ferguson for the Butte bank job. “Everyone who had worked with him thought he had done a helluva job at Valencia. This decision was ridiculous because he just got named in a group-all suit.”

And it didn’t sit right with those at the Butte bank.

“I really felt sorry for that guy,” said Ellis L. Matthews, Butte Community’s chairman. “Just because of one sentence in a book somewhere, he got hurt.”

The FDIC, though, demurs.

The agency doesn’t use a shotgun approach to litigation and doesn’t have a written policy prohibiting it from approving a new bank president whom the agency is suing over a previous bank failure, said John R. Sexton, regional FDIC director in San Francisco.

Close Scrutiny

“We have to look particularly at the chief executive of a new bank very, very carefully,” he said. “We assess his competence and ability in great detail. If he was previously involved in a failing institution, we increase the scrutiny.”

Information uncovered after a lawsuit is filed could implicate a defendant more deeply in wrongdoing or clear him completely, said Keith Seibold, the FDIC’s regional director of liquidation. And sometimes, Sexton said, regulators don’t learn enough to clear a defendant quickly, or the case could be settled before any damaging evidence is found.

Neither official would speak specifically about the Ferguson case.

But Sexton conceded that “it’s not a bad assumption” to suggest that the FDIC won’t approve as top officers bankers it is suing.

The agency has a good point, most bankers concede. Yet those who know Ferguson say he got a particularly raw deal. He shouldn’t have been sued in the first place, they said. And there were other circumstances that should have allowed him to be approved for the Butte job:

* Regulators, who had imposed an order on Valencia requiring it, among other things, to hire management to their liking, allowed Ferguson to take over as president in July, 1984, and as chief executive in April, 1985, to try to save the failing bank.

* Ferguson and his team worked so hard and so well that the eventual liquidation of the institution allowed regulators the rare luxury of paying off all valid depositors and creditors in full with $6.7 million left over.

Rebuilt an Institution

* Regulators continued to work well with Ferguson after he became president and chief executive of California City Bank in Orange in March, 1986. He was instrumental in waking up the lethargic institution and making it attractive enough to be bought last year by CommerceBank in Newport Beach.

* In contrast to Ferguson’s plight, regulators approved Gene Hobday, Valencia’s president and second-largest shareholder, as president of the Bank of Anaheim when it opened in October, 1984. While at Valencia, Hobday implemented an aggressive growth plan that led to much of the bank’s troubles, and he quit a month after the FDIC imposed its first operating order on Valencia. Hobday’s clearance for the Anaheim bank came before the agency filed its lawsuit against him and other directors and officers, including Ferguson, in February, 1987.

“We always considered Harvey to be top drawer. The work he did is what lined the pockets of the FDIC,” said lawyer Findley.

Ferguson, who has handled just about every job in his 36 years in the industry, receives effusive praise from all quarters for his work at Valencia and California City.

“Harvey did everything that could be done to have the bank survive, but he was dealing with an impossible situation,” said former Orange County Superior Court Judge Bruce Sumner. Sumner supervised the payout of $8.5 million to 62 pension and profit-sharing plans that lost money when their Valencia trust accounts were allegedly mismanaged by trust department executives and consultants.

Robert Hoyt, who was California City’s vice chairman, said Ferguson is “an excellent administrator and banker.”

Strong in Operations

“His long suit is operations--being a frugal administrator and getting along with people,” Hoyt said. “Those are real important things. The whole world revolves around communications, and if you lack that, you’ve got problems. Harvey provided that asset for us.”

Luckily for Ferguson, a good job was waiting for him when he returned to Orange County. Clyde Gossert, chairman of CommerceBank, wanted him to run the bank’s branch operations. When his bank bought California City, Gossert didn’t want Ferguson to leave for Paradise.

“I found him to be very straightforward, very honest,” Gossert said. “I have a lot of respect for what he did with California City. He turned it around.”