Bankrupt Bank's Board of Directors Sued for Buying CMO's

July 18th, 2011
in econ_news

imperial capital bankcorpEconintersect: The current board of directors of failed California bank Imperial Capital Bancorp (IMPCQ) was sued by its unsecured creditors. reported:

Imperial Capital Bancorp's official committee of unsecured creditors filed with the U.S. Bankruptcy Court a lawsuit against every member of the current board of directors of the Debtors, seeking damages for breaches of fiduciary duties in connection with the purchase of $800 million in mortgage-backed securities called collateral mortgage obligations.

Follow up:

The committee asserts, "The CMO investigation defendants proposed, negotiated, and facilitated the acquisition of the CMO portfolio. In doing so, the CMO investigation defendants acted in their own interest in facilitating consummation of the CMO portfolio acquisition even though they knew or should have known it would result in harm to Imperial. At a minimum, the CMO investigation defendants were willfully blind to the foreseeable disastrous consequences of the CMO Portfolio acquisition and acted grossly negligently or recklessly in advocating for and facilitating consummation of a transaction that in short order would result in disaster for Imperial."

The timeline of events:

December 2008 - Delisted by NYSE for falling below minumum global capitalization.

August 2009 - Federal Reserve issued inforcement action against the bank.

December 2009 - FDIC shutdown Imperial

December 2009 - Imperial Capital Bankcorp files bankruptcy listing $40 million in assets and $100 million in debts.

July 2010 - The FDIC Inspector General issued a material loss review which stated in part:

Imperial's failure can be attributed to the Board and management pursuing an aggressive growth strategy concentrated in CRE and ADC lending without establishing sound risk management practices to manage the concentrations during the economic downturn. Ineffective monitoring of the speculative real estate construction market and inadequate oversight of the highly concentrated CRE loan portfolio led to critically deficient asset quality. Furthermore, during 2008, the Board and management increased the risk profile of the bank by purchasing high-risk investment securities when markets for those securities were collapsing. This decision created an additional asset concentration and burden on capital. Specifically, earnings became critically deficient and eroded the bank's capital as a result of operating losses associated with the decline in the bank's ADC and CRE loan portfolios as well as market depreciation in the investment portfolio. As the bank's financial condition deteriorated, its ability to rely on Federal Home Loan Bank (FHLB) borrowings and brokered deposits became limited and strained its liquidity. Despite actions taken by the Board and management to address its deteriorating condition, the CDFI ultimately closed Imperial due to its deteriorating asset quality, poor earnings, and inadequate capital.



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