Officers and directors of failed Colonial BancGroup have agreed to pay investors $10.5 million to settle a class-action lawsuit. The settlement must be approved by the U.S. Bankruptcy Court in Montgomery. That court will decide if the settlement money can be paid with proceeds from an insurance policy covering the bank’s directors and officers. As has been widely reported, Montgomery-based Colonial failed in 2009, was seized by the government as insolvent, and sold to North Carolina-based BB&T Corp., which took over the branches and some of the assets. The shareholders’ suit was led by the Arkansas Teacher Retirement System and other pension funds.
Colonial was once the second-largest bank based in Alabama, with 355 offices in five states. It collapsed after lending billions to developers and homeowners during the real-estate bubble, much of it in Florida and Las Vegas. All of the bank’s shareholders saw their holdings wiped out when the company was seized by state regulators in August 2009 and filed for bankruptcy protection a few days later. The Federal Deposit Insurance Corp. initially estimated the failure would cost its deposit fund $2.8 billion. Colonial’s failure is the sixth largest ever of a U.S. bank. At the end, 13% of loans weren’t being paid as agreed, and the company had lost money for five consecutive quarters, including a final loss of $600 million.
I understand that is an ongoing criminal probe by the U.S. Justice Department centering on Colonial’s mortgage lending and accounting. The bank applied for $550 million in funds from the government’s Troubled Asset Relief Program, but the money was never paid out. Two Colonial officers, Catherine Kissick and Teresa Kelly, have been sentenced to prison terms for their work with a fraudulent mortgage originator in Florida. They both admitted lying to auditors and regulators. Lee Farkas, the leader of that Florida mortgage company, is serving 30 years in prison for the fraud committed at Taylor Bean & Whitaker.
There is a lesson to be learned from this sad story and that is, persons who can’t be actively involved in running a large business should think twice before accepting a part-time position on that company’s board of directors. There were some real good folks on Colonial’s board and they unfortunately – because of what was done by others – got caught up in a very bad ordeal. Hopefully, this settlement will be approved and paid by the insurance money now under the control of bankruptcy court.
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