A group of hedge funds have reached a $20 million settlement in Delaware Chancery Court with the former executives and board members of defunct CertusBank. It was claimed that the bank’s leadership spent tens of millions of dollars on frivolous expenses, ran the bank into the ground and then destroyed documents in an effort to cover up their wrongdoing. The settlement was reached after months of intense discovery efforts by the hedge funds’ lawyers. It should be noted that the bank’s only recoverable asset was a $50 million insurance policy and it was being rapidly depleted by litigation.
Certus was founded in 2011 by former Bank of America and Wachovia executives, who sold a group of hedge funds on the idea of starting a holding company to buy up failing Southeastern community banks in the wake of the financial crisis and turn them around. The federal government was providing charters at the time that qualified holders for lucrative federal support like the ability to bid on failed banks at Federal Deposit Insurance Corp. auctions.
It was contended by the shareholders that Certus was one of only five banks to receive the so-called shelf charters, making it a “government-backed business venture that should have been an easy winner.” However, under the terms of the charter investors were required “to accept the unfettered control of the Certus board and management” and were prevented from initiating proxy fights. Certus bought two failed Georgia banks in 2011, but quickly began running up an enormous corporate tab “for [executives'] own personal enjoyment, while projecting an image of glamour and opulence,” the original complaint said.
By April 2014, the bank had lost nearly $170 million and was under investigation by the South Carolina Attorney General’s office. In June 2015, the bank sold off nearly all of its remaining assets and in November 2015 some of Certus’ hedge fund investors filed suit, alleging breach of fiduciary duty, waste and other claims. Certus entered into a $110 million lease for 160,000 square feet of office space in Greenville, South Carolina, in 2011, although the board had only authorized them to lease 20,000 square feet total, the complaint says.
The hedge funds are represented by Joel Friedlander, Christopher Foulds and Christopher P. Quinn of Friedlander & Gorris PA and Mark Lebovitch, Christopher J. Orrico and John Vielandi of Bernstein Litowitz Berger & Grossman LLP. The case is 3-Sigma Value Financial Opportunities LP, et al. v. Milton Jones, et. al., in the Court of Chancery for the State of Delaware.
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