By RICHARD CLOUGH Staff Reporter
Michael Perry’s legal headaches might finally be ending – but there’s still one big one left.
For more than four years, the former head of IndyMac Bank has been battling federal regulators and jilted shareholders in a myriad of lawsuits related to the Pasadena mortgage lender’s spectacular 2008 collapse.
But after a series of recent legal victories, Perry has resolved nearly all of the outstanding litigation.
Last week, his attorneys announced that they reached a settlement agreement with the Securities and Exchange Commission, ending the last remaining claim of a civil fraud suit just weeks before it was set to go to trial. The deal came shortly after his lawyers reached settlements on multiple shareholder suits.
“There were two class actions that were settled. We also got him dismissed out of … a couple of different cases,” said Perry’s attorney, D. Jean Veta, a partner with Covington & Burling LLP in Washington, D.C.
But Perry is not fully in the clear.
The Federal Deposit Insurance Corp. is seeking more than $600 million in damages from the former executive over his alleged role in IndyMac’s costly failure. The wide-ranging suit isn’t scheduled to go to trial until next year.
As chief executive and chairman, Perry presided over the institution’s growth into one of the country’s largest independent mortgage lenders. But as the housing market collapsed, IndyMac suffered heavy losses and was seized by the FDIC. That wiped out shareholder equity and cost regulators more than $13 billion.
Subsequent lawsuits have accused Perry of taking excessive risks and failing to disclose his actions. The SEC claimed Perry hid the extent of the company’s decline and the steps it was taking to keep capital levels up.
Last week’s settlement with the agency resolved the SEC’s only claim left standing; the judge had tossed all the others.
“The court ruled in Mr. Perry’s favor on every claim that was presented to it,” Veta said.
Perry did not admit or deny wrongdoing and will pay $80,000 to settle the suit.
Rapid decline
IndyMac was started in 1993 as a subsidiary of subprime lender Countrywide Financial Corp. and split off in 1997. The institution specialized in so-called alt-A loans, which targeted borrowers who could not qualify for standard mortgages but were rated higher than subprime.
Those higher-risk loans deteriorated rapidly once the housing market began to decline. In July 2008, IndyMac suffered a bank run that drained about $1 billion, leading to a liquidity crisis and the institution’s subsequent failure, one of the largest in U.S. history.
Though regulators were able to sell off the assets later to a group of investors who renamed the institution OneWest Bank, fallout from the failure has lingered.
A number of shareholders filed class-action lawsuits; Perry reached settlement agreements on two major cases this summer in the amounts of $5.5 million and $6.5 million.
The FDIC filed a lawsuit last year in federal court in Los Angeles claiming Perry authorized the production of $10 billion in risky residential mortgage loans even after he knew the market was in decline.
“Perry chose to roll the dice in an aggressive gamble to increase market share while sacrificing credit standards, even though a reasonable banker of a depository institution would have suspended, limited or stopped the production of these risky loans during this time of known, unprecedented and escalating risks,” the FDIC said in the lawsuit.
The agency, which has closed 454 institutions since the beginning of 2008, has been under pressure to recover some of the costs of the failures and hold former executives accountable. The FDIC has authorized lawsuits against 647 former bank officers and directors. To date, it has filed 32 lawsuits against 266 individuals.
Catherine Galley, senior vice president for financial consulting firm Cornerstone Research in Los Angeles, said she is not aware of any of the FDIC’s suits that have proceeded to trial – and she’s not sure any of them will.
“Litigation is very expensive for all parties concerned and certainly trials are expensive,” she said. “So there’s often a big incentive for both sides for settlement to occur.”
The FDIC has so far reached settlements in three cases, including a $65 million agreement with the former heads of Washington Mutual Bank.
A spokesman for the FDIC declined to comment on whether the agency has discussed a settlement with Perry’s lawyers. Veta would not comment on the FDIC case.
If it does proceed to trial, Galley said it might be tough for the FDIC to win. In Perry’s case, as with most of the suits against failed-bank executives, there is “a causation issue” that makes it tough to assign blame.
“What really caused the losses?” she asked. “There were unforeseen downturns in the markets that few people anticipated.”
