Second suit filed in SV Bank collapse
Suit is immediately joined with prior class action lawsuit
A shareholder suit brought against the directors and officers of the failed Sonoma Valley Bank on Aug. 17 on behalf of the still viable holding company, Sonoma Valley Bancorp, has been joined with an earlier class-action suit filed on June 29, in hopes of recovering some or all of the $69 million in share value that was lost when federal regulators seized the community bank in 2010.
Sonoma Valley Bank’s (SVB) fortunes unraveled when the Federal Deposit Insurance Corporation (FDIC), investigating what happened to $8.7 million in bailout money SVB received in February, 2009, revealed a series of non-performing loans made to a Marin county developer with a history of defaulting on development loans. Loans totaling over $54.5 million were floated for three projects: a west Santa Rosa condominium development, a Petaluma apartment condo-conversion, and a south Santa Rosa self-storage facility.
Marin developer Bijan Madjlessi and his partners eventually defaulted on $45 million of those loans.
The FDIC concluded that the bank didn’t have enough cash on hand to cover its bad loans, and forced SVB to restate its bad debt and raise its cash reserves by $20 million. The seizure came after SVB failed to raise the cash by the FDIC deadline, in spite of assurances by the directors that the bank would eventually make good on the losses.
Investigations by the FDIC, Treasury Department and IRS may take another eight months, according to FDIC spokesman Greg Hernandez. They may result in civil or criminal actions.
The suits allege that the officers and directors of the bank knew or should have known that the loans were risky – Madjlessi had defaulted on loans on the same projects before coming to SVB. Brian Melland, a loan officer at SVB, received $50,000 from Madjlessi’s wife for a personal financial venture just days before one of the large loans was approved.
SVB enjoyed early success as a local community bank, and solicited local residents to buy into the company from the beginning, based on the solid reputations of its directors and officers in the Sonoma Valley. For the most part, the bank’s loans were to local businesses and developments, until an aggressive executive compensation policy was adopted in 2008.
The people being sued are Mel Switzer (Director and Vice Chairman of the Board), Sean Cutting (CEO of the bank and the holding company), Robert J. Nicholas (Director and Chairman of the Board of Bancorp), Suzanne Brangham (Secretary and a Director of Bancorp), Dale T. Downing (Director for the bank and Bancorp), Robert B. Hitchcock (Director for the bank and Bancorp), Valerie Pistole (Director of the bank and Bancorp), and Mary Dieter (Executive Vice President, Chief Financial Officer and Assistant Corporate Secretary of Bancorp, as well as having held other positions of authority with the bank).
Like many banks, the actual bank – Sonoma Valley Bank – was wholly owned by its parent, Sonoma Valley Bancorp – and investors bought shares of the parent company. The officers and directors often shared dual roles with each entity, which can be confusing at times.
The first class action suit brought by shareholder and Sonoma attorney Newton dal Pogetto, was filed in late June, along with a demand for payment from Progressive Insurance Co. which issued a $20 million Directors & Officers liability insurance policy.
The latest suit, filed by Burlingame-based Cotchett, Pitre & McCarthy LLP, is slightly different, suing on behalf of the holding company rather than the stockholders directly. It’s a subtle distinction, but one which dal Pogetto agrees is the right way to go forward, so the suits were combined and will go forward over the course of the next two years.
Anne Marie Murphy, an attorney with Cotchett, Pitre, said the suit was based on the directors’ and officers’ failure to exercise care when loaning the bank assets. The failure to disclose the non-performing loans in at least one SEC filing is cited as evidence of wrongdoing.
“It is not a situation where collapse was unavoidable. Several years of warnings and improper decisions led to failure of Sonoma Valley Bank,” Murphy said.
There are over 1,000 shareholders who saw the stock value drop from a high of $30.95 a share in September of 2007 to less than a penny today, a loss of over $69 million. The FDIC will have first claim on any money recovered on behalf of the government bailout recovery and deposit insurance claims (a total of $14 million); after that come vendors owed for day-to-day bills and other direct debts. Stockholders will come last.
A copy of the amended suit can be downloaded at cpmlegal.com/pdf/2011-09-08-File_Endorsed_FAC_and_Exhibits.pdf.