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Aug

12

2014

Kristina Del Vecchio Appointed Chair of Consumer Financial Services Committee – CA State Bar Business Law Section

SAN FRANCISCO, CA – August 12, 2014. Joseph & Cohen, Professional Corporation, announced today that Kristina Del Vecchio has been named Chair of the State Bar of California’s Business Law Section’s Consumer Financial Services Committee.

An accomplished advisor and litigator for banks, credit unions and other financial services companies, Ms. Del Vecchio joined Joseph & Cohen as Of Counsel in January 2014. Del Vecchio previously served as Vice Chair of Communications for the committee, and notes of her new role, “I am honored to have the opportunity to lead this outstanding committee, which is comprised of a variety of impressive attorneys committed to enhancing their practice and awareness of issues affecting the consumer financial services industry.”

Ms. Del Vecchio’s appointment adds to the list of notable positions served by Joseph & Cohen partners in the State Bar of California’s Business Law Section. Founder and Managing Partner, Jonathan Joseph is Chair of the Financial Institutions Committee; and Kenneth Sayre-Peterson, Partner, serves as the Vice-Chairman of Legislation for the Consumer Financial Services Committee.

Additionally, Jonathan Cohen, Head of Litigation at Joseph & Cohen, is slated to speak on a panel, moderated by Ms. Del Vecchio, titled New Developments in the Enforcement of Consumer Arbitration Clauses at the annual State Bar meeting on September 14.

Joseph & Cohen, Professional Corporation, is a Financial Services and Litigation Boutique headquartered in San Francisco that emphasizes complex banking, corporate and financial services matters, regulatory and bank enforcement defense, private equity, bankruptcy and insolvency, employment and commercial litigation services.  Joseph & Cohen is known for sophisticated expertise, extraordinary commitment to clients, relationship-based services, and a range of specialized skills typically found only in the largest American law firms.

For additional information about the Joseph & Cohen, Professional Corporation, please visit our website at http://www.josephandcohen.com or Facebook at www.facebook.com/josephandcohen.

Press Contact:  Jonathan Joseph at Joseph & Cohen, 415-817-9200, ext. 9 or jon@josephandcohen.com.

Jonathan Cohen Quoted in ACAMS moneylaundering.com Article on Directors and Officers Liability Insurance Issues

Joseph & Cohen, Professional Corporation, was featured in a recent ACAMS moneylaundering.com article by Kira Zalan and Colby Adams titled “With Regulators’ Talk of Individual Fines Comes Bankers’ Queries on Insurance.”

Published on June 17, 2014, the article explores why more and more bank compliance officers are exploring the scope of insurance coverage under Directors and Officers (D&O) liability insurance policies to address the rise of regulatory penalties against individual bankers.

The article notes an important and often overlooked reality that many financial institutions and their officers are unaware of the exclusions in their D&O policies, to which Jonathan Cohen, the firm’s head of litigation, was quoted:

“More often than not an officer or director will be surprised by the lack of coverage that they have.”

Joseph & Cohen’s core corporate and regulatory practice includes the representation of federally insured depository institutions and the defense of Officers and Directors of financial institutions in civil damage actions instituted by the FDIC or shareholders and administrative proceedings brought by the FDIC for civil money penalties or other sanctions.   Joseph & Cohen also has extensive experience in advising institutions and their Offices and Directors in connection with insurance coverage and related litigation.

For additional information about Joseph & Cohen, Professional Corporation, please visit our website at  www.josephandcohen.com or Facebook at www.facebook.com/josephandcohen.

Litigators Nicole Dogwill and Robyn Callahan Join Joseph & Cohen

SAN FRANCISCO, CA – April 08, 2014.  Joseph & Cohen, Professional Corporation, announced today that the firm has added two skilled litigation attorneys to its expanding boutique litigation practice. Nicole P. Dogwill joined the firm as a Partner, and Robyn C. Callahan as Of Counsel.

Nicole Dogwill is an experienced litigator with core expertise advising and defending mature and emerging companies, as well as their directors and officers, on matters involving fiduciary duty, corporate governance, securities, fraud, antitrust/unfair business practices, and related business claims. Ms. Dogwill also advises and litigates fiduciary duty and related claims arising in trust and estate matters.

Ms. Dogwill was named a “future star” in both the 2012 and 2013 editions of Benchmark Litigation. The National LGBT Bar Association selected Ms. Dogwill as one of the Top 40 under 40 LGBT Attorneys for 2010. She is currently the President of the National LGBT Bar Association’s Board of Directors.

Jonathan Joseph, Joseph & Cohen’s Managing Partner, stated “Nicole Dogwill shares our passion to deliver world class legal services to business and financial institution clients via a boutique law firm model that embraces long term client relationships, diversity, collegiality and quality in everything we do.”

Nicole Dogwill added “I am honored to be joining this esteemed group of lawyers, many of whom I’ve had the privilege of working with before to provide exceptional services to my clients in California and across the United States.”

Prior to joining Joseph & Cohen, Ms. Dogwill was a partner at Shartsis Friese LLP.  She was also a partner at Winston & Strawn LLP in San Francisco for seven years.

Also an accomplished litigator, Robyn C. Callahan brings her expertise in business litigation, employment law and commercial disputes, including complex class actions. With over a decade of experience working for both boutique and global Am Law 100 ranked firms, Ms. Callahan has successfully represented clients across a broad range of industries in federal, state and appellate courts.   She previously worked at Winston & Strawn’s San Francisco office alongside Jonathan Cohen, Jeffrey Lederman and Nicole Dogwill.

Jonathan Cohen, the Head of Litigation, said “We could not be happier to have Robyn join us.  She is a truly skilled lawyer and adds significant depth to our team, with extensive trial experience in both commercial and employment litigation.”

Ms. Callahan noted, “I am thrilled to reunite with Jon, Jeff and Nicole and to be working with such a talented team of attorneys who value the importance of integrity in the practice of law and in fostering long-term client relationships.

Joseph & Cohen, Professional Corporation, is a Financial Services and Litigation Boutique headquartered in San Francisco that emphasizes complex banking, corporate and financial services matters, regulatory and bank enforcement defense, private equity, bankruptcy and insolvency, employment and complex commercial litigation services.  Joseph & Cohen is known for sophisticated expertise, extraordinary commitment to clients, relationship-based services, and a range of specialized skills typically found only in the largest American law firms.

For additional information about the Joseph & Cohen, Professional Corporation, please visit our website at http://www.josephandcohen.com or Facebook at www.facebook.com/josephandcohen.

Press Contact:  Jonathan Joseph at Joseph & Cohen, 415-817-9200, ext. 104 or jon@josephandcohen.com.

Feds Bite Largest Bitcoin Exchange: Lessons for Virtual Currency Entrepreneurs

By Jonathan D. Joseph

When the US Treasury’s Financial Crimes Enforcement Network, a/k/a FinCEN, published an interpretative ruling on March 18, 2013 discussing how its regulations applied to users, exchangers and administrators of virtual currencies, Mt. Gox, the world’s largest exchange for Bitcoin transactions, should have taken note.   Mt. Gox and other early pioneers in the virtual currency space have anarchist roots and generally eschew governmental regulation; however, it is now clear that the survivors in the Bitcoin and cryptocurrency ecosystem will be those that successfully navigate the complex web of federal and state money transmission laws and regulations.

Earlier this week, Homeland Security Investigations (“HSI”) obtained a warrant, issued by the U.S. District Court of Maryland, authorizing U.S. government seizure of assets of Mt. Gox held at Iowa based payment processing start-up Dwolla and Wells Fargo Bank.   HSI acted after it discovered that Mt. Gox, based in Tokyo, Japan, was operating as an unlicensed money transmission service through its American affiliate, Mutum Sigillum LLC, and it may have lied to Wells Fargo when it opened its initial US bank account.

FinCEN is the bureau of the Treasury Department that seeks to prevent money laundering and terrorism financing through its regulation of Money Service Businesses (“MSBs”).  Its March 2013 guidance states that those dealing in or administering virtual currencies such as exchanges like Mt. Gox, but not users or “miners”, need to register as MSBs and comply with anti-money laundering regulations. While Bitcoin is the best-known cryptocurrency or digital currency, others have sprung up recently, including Opencoin, Litecoin, Terracoin, Feathercoin and Novacoin, among others.   While concepts underlying virtual or cryptocurrencies can be mind- numbingly complex, the FinCEN guidance is reasonably clear as to who is regulated:

“A person that creates units of this convertible virtual currency and uses it to purchase real or virtual goods and services is a user of the convertible virtual currency and not subject to regulation as a money transmitter. By contrast, a person that creates units of convertible virtual currency and sells those units to another person for real currency or its equivalent is engaged in transmission to another location and is a money transmitter.  In addition, a person is an exchanger and a money transmitter if the person accepts such de-centralized convertible virtual currency from one person and transmits it to another person as part of the acceptance and transfer of currency, funds, or other value that substitutes for currency.”  FIN-2013-G001, March 18, 2013.

FinCEN categorizes participants in the virtual currency market into three generic categories: “user,” “exchanger,” and “administrator.” A user is a person that obtains virtual currency to purchase goods and services. An exchanger is a person engaged as a business in the exchange of virtual currency for real currency, funds or other virtual currency.   An administrator is a person engaged as a business in issuing (circulating) a virtual currency and who has the authority to redeem or withdraw from circulation that virtual currency.

A person may engage in “obtaining” a virtual currency in a number of different manners such as “earning,” “mining,” “harvesting,” “manufacturing,” “creating,” and “purchasing,” depending on the details of the specific virtual currency model involved.   FinCEN concluded that how a person obtains a virtual currency is immaterial to the legal characterization under the Bank Secrecy Act of the process or of the person engaging in the process.   This means that a user who obtains convertible virtual currency and uses it to purchase real or virtual goods or services is not a Money Service Business under FinCEN’s regulations.   Users must still be cautious, as an activity which is exempt from FinCEN’s rules, may still violate other federal or state statutes, rules and regulations.  Additionally, almost all states have money transmission laws that may apply even if FinCEN rules do not.

An administrator or exchanger that (1) accepts and transmits a convertible currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations, unless a limitation or exemption from the definition applies to the person.  As one illustration, a federally-insured commercial bank is exempt from the definition.  However, in most cases, whether a person is a money transmitter is a matter of facts and circumstances.  Under FinCEN’s interpretations and the law of many states there is no differentiation between real currencies and convertible virtual currencies.  Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under BSA regulations.  31 CFR section 1010.100(ff)(5)(i)(A).

An exchange’s activities most often involve acting as a seller of Bitcoins or other virtual currency where it accepts real currency or its equivalent from a user/purchaser and transmits the value of the real currency to fund the purchaser’s virtual currency account held by an administrator.  In the Dwolla/Mt. Gox case described above, users were transferring U.S. Dollars to Mt. Gox’s American affiliate via Dwolla.  Prior to the HSI seizure, the American affiliate had been transferring U.S Dollars received from Dwolla to Mt. Gox in Japan and Mt. Gox allegedly used the Wells Fargo account to route funds from Japan to and from accounts at Dwolla at the direction of users. Dwolla, headquartered in Des Moines, offered an easier way for people to buy or sell Bitcoins through Mt. Gox, rather than attempting international wires to and from the company’s Japanese bank.

Under FinCEN regulations, sending “value that substitutes for currency” to another person or to another location constitutes money transmission, unless a limitation to or exemption from the definition applies.  Consequently, based on the HSI warrant, Mt. Gox was transmitting funds to another location, namely from the user’s real currency account at a bank to the user’s virtual currency account with the administrator.   The government alleges this is illegal since the only services being provided are unlicensed money transmission services.

Once a person or entity is engaging in the business of money transmission (both real or virtual currencies), doing so without registering with FinCEN as a Money Service Business and obtaining licenses under State money transmitter laws is mandatory unless certain enumerated exemptions apply. Most States including California, New York, Florida, Texas and Illinois and the District of Columbia require money transmitting businesses to obtain a license and comply with the other regulatory requirements (unless certain exemptions apply).  Failure to be registered and licensed can constitute a felony.

The fervor of the cyrptocurrency movement is starting to resemble the California Gold Rush after gold was discovered in 1849.  Millions of dollars are being invested in starts-up companies mainly in the Silicon Valley as Bitcoin entrepreneurs and venture capitalists race after what some believe could ultimately be worth billions.  In fact, Opencoin recently announced it had completed an angel round which included Silicon Valley heavy hitters Andreessen Horowitz, Lightspeed Venture Partners and Barry Silbert’s Bitcoin Opportunity Fund.

Importantly, it doesn’t appear that Homeland Security or FinCEN is cracking down on Bitcoin itself, just on how it’s being exchanged by Mt. Gox. This is good news for Mt. Gox’s US-based competitors, such as Seattle-based CoinLab and San Francisco-based Coinbase, Bitcoin exchanges that have registered with the Treasury Department as money transmitters.

An important lesson for entrepreneurs and VCs entering the virtual currency space is that virtual currency business models must be analyzed by lawyers with corporate and venture capital expertise, as well as deep familiarity with state and federal currency and money transmission laws.  For those that would turn a blind-eye to the necessity of robust legal compliance at an early stage based on libertarian or anarchist beliefs, naivety or an extraterritorial structure, failure is almost certainly guaranteed.

Smart entrepreneurs understand this.  Success stories include PayPal, Square and presently Google Payment Corp., and Facebook Payments are muscling into the space.  Staying lean until proof of concept has been achieved is important,  but when it comes to federal and state money transmitter regulation,  early angel and VC investment rounds must include funds for legal compliance.  Joseph & Cohen has the expertise and experience to successfully establish and plan innovative legal compliance programs for VCs, virtual currency and Bitcoin start-ups.

Jonathan Joseph is the Managing Partner of Joseph & Cohen, Professional Corporation, a Financial Services and Litigation Boutique headquartered in San Francisco that emphasizes complex banking, corporate and venture capital transactions, regulatory and money transmission activities, securities, M & A, bankruptcy and insolvency, employment law and commercial and executive employment litigation services.

For additional information about Joseph & Cohen, Professional Corporation, please visit our website at www.josephandcohen.com or contact Jonathan Joseph at 415-817-9250 or jon@josephandcohen.com.

Joseph & Cohen Elevates Ken Sayre-Peterson to Partner

SAN FRANCISCO, CA – May 1, 2013. Joseph & Cohen, a Professional Corporation headquartered in San Francisco, announced today that Kenneth Sayre-Peterson has been elected a partner following his successful stint as Of Counsel with the firm that began in February 2012.

Managing Partner, Jonathan Joseph stated, “Joseph & Cohen’s clients have benefited from Ken Sayre-Peterson’s enormous expertise in bank regulation, credit union matters, financial services, corporate transactions, money transmitter compliance and bank enforcement work.  He has helped to secure the firm’s position as one of the leading bank and depository institution regulatory practices in California. Elevating Ken to partner was an incredibly easy decision.”

Sayre-Peterson adds, “It is a delight to work with this team of distinguished attorneys in a collegial boutique setting. I am honored to be invited in as a partner, and look forward to continuing to deliver superlative regulatory and transactional legal services to our valued clients.”

Prior to joining Joseph & Cohen, Ken Sayre-Peterson held increasingly senior positions as an attorney with the California Department of Financial Institutions. During his distinguished twenty-two year career, he practiced general financial institutions law and garnered an intimate knowledge of the banking, credit union, money transmitters, securities, and trust laws of California, as well as the pertinent and corresponding federal laws.

Joseph & Cohen, Professional Corporation, is a Financial Services and Litigation Boutique headquartered in San Francisco that emphasizes complex banking, corporate and transactional matters, regulatory and bank enforcement defense, securities, M & A, bankruptcy and insolvency, employment and commercial and executive employment litigation services.  Joseph & Cohen is known for sophisticated expertise, extraordinary commitment to clients, relationship-based services, and a range of specialized skills typically found only in the largest American law firms.

For additional information about the Joseph & Cohen, Professional Corporation, please visit our website at www.josephandcohen.com or Facebook at www.facebook.com/josephandcohen.

Press Contact:  Jonathan Joseph at Joseph & Cohen, 415-817-9200, ext. 9 or jon@josephandcohen.com.

Marie F. Hogan

Marie F. Hogan is Of Counsel in the firm’s San Francisco office. She has practiced law in California for more than thirty years with a core emphasis on representing commercial banks, other depository institutions and financial service companies in connection with mortgage lending, bank operations, loan workouts, consumer law and compliance, credit and debit cards, bankruptcy and insolvency and similar matters.

Ms. Hogan has been active in the State Bar of California for many years, having served as chair of the Executive Committee of the Business Law Section in 1998 and as a member or advisor to the Executive Committee from 1994 to the present. Marie Hogan is currently also a member of the Consumer Financial Services Committee of the State Bar’s Business Law Section. Ms. Hogan was previously a member of the Uniform Commercial Code Committee where she contributed her extensive skills related to, among other areas, deposits, letters of credit and personal property leasing.

Prior to joining Joseph Law, she has held senior legal positions in some of the largest banking organizations in California including Bank of America NT & SA, The Bank of California NA, World Savings Bank and Charles Schwab Bank.
Ms. Hogan has been a member of the Board of Directors of American Bach Soloists since 2000. She also served two terms as President of the organization. American Bach Soloists perform music of the Baroque era and are known around the world for the quality of their performances and interpretation

Ms. Hogan was awarded her Juris Doctor degree from Hastings College of the Law in San Francisco. Ms. Hogan received her undergraduate degree from the School of Foreign Service at Georgetown University in Washington D.C.
Ms. Hogan is a member of the State Bar of California.

Department of Financial Institutions Attorney Ken Sayre-Peterson Joins Joseph & Cohen – Expands Firm’s Core Regulatory Practice

SAN FRANCISCO, CA February 21, 2012.   Joseph & Cohen, Professional Corporation, announced today it has expanded the depth and scope of its bank regulatory, financial services and legislative practice with the addition of Kenneth Sayre-Peterson as Of Counsel.  Sayre-Peterson elected to join Joseph & Cohen following his retirement from the California Department of Financial Institutions (DFI), where he served in various legal capacities during a lengthy career, most recently having acted as the DFI’s General Counsel.

Kenneth Sayre-Peterson acted as the General Counsel for the California Department of Financial Institutions from June 2007 until his retirement in November 2011.  His final position with the DFI was the culmination of 22 years of service that began in 1988.  Prior to joining the legal staff of the California DFI, Mr. Sayre-Peterson practiced tax law for four years as a staff counsel with the California State Board of Equalization. Before entering state service, he spent two years in private practice, specializing in appellate work and lobbying.

“We are extremely pleased that Ken Sayre-Peterson is teaming up with Joseph & Cohen. Ken is one of the preeminent financial institutions lawyers in California.  His many years of bank and credit union regulatory expertise and financial services legislative skills  coupled with the firm’s well regarded financial services practice, deepens and expands Joseph & Cohen’s ability to offer complete legal solutions to banks, thrifts, money transmitters and other financial institutions,” said Jonathan D. Joseph, Joseph & Cohen’s Managing Partner.

Joseph added “Ken’s insider perspective from more than two decades with the Department of Financial Institutions allows the firm to provide an unprecedented level of legal Joseph added “Ken’s insider perspective from more than two decades with the California services  to money center, regional and community banks in connection with their most complex acquisitions, transactional and regulatory imperatives while also lending unparalleled strength to our existing team that advises troubled banks and defends officers and directors of failed banks in all types of enforcement proceedings.”

Ken Sayre-Peterson stated “I’ve known Jonathan Joseph since my early days with the CA DFI. From my vantage point in the Department I’ve admired the quality, integrity and tenacity of his lawyering in matters before the DFI.  Consequently, I am delighted to step back into private practice with Joseph & Cohen and believe that we will achieve significant synergies through our respective talents.”

Throughout his career at the California Department of Financial Institutions, Mr. Sayre-Peterson practiced general financial institutions law which resulted in an intimate knowledge of the banking, credit union, money transmitters, securities, and trust laws of California, as well as the pertinent and corresponding federal laws.  Additionally, Mr. Sayre-Peterson was the attorney responsible for assisting the DFI’s Legislative Section.  In that position, Ken spearheaded the recent revision and restatement of California’s Banking Law as newly codified in the California Financial Code, and drafted all legislation necessary to complete that four year project. While serving as the DFI’s General Counsel, Ken also played a major role in the policy making process, influencing both the direction and scope of the DFI’s examination and enforcement program.

Ken Sayre Peterson became a member of the State Bar of California in1983 after graduating from the McGeorge School of Law in Sacramento, with distinction.  He earned a Bachelor of Arts degree in History from California Polytechnic State University, San Luis Obispo, in 1977.

Joseph & Cohen, Professional Corporation, is an AV® rated law firm headquartered in San Francisco, California.  The firm emphasizes complex banking, corporate, regulatory, securities, employment, litigation and transactional matters for financial institutions, small businesses, investors and venture capital firms.  Joseph & Cohen is known for sophisticated expertise, extraordinary commitment to clients, relationship-based services, and a range of specialized capabilities typically found only in the largest American law firms. The Firm’s core areas include advice related to banking and financial services law; directors and executives; regulatory and legislative matters; mergers & acquisitions; securities offerings; SEC disclosure matters; employment litigation; D & O insurance coverage; money transmitters; bank operations; and regulatory agency enforcement proceedings.

For additional information, visit the firm’s website at www.josephandcohen.com and Facebook at www.facebook.com/josephandcohen.

Contact: Jonathan D. Joseph:   jon@josephandcohen.com or 415.817.9200,  ext. 9; and Kenneth Sayre-Peterson:   ken@josephandcohen.com or 916.204.2053.

406 Bank Failures Since 2008 – Lessons for the Survivors

By Jonathan Joseph*

Since the initial crush of the financial crisis in the summer of 2008, 406 banks have failed. As of October 24, 2011, the FDIC has authorized suits in connection with 34 failed institutions and 308 officers and directors for D&O liability of at least $7.3 billion.

The current cycle of litigation initiated by the FDIC has begun slowly, however, now that that more than three years has elapsed since the first major bank failure occurred in July 2008, the pace of lawsuits against former bank officers and directors will increase markedly. Since more than 335 of the current round of bank failures didn’t occur until July 2009 or later, at this point, most of the FDIC’s suits have focused on the earliest failures. As receiver, the FDIC has three years to file civil damage actions for tort claims from the time a bank is closed. If state law permits a longer time, the state statute of limitations is followed.

To date, only 15 of the FDIC’s civil lawsuits have actually been filed against former officers and directors of failed banks including suits against five former officers of IndyMac Bank in California (but none of its directors).  Two-thirds of the fifteen suits were filed in Georgia, California and Illinois and claims included negligence, gross negligence and breach of fiduciary duty.  Some of the suits have also included claims for recklessness, corporate waste and willful misconduct. In the prior era, the FDIC brought suit against directors and officers in 24% of the bank failures from 1985 and 1992.  With 38 failures in California, 17 in Washington and failures in Arizona (11), Nevada (11) and 6 in Oregon since 2008, if the past is prologue, the FDIC will bring additional civil damage claims against a significant number of bank officers and directors in the Western states during the next 24 months.

San Francisco based United Commercial Bank (UCB), with $11.2 billion in assets, was closed on November 6, 2009.  On October 11, 2011, just prior to the second anniversary of UCB’s failure, the U.S. Attorney for Northern California unsealed a criminal indictment that resulted in the arrest of two former UCB executives. The investigation is “ongoing,” meaning more indictments are possible. The dame day, the Securities and Exchange Commission brought civil charges against UCB’s former CEO, Tommy Wu, as well as the two indicted executives for securities fraud, falsifying corporate books and records and false statements to the outside auditor. The FDIC also commenced enforcement actions seeking permanent banking industry bans against 10 former UCB officers (including Tommy Wu and the two indicted officers) and civil money penalties. Three additional officers, who cooperated in the FDIC’s investigation, consented to prohibition orders and civil money penalties. As of October 24, 2011, there had been no announcement of any civil damage suit by the FDIC against any directors or officers of UCB.

This is the environment in which commercial bank D&O’s are operating today.  Important lessons can be distilled from the current round of FDIC lawsuits, criminal indictments and regulatory enforcement actions – applicable to sound and troubled banks.  The current lawsuits and enforcement actions challenge past conduct and recount recurring themes that help further define corporate best practices and delineate strategy and duties for bank leaders in the future.

The following guidelines are derived from the author’s experience in the “trenches” advising banks and defending officers and directors of failed and distressed banks:

1)      Adopt Corporate Best Practices. Well-drafted board minutes should demonstrate directors have exercised reasonable business judgment.  Use outside experts as needed to help show that decisions were prudent and made in good faith. Take regulatory criticisms seriously. Address them promptly and responsibly.  Hold management accountable. Develop practices and procedures to identify conflicts of interest and don’t approve transactions premised on conflicts without thorough vetting.   In connection with complex transactions, management succession, board compensation, bank agency enforcement issues and guiding a “distressed” bank, outside directors should consider retaining independent board counsel to assist in understanding and satisfying fiduciary duties, documenting reasonable business judgments, addressing conflicts of interest and responding to regulatory matters.

2)      Director & Officer Liability Insurance.   Annually, directors should assess whether coverage is tailored specifically to the current profile of the bank and its D&O’s.  The D&O insurance market is fluid.  Consequently, a specialty broker and independent counsel with banking and coverage expertise should guide the board.  Regulatory exclusions should be avoided.  Don’t wait until trouble brews to obtain policies without such exclusions.  Consider purchasing policies at both the bank and the bank holding company level since such policies often play out differently in the event of a bank failure.  D&O’s should consider purchasing (solely with individual funds) endorsements or separate policies that cover civil money penalties since the FDIC will not allow a bank to fund this type of coverage.

3)      Be Aware that Outside Directors Are Not Treated Equally. In several recent suits, the FDIC has focused on outside directors that had elevated banking industry expertise compared to ordinary businessmen. For example, in August 2011 the FDIC sued 14 outside directors of Georgia’s Silverton Bank. The complaint alleged that these directors were either CEO’s or presidents of other banks and asserted they were more “skillful and possessed superior attributes in relation to fulfilling their duties” compared to other directors that were not professional bankers.  The FDIC’s position is that these individuals should be held to a higher standard of care. Arguably, the FDIC could assert this position as to any outside director with superior skill or experience.  Such individuals should document vigilance in the boardroom and understand how their duties may differ from other directors and officers.

4)      Establish and Follow Sound Loan Underwriting Policies and Avoid Rapid Growth. Many recent FDIC suits assert that board’s approved deficient loan underwriting policies and further exacerbated this conduct by repeatedly permitting exceptions to weak standards.  Many failed banks were alleged to have implemented “unsustainable business models pursuing rapid asset growth concentrated in high-risk” loans that violated the bank’s underwriting policies. Some banks permitted extremely high CRE/ADC concentration levels even after repeated regulatory warnings.  One failed California bank had ADC loans to total capital ten times the regulatory guideline prior to failure.

5)      Evaluate Bank and Holding Company Interests. In one-bank holding companies, the interests of the bank and the holding company are often similar. However, when a holding company is controlled by a single person or small group, the interests of the bank may not align with the parent.  Where a holding company or bank becomes troubled or holds insufficient capital, the interests of the two companies could significantly diverge. In such cases, directors and officers will need to well understand conflicting duties and interests and address them suitably.

*          *          *          *

*About the authorJonathan Joseph has focused for over 30 years on regulatory, corporate and transactional matters for community and regional banks and officers and directors of distressed and failed institutions.  He is a member of the Financial Institutions Committee of the Business Law Section of the California State Bar and the managing partner of Joseph & Cohen, Professional Corporation (www.josephandcohen.com) in San Francisco, CA.

Joseph & Cohen’s Facebook site offers blog posts with business and banking information which the firm finds interesting or whimsical.

The comments herein do not constitute legal opinion and are not a substitute for legal advice.   © Joseph & Cohen, Professional Corporation 2011. All Rights Reserved.

Claims Against Failed Bank D&O’s Will Spike in 2012

By Jonathan Joseph*

The total number of bank failures since the banking crisis began in 2008 is now dangerously close to 400. To date, the FDIC has only filed 14 lawsuits against failed bank directors and officers from thirteen different failed banks.  A total of 103 former bank directors and officers have been named in these suits.

Based on published statistics and our own analysis of U.S. bank failures from 2008 to September 16, 2011, we believe that approximately 80 additional suits will be brought by the FDIC, as receiver, in the next two years. While the FDIC’s investigation and claim process has moved slowly, the number of damage suits authorized and filed is quickening and, we expect, will spike in 2012.

In August 2011, 5 new suits were filed, more than double any previous month. Currently, the FDIC’s website states it has authorized suits in connection with 32 failed institutions against 294 individuals for D&O liability with damage claims of at least $7.2 billion.  All but one of these suits involved banks that failed prior to July 2009. Consequently, while 14 lawsuits have been filed and the FDIC has approved claims against an additional 191 directors and officers who served 18 different failed banks, this significantly understates the number of new suits to be filed and D&O’s to be named.

The current round of bank failures began somewhat slowly in 2008. The closing of IndyMac Bank in July 2008 marked the beginning of a huge acceleration of failures with 140 failures in 2009 and 157 in 2010.  The pace has slowed in 2011 with 71 failures year to date.  Some of the 18 authorized FDIC lawsuits not yet filed may settle; however, the FDIC will approve additional lawsuits against bank directors and officers at an increased pace in the ensuing months because 252 or 64 percent of the current round of bank failures occurred between July 9, 2009 and December 31, 2010.  The FDIC is now approaching the decision point in many of these pre-2011 failures including the retention of outside law firms to prosecute damage claims on its behalf, as receiver.

D&O liability suits are generally only pursued if the FDIC concludes they are both meritorious and cost-effective.  Before seeking recoveries from individual directors and officers, the FDIC conducts an investigation into the causes of the failure. The FDIC states on its website that investigations are usually completed within 18 months from the time the institution is closed, but lawsuits typically aren’t filed for another few months to a year.  Investigations can extend longer and lawsuits are sometimes filed just before the third anniversary of a bank’s failure.

Here are some illustrations: Georgia’s Silverton Bank failed on May 1, 2009 and suit was filed on August 22, 2011 (27 months).  Haven Trust Bank in Georgia failed on December 12, 2008 and suit wasn’t filed until July 14, 2011 (32 months).  Cooperative Bank in North Carolina was closed in June 2009 and suit was filed August 10, 2011 (26 months). On the other hand, Wheatland Bank in Illinois failed on April 23, 2010 and suit was filed on May 5, 2011 (13 months).  With $11.2 billion in assets, San Francisco based United Commercial Bank was closed and most of its assets were assumed by East West Bank on November 6, 2009.  Yet after almost two years, no public announcement of FDIC damage claims against any of UCB’s executive officers and directors have surfaced.  United Commercial Bank was California’s largest ever commercial bank failure.

Not all bank failures result in Director and Officer (D&O) lawsuits. The FDIC brought claims against directors and officers in 24 percent of the bank failures between 1985 and 1992. Since July 2009, the FDIC was named receiver at 323 failed banks.  Bank failures have been most heavily focused in Georgia (70), Florida (56), Illinois (45), California (37), Washington (17) and Minnesota (16). If one assumes the same 24 percent ratio of suits from the 1985 – 1992 era will be repeated in connection with failures since June 2009, former directors and officers of about 80 additional banks could be targets of FDIC damage suits in the next two years in addition to the 14 suits already underway.  The actual number could be somewhat higher but we doubt it will be much lower.

Prior to filing a lawsuit against a director or officer of a failed bank, staff for the FDIC, in its capacity as the receiver (or outside counsel representing the FDIC as receiver), will mail a demand letter to the bank’s officers and directors asserting the FDIC’s claims for monetary damages arising out of the bank’s failure.  These demand letters typically do not distinguish between the different roles that officers and directors may have played under the circumstances nor is much effort made (at this point in the process) to determine which officers and directors in a particular organization may have been negligent, grossly negligent, breached fiduciary duties or wasted assets.

In a number of recent suits, the FDIC has focused on outside directors that had more banking industry expertise than other directors (i.e., directors of Silverton Bank) who were not themselves professional bankers.  Directors with lending, accounting and CPA expertise may potentially be held by FDIC to higher standards, which could make them more visible targets.  Often the FDIC’s demand letter is sent to trigger a claim under the bank’s director and officer liability policy and as part of an attempt to settle with the responsible parties.  If a settlement cannot be reached, however, a complaint will be filed, typically in federal court. Thus, in many of the upcoming lawsuits, the FDIC may pursue claims against individuals but will also focus on the insurance proceeds that could be available in connection with many failures especially those that occurred prior to 2011 (when regulatory exclusions were not as widespread).

It is crucial that officers and directors of a troubled or failed bank retain knowledgeable insurance coverage and bank regulatory counsel to assert rights to coverage under the bank’s liability policies and to determine whether the facts and circumstances raise unique or special legal defenses.   Officers and directors of all distressed banks should attempt to retain experienced outside counsel prior to a bank’s failure as the bank’s existing counsel will usually be conflicted out upon failure.  Notice of circumstances that could give rise to coverage under a policy should be filed with insurers on a timely basis (usually pre-failure) and written follow-up by coverage counsel with insurers post-failure  is often be necessary. If a director or bank officer hasn’t done so prior to failure, they should always retain experienced counsel at the first hint of an investigation or demand arising out of the bank failure.

In many of cases, the FDIC’s ultimate objective will be the recovery of D&O insurance proceeds.  For this reason, it is often advisable to retain a combined legal team that has the capability to address insurance issues, liability and damage claims, regulatory enforcement actions (such as banking industry bans and civil money penalties) and, in rarer cases, criminal probes and indictments.

*About the Author: For over thirty-two years, Jonathan Joseph has focused on the representation of community and regional banks and officers and directors of distressed and failed banking organizations in connection with regulatory, transactional and corporate matters.  He is a member of the Financial Institutions Committee of the California State Bar and a leading banking industry lawyer in California.  Mr. Joseph founded the firm of Joseph & Cohen, Professional Corporation, in 2006 and is its Chief Executive Officer.  Joseph & Cohen currently represents financial institutions and officers and directors of troubled and failed banks from its office in San Francisco, CA.

For additional information, please email the author: Jon@JosephandCohen.com.

© Joseph & Cohen, Professional Corporation. 2011. All Rights Reserved.

California’s New Money Transmission Law Sweeps Up

By Marie Hogan*

Effective as of January 1, 2011, California’s sweeping new Money Transmission Act (the “MTAct”) became applicable to the money transmission business. The MTAct expanded the state’s regulation and license requirements for money transmitters by covering domestic money transmitters, including stored value device issuers and other businesses that offer new types of alternative payment and mobile applications.  The new law assigns regulation and licensing authority to the California Department of Financial Institutions

Background

The regulation of money transmission varies from state to state, but most states regulate domestic money transmission involving their residents. The MTAct now covers domestic money transmission by adding similar requirements and consolidates the regulatory and licensing mandates previously found in other California statutes. California’s regulation of money transmission had previously been of persons who help consumers transmit money overseas through the Transmission of Money Abroad Law, the issuance of traveler’s checks through the Travelers Checks Act and the issuance of payment instruments through the Payment Instruments Law.

Under the MTAct, it is a crime for a person to engage in the business of money transmission without a license or for a person to intentionally make a false statement, misrepresentation or false certification in a record filed or required to be maintained under the MTAct.  Consequently, it is important that individuals and businesses planning to engage in money transmission activities comply with the MTAct and its licensing requirements.  Due to rapid technological advances, many emerging, alternative or stored value payment businesses and their applications could be covered for the first time in California.

What is money transmission?

Money transmission is selling or issuing in California, or to or from persons located in California, payment instruments, stored value devices or receiving money or monetary value for transmission by electronic or other means.

“Payment instrument” means an instrument for the transmission or payment of money or monetary value, whether or not negotiable, such as, for example, a check, draft or money order.  Excluded are issuers who also redeem the instrument for goods or services provided by the issuer or its affiliate, for example, a “rain check”.

“Stored value” involves monetary value representing a claim against the issuer that is stored on a digital or electronic medium and accepted as a means of redemption for money or as payment for goods or services.  For example, Visa® gift cards.  Excluded are cards issued by businesses that also redeem the card for goods or services provided by the issuer or an affiliate (“closed loop”), for example, cards issued by leading coffee chains.

“Receiving money for transmission” includes any transaction where money or monetary value is received for transmission within or outside the United States by electronic or other means.  Thus, certain new mobile payment applications or emerging payment platforms not offered by banks or other regulated depository institutions could  be within this category and subject to regulation and licensing.

Who can be a licensed money transmitter?

Only a corporation or limited liability company may be a California licensed money transmitter.  Under limited circumstances, a licensee may have agents who are not licensed money transmitters.  An example of a permissible non-licensed agent could include a local convenience grocery or liquor store that sells money orders as the agent for a bank.

Who cares?

  1. Anyone who sells a stored value instrument or creates stored value via a digital or electronic medium.
  2. Anyone who receives money for transmission, including by electronic means.
  3. Anyone who issues a payment instrument, for example, money orders.

Only licensed money transmitters or their permissible agents may issue or sell stored value instruments or payment instruments.

What does this law do?

The law does four things:

  1. Combines three existing licensing regimes into one.  The three prior licenses were travelers check issuers, money order sellers and foreign money transmitters.
  2. Newly subjects domestic money transmission to licensing.
  3. Licenses certain stored value (i.e., open loop) issuers.
  4. Makes it a crime to engage in the money transmission business in California without a license.

What activities require a license?

Similar to most California licensing requirements, anyone who engages in, solicits, advertises or performs specified “money transmission” services in California or for California residents must be licensed.

License Transition

Travelers check issuers, money order sellers and foreign money transmitters licensed in California prior to January 1, 2011, continue to be validly licensed. Any newly covered entity or business must file an application for a license by July 1, 2011.

Who is exempt from licensing?

All FDIC insured depository institutions are exempt, as are trust companies, credit unions, licensed broker dealers and payment systems serving exempt entities, such as an automated clearing house.  Affiliates of a FDIC insured entity are not exempt, nor is any other entity holding another license from the California Department of Financial Institutions or the California Department of Corporations.

Due to rapid technological advances involving alternative payment platforms, mobile applications, smart phones and other communication devices, businesses planning to offer any type of service involving the electronic receipt and transmission of money (or other medium of exchange) or stored value devices or applications should carefully consider whether licensing is required in California pursuant to the MTAct.

For additional information related to the California Money Transmission Act or other financial services matters, please contact Marie Hogan or Jonathan Joseph at Joseph & Cohen, Professional Corporation.

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*Marie Hogan is Of Counsel to Joseph & Cohen, Professional Corporation, San Francisco, CA.

© Joseph & Cohen, Professional Corporation. 2011. All Rights Reserved.