News Archives

News

Jul

15

2015

Joseph & Cohen Expands Its Banking Practice – Janet Walworth Joins As Of Counsel

SAN FRANCISCO, CA – July 15, 2015. Joseph & Cohen, Professional Corporation, announced today that Janet Walworth has joined the Firm’s banking and transactional group as Of Counsel.  With over 30 years of experience as a commercial lending, transactional and restructuring lawyer, Ms. Walworth deepens Joseph & Cohen’s boutique banking industry group which focuses on regulatory, corporate, transactional and litigation for banks, credit unions and other financial service companies.

Janet Walworth currently represents major money center banks, regional and community banks and other financial service companies.  She is a skilled secured lending lawyer with expertise in real estate and personal property secured loans and factoring. Ms. Walworth has a gift for transactional work premised on her ability to forge relationships with her clients. She brings a genuine interest in and understanding for the business and legal issues involved in every matter and is committed to getting the right results for her clients.

Jonathan Joseph, Joseph & Cohen’s Managing Partner, stated, “I’m thrilled to have Janet Walworth join our banking group.  With her years of experience in the secured lending space, we expect our financial institution clients will be clamoring for her to help them structure and consummate secured loans.  Joseph & Cohen can now offer our banking clients an expanded set of services including corporate, regulatory, secured lending, restructurings and commercial and employment litigation.”

Ms. Walworth added, “I’ve known some of the partners at Joseph & Cohen for years and believe that my secured lending and transactional expertise complements their existing practice extremely well.  I’m excited because my existing clients will benefit from the well-known banking industry attorneys comprising the banking practice group at Joseph & Cohen.”

Prior to joining Joseph & Cohen, Ms. Walworth most recently served as Of Counsel for Greenfield Draa & Harrington LLP in San Jose. She earned her L.L.M in Intellectual Property Law from Santa Clara University School of Law in 2012 and was awarded a J.D. from University of San Francisco School of Law, with Honors, in 1979. She is a Member of the McAuliffe Honor Society and received an A.B from the University of California at Berkeley, Magna Cum Laude, 1975 with a major in Journalism and a minor in English Literature.

Ms. Walworth is a member of the State Bar of California and admitted to practice before the U.S. District Court, Northern District of California and Eastern District of California.

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, 415-817-9250 or jon@josephandcohen.com.

 

 

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.

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.

Joseph & Cohen Rolls Out New Marketing Campaign

SAN FRANCISCO, CA – March 22, 2013. Joseph & Cohen, headquartered in San Francisco, rolled out a new marketing campaign today as part of its sponsorship of the Western Independent Bankers’ (WIB) Annual Conference for Bank Presidents, Senior Officers & Directors being held in Kauai, HI from March 23 – 27, 2013. Managing Partner Jonathan Joseph notes, “Joseph & Cohen is proud to be a major sponsor of WIB for the fourth consecutive year. WIB’s commitment to assist bankers and directors in navigating the complex changes in the industry mirrors our own.”

For this year’s marketing sponsorship, Joseph & Cohen, which specializes in representing independent and regional banks, chose the image below of a well-dressed attorney riding a skateboard. The concept emphasizes the firm’s ability to solve complex legal matters with skill and agility in a laid-back but professional and cutting edge manner. Joseph & Cohen believes its fresh vision provides a competitive edge in connecting with the next generation of banking leaders.

To learn more, call 415.817.9200 to speak to either of the firm’s name partners: Jonathan Joseph or Jon Cohen.

Joseph & Cohen Settles All Claims by FDIC Against Five Former Officers of County Bank

SAN  FRANCISCO,  CA  –  November  13,  2012. Joseph  &  Cohen,  Professional Corporation, located in San Francisco, California, announced today that it successfully structured a settlement for its clients, five former officers of County Bank, Merced, California,  in  connection  with  a  lawsuit  brought  by  the  Federal  Deposit  Insurance Corporation, in its capacity as receiver for County Bank.   County Bank, which collapsed in February 2009, had been the wholly-owned banking subsidiary of Capital Corp of the West (Nasdaq: CCOW).

The case, which was filed by the FDIC in the Federal Court in Fresno, California in January 2012, was titled FDIC, as receiver for County Bank v. Hawker, et al., (Case No. 1:12-CV-000127-LJO) (“FDIC v. Hawker”). The settlement completely settles and satisfies all claims  brought by the FDIC against the five former officers of the Bank: Thomas Hawker, Edward Rocha, John Incandela, David Kraechan and Jay Lee (the “officers”).

A companion case that the officers filed against BancInsure, Inc. and the FDIC in July 2012, in the same Fresno based Court, remains outstanding.  In that case,  Hawker et al v. BancInsure (Case No. 1:12-cv-01261-LJO-GSA), Tom Hawker and the other officers asserted claims against  BancInsure for declaratory relief, breach of contract, bad faith, punitive  damages  and  reformation.  The  officers  were  forced  to  sue  BancInsure,  the professional liability insurer for County Bank, after it  abandoned them and refused to defend the claims in the FDIC Action.

Jonathan Joseph, counsel for the officers stated “We believed that we had strong legal and factual  defenses to the FDIC’s claims.   In our view, County Bank collapsed as a result of the greatest recession in our lifetime.  So, we vigorously defended Tom Hawker and the other four officers of County Bank against all of the government’s allegations. But, after the D&O Insurer abandoned our clients and refused to defend them or settle the FDIC lawsuit, we are pleased to have successfully structured this deal with the FDIC as the settlement eliminates all claims, further uncertainty and the trouble, risk and expense associated with the litigation.”

An essential element of the settlement involved an assignment to the FDIC by the officers of their lawsuit against BancInsure including claims for bad faith and breach of contract. The officers retained the right  to recover their defense expenses incurred prior to the FDIC settlement from BancInsure.  The officers  maintained the right to continue to control and prosecute this retained claim against BancInsure.

Tom Hawker, former CEO of County Bank and President and CEO of CCOW, said “I am relieved to put this case behind me as it eliminates further uncertainty, cost or risk to me and my family.  I am outraged that the Bank’s D&O insurer abandoned me as I would have  been  financially  ruined  if  I  continued  to  defend  myself  against  the  FDIC’s allegations despite having excellent legal and factual defenses to their claims.”

As a result of the settlement, the FDIC will control and prosecute the officers’ assigned claims against BancInsure at its cost and expense.  Jon Cohen, litigation partner at Joseph & Cohen, explained “We look forward to litigating alongside the FDIC on behalf of our clients  to  prove  that  BancInsure  improperly  applied  the  so-called  “insured  versus insured” exclusion to deny the coverage our clients had expected and relied upon.”

The parties exchanged other valuable covenants including an agreement not to bring any other civil claims against each other and a promise by the FDIC not to take any further action or assert any claims against any of the property or assets of the officers.

Joseph & Cohen, Professional Corporation, is an AV® rated law firm based in San Francisco,  California,  that  emphasizes  the representation  of community and  regional banks  and  bank  holding  companies  and  their  officers  and  directors.  The firm also specializes in representing financial service companies, credit unions and private equity firms in connection with corporate, securities, regulatory, litigation, executive employment and merger matters.  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.

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

Feds Target Payday Lenders: The New Enforcement Reality

By Marie Hogan and Jonathan Joseph

The President of the United States sent a wake-up call to the payday lending industry in his 2012 State of the Union speech that they are a target of federal enforcement action by the new Consumer Protection Financial Bureau or CFPB.   President Obama exclaimed:

“If you’re a mortgage lender or payday lender or a credit card company, the days of signing people up for products they can’t afford with confusing forms and deceptive practices—those days are over.”

Almost a week before the speech, the Consumer Financial Protection Bureau, the newest federal agency whose name describes its mission, published its guidelines for examinations of short-term, small-dollar lenders (aka “payday lenders”). See www.consumerfinance.gov/guidance.  Payday lenders and other non-bank financial service providers that have never been subject to direct federal regulation will now be under the jurisdiction of the CFPB.

The CFPB’s guidelines and the President’s call out indicate the payday lending industry has clearly been targeted due to perceived abuses. The initial guidelines for the payday lending industry consist of 17 pages and are a supplement to the CFBB’s 802 page examination handbook.  The management and boards of directors of payday lenders that desire to comply with the CFPB’s regulations should familiarize themselves with the guidelines and implement expanded compliance systems.

WHAT is the CFPB’s purpose?

The CFPB will implement and enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that the market for consumer financial products and services are fair, transparent, and competitive. They will especially target lenders engaging in unfair, deceptive or abusive acts or practices.

WHY payday lending?

Payday loans are supposed to be short term: 14 days. As the name implies, they’re supposed to provide emergency cash to enable consumers to cover short term necessities until the next pay day, when they theoretically should be able to repay the loan.  Critics say this is typically not the case.  Customers often roll-over their debt when they can’t repay it. They wind up living off that borrowed money at an annual interest rate of 400 to 600 percent or more.

Here’s how it works. Let’s say an individual needs $100 and the interest rate for that two week period is 15 percent. The customer writes a postdated check made out to the lender for $115. If the customer can’t pay that amount when the two weeks is up, the lender keeps $15, the loan is extended and another $15 fee is added on.

The CFPB is still in the fact gathering mode regarding the payday industry, holding hearings earlier this year in Birmingham, Alabama.  However, the industry is number two in its list of priorities (see www.consumerfinance.gov/regulations/fall-2011-statement-of-regulatory-priorities).  Richard Cordray, the CFPB’s executive director, said the agency will examine bank and non-bank institutions offering these short-term, small-dollar loans. At the Birmingham hearing, Cordray expressed this sentiment:

“We recognize that there is a need and a demand in the country for emergency credit. At the same time, it’s important that these products actually help consumers and not harm them. We know that some payday lenders are engaged in practices that present immediate risks to consumers and are illegal. Where we find these practices, we will take immediate steps to eliminate them.”

WHAT is the scope of CFPB’s responsibility?

CFPB has responsibility for specified federal consumer financial laws, such as Truth in Lending and the Fair Credit Reporting Act and certain Federal Trade Commission rules, such as the Credit Practices rule.  The CFPB may also issue rules, and even without a rule, it may examine for unfair, deceptive or abusive acts or practices that cause significant financial injury to consumers, erode consumer confidence, and undermine the financial marketplace.

WHICH payday lenders can the CFPB examine?

Any payday lender, in any state, whether regulated or not, can be examined.  The CFPB has the power to take enforcement actions against any payday lender. The first step for the CFPB is an examination of the company for compliance with federal consumer financial laws and unfair, deceptive or abusive acts or practices.   An important point is that the examination guidelines merely provide a roadmap for what a company needs to do.  The CFBP’s guidelines don’t provide detailed direction to a payday lender but the CFBP will provide notice through the examination process regarding the company’s demerits and legal violations.  The CFPB has a scale of 1-5 (one being the best) that will be awarded in an examination.  In general, all payday lenders should strive to earn 1 or 2 ratings in all sub-categories that are reviewed.

The CFPB may investigate and bring administrative enforcement proceedings or civil actions in Federal district court for violations of federal consumer financial laws.  The CFPB additionally may obtain “any appropriate legal or equitable relief with respect to a violation of Federal consumer financial law” including: 1) rescission or reformation of contracts; 2) refund of money or return of real property; 3)  restitution, disgorgement or compensation for unjust enrichment; 4) payment of damages or other monetary relief; 5) public notification regarding the violation; 6) limits on the activities or functions of the person against whom the action is brought; and 7) civil money penalties (which can go either to victims or to financial education).

The CFPB has no criminal enforcement authority; however, it may refer matters it believes may constitute criminal activity to the Department of Justice.

Payday Lender Examinations:   What should management know?

The examination procedures are very much based on bank/financial institution formats.  Here is our list of how this system works based on years of experience and working with the regulatory agencies:

First, policies and procedures must be in writing.  That means the payday lender’s Board of Directors should establish detailed written procedures covering all significant compliance risks and processes.

Second, procedures must address compliance with federal consumer financial laws, as well as addressing other risks.

Third, the Board must be intimately involved in establishing policy, overseeing management and insisting that management comply with its policies.

Fourth, companies must train and monitor their employees.

Fifth, monitor audit procedures and processes and address all criticisms from internal and external auditors, state regulators and the CFPB.

Sixth, compliance must cover “soup to nuts”, meaning from product development to end of customer relationship and every significant step in between.

Seventh, appoint a compliance officer with real authority and responsibility.  For smaller companies, this may be an employee who has other responsibilities, but take steps to assure that the compliance officer is qualified.

Eighth, the company must monitor any third party service providers for compliance with the above.

The CFBP examination objectives are:

1.            To assess the quality of compliance risk management systems, including internal controls and policies;

2.            To identify acts or practices that materially increases the risk of violations of federal consumer financial laws;

3.            To gather facts that help determine whether the lender is engaged in acts or practices that violate the requirements of federal consumer financial laws;

4.            To determine if a violation of a federal consumer financial law has occurred and whether enforcement actions are appropriate.

Which Federal Laws Are Applicable to Payday Lenders?

  • TILA and Regulation Z—TILA is the Truth in Lending Act and Regulation Z require lenders to disclose loan terms and annual percentage rates.  Regulation Z also covers advertising disclosures, proper crediting of payment, proper crediting of credit balances and periodic disclosures.
  • EFTA and Regulation E—EFTA is the Electronic Funds Transfer Act which protects consumers engaging in electronic transfers, including that lenders may not require, as a condition of loan approval, the customer’s authorization for loan repayment through recurring electronic funds transfers.
  • FDCPA—This is the Fair Debt Collection Practices Act which governs collection activities conducted by (a) third party collection agencies and (b) lenders collecting their own debt under an assumed name.
  • FCRA— This is the Fair Credit Reporting Act which, with its regulations, governs furnishing information to credit agencies and the use of credit reports.
  • GLBA – This is the Gramm-Leach-Bliley Act which, together with implementing regulations, requires that furnishers of information to consumer reporting agencies ensure the accuracy of data furnished to the consumer reporting system.
  • ECOA—This is the Equal Credit Opportunity Act which, together with implementing Regulation B, sets requirements for accepting credit applications and providing notice of any adverse action.  Discrimination against a borrower is prohibited, plus discrimination based on public assistance income or because the applicant has exercised any right under the Consumer Credit Protection Act is prohibited.

Some payday lenders do attempt to comply with applicable law.  However, bad actors in the industry have contributed to the perception that widespread abuses exist.   Companies in the “short term small dollar” lending business that desire to avoid potential CFPB enforcement sanctions should implement compliance systems and procedures modeled after those used in the banking industry designed specifically to comply with the laws listed above.  This may entail adding risk and compliance officers to existing management teams, robust internal controls and better policies and procedures.

For additional information contact:

Jonathan Joseph at jon@josephandcohen.com; or

Marie Hogan at mhogan@josephandcohen.com.

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.

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.

___________________________

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

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

Joseph & Cohen Join Amicus Committee of Bank Counsel in Support of Bryan Cave LLP

SAN FRANCISCO, CA – March 28, 2011. Joseph & Cohen, Professional Corporation, announced today that its co-founders, Jonathan D. Joseph and Jonathan M. Cohen, joined the Ad Hoc Committee of Bank Counsel (“Amici” or “Committee”) in support of the law firm, Bryan Cave LLP (“Bryan Cave”), in a case brought against them by the FDIC (FDIC v. Bryan Cave LLP, 10-cv-03666).  The FDIC  sued Bryan Cave in November 2010  in the U.S. District Court in Atlanta, charging Bryan Cave with failing to hand over bank records related to the October 2010 collapse of Kansas-based Hillcrest Bank.

The Committee, comprised of some of the top banking lawyers in the country, was formed last week to file an Amicus Brief supporting Bryan Cave’s motion for a summary judgment.  The controversy relates to Bryan Cave’s representation of the directors of Hillcrest Bank in the brief period before and after that Bank failed.  The issue in the case is of vital importance to bank directors and executive officers as the FDIC has asserted that bank directors and officers have no right to retain bank documents after the FDIC is appointed receiver of a failed bank.

The Committee’s “friend of the court” brief points out that the FDIC’s complaint, if sustained, would be an unprecedented deprivation of long accepted rights of bank officers and directors to mount and conduct an adequate and timely defense against claims by the FDIC and others. The Committee’s Amicus Brief was filed before Judge Timothy Batten, Sr. in the Northern District of Georgia on March 24, 2011.  As Amici, their court filing fulfills the classic role of amicus curiae by assisting in a case of general public interest and supplements the efforts of counsel to a party in  the case.

The Committee is a group of twenty-eight experienced and recognized bank attorneys and one major national law firm all of whom are currently active in the representation of FDIC insured financial institutions, as well as their officers and directors.  Members of the Committee are frequently called upon to provide advice and counsel to officers and directors regarding their rights and obligations when they are subject to or threatened with a claim by the FDIC, by shareholders or other third parties, for claims incident to a failure or risk of failure of the bank for which they serve.

Jonathan Joseph, CEO of Joseph & Cohen, stated “We joined the Amicus Committee to advocate for a fair and just resolution of the matters in dispute consistent with the statutory and constitutional rights of bank directors and officers of failed and failing banks to defend, with the aid of counsel, against suits and claims, as well as the interest of the FDIC in maintaining the confidentiality of protected records.”

The central question in the case is whether directors and officers of federally insured banks may access and obtain copies of bank documents in anticipation of the bank’s failure, so that they may later use the copies, with the assistance of counsel to explain and defend their conduct.  Bryan Cave has filed a motion asking the Court to dismiss the case arguing that as a matter of law the FDIC has no valid claims.

Bryan Cave’s motion points out that no federal statute or regulation prohibits a bank director or officer from accessing bank documents to assist in explaining or defending his or her conduct.  Consequently, they assert that under Kansas law, as in Delaware, New York and many other states, bank directors have a well-recognized right to review and copy corporate documents, and to share those copies with their own counsel, for the entirely legitimate purpose of explaining and defending their own conduct.

Joseph & Cohen, Professional Corporation, is an AV® rated law firm based in San Francisco, California that emphasizes the representation of community and regional banks and bank holding companies and their officers and directors.  The firm also handles complex corporate, securities, regulatory, employment and merger transactions as well as   commercial and executive employment litigation.  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.

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