FDIC Seeks to Flex Muscles Notwithstanding Large Investigative Backlog


In March, the Federal Deposit Insurance Corporation (FDIC) sent clear signals of the aggressive posture it intends to take against the officers and directors of failed and troubled financial institutions, using tools both new and old.

First, the FDIC announced a Notice of Proposed Rulemaking for rules establishing the mechanism by which the FDIC can recover compensation that was paid to officers and directors of covered financial companies that subsequently fail. This implements the expansive new authority granted to the FDIC by last year’s Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

Second, the FDIC filed a lawsuit against several former executives of Washington Mutual Bank (WaMu), which failed catastrophically at the height of the 2008 financial crisis. Demonstrating the extent of its power as receiver for the bank, the FDIC also named the wives of two former WaMu executives in the lawsuit. More significantly, the FDIC also sought a preliminary order freezing the individuals’ personal assets, a highly unusual and aggressive step to take early in civil professional liability litigation.

Proposed Rules Addressing Executive Compensation Clawback

On March 15, 2011, the FDIC released a Notice of Proposed Rulemaking describing a framework by which the FDIC as receiver may claw back compensation from executives and directors of failed financial companies. Under the Dodd-Frank Act, covered financial companies are those companies that are resolved by the FDIC under the orderly liquidation provisions of Title II of the Act. This includes firms that derive 85 percent of their revenues from financial activities, but specifically excludes depository institutions, government sponsored enterprises, and government entities.

Section 210(s) of the Dodd-Frank Act allows the FDIC to recover compensation for the two-year period preceding receivership based on a determination that executives or directors were “substantially responsible” for the failure of the covered financial company. In cases involving fraud, clawbacks may apply to an unlimited time period. For the purposes of the proposed rule, compensation is defined as including not only salaried income but also any bonuses, incentives, benefits, deferred compensation, and other direct or indirect financial remuneration received from the company.

The recent proposed rule provides the FDIC a framework for determining whether individual executives and directors were “substantially responsible” for the financial condition of their companies and therefore subject to the compensation clawbacks. The proposal also includes a presumption of responsibility for the failed financial condition in the cases of some top executives and officers.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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