On March 16, 2011, the FDIC brought suit in the United States District Court in Seattle against three top executives of the failed Washington Mutual Bank, alleging that those executives’ “gross negligence and breaches of fiduciary duty” caused WaMu to lose “billions of dollars.”  In a further sign that the FDIC intends to be aggressive in such matters, the FDIC named as defendants two of the executives’ wives, alleging that they improperly received transfers of property before and after WaMu’s September 2008 failure.

The lawsuit represents the sixth lawsuit to date filed by the FDIC against former directors and/or officers of failed banks following the recent economic downturn.  It is significant because WaMu represented the largest bank failure in U.S. history, with assets that stood at more than $300 billion dollars when it failed.

The complaint does not set a specific amount of damages sought, but the damages could well exceed $900 million.  The complaint generally alleges that the executives focused on short term gains to increase their own compensation, and disregarded the best interests of the institution for the longer term.  Specifically, the complaint alleges that the bank’s home loans division recklessly made billions of dollars of loans which were highly risky, single family residential loans, which dramatically heightened the risk profile of the loans held in WaMu’s portfolio.  The complaint alleges that this high concentration in high risk residential loans, positioned the bank such that it would be impossible for it to survive what characterized as “the inevitable decline in the overrated housing market.”

There have also been reports that the FDIC reached an agreement with WaMu’s outside directors for a payment of $125 million to settle all potential claims.  If these reports are in fact accurate, it is interesting that the settlement amount was negotiated and finalized without the initiation of any litigation.

Finally, the FDIC has made it clear that it will be pursuing more of these types of claims.  The FDIC’s Professional Liability Lawsuits page shows that the FDIC’s Board has approved lawsuits against 158 individual directors and officers of failed banks, while filed lawsuits only name 40 individual defendants so far.  Thus, it would appear that far more litigation is on the way.