Jury Verdict Puts Banks on Notice: 'Meltdown Defense' Won't Fly
Jurors found that BankAtlantic Bankcorp, its CEO and its CFO were liable to shareholders for about $42 million for making false statements about the bank's real estate portfolio and reporting inflated net income. Those false statements -- which essentially claimed that the bank's real estate loans were performing much better than they were -- inflated the stock price, the jury found, so when the truth came out shares plummeted further than they would have otherwise.
The verdict is a big deal because defense attorneys claimed that the whole drop in share price was due to the "catastrophic meltdown of the Florida real estate market," and if that was true, it didn't matter how many false statements the bank or its executives made. To prove securities fraud, investors must show that it was the fraud that caused their damages, not something else. If juries aren't sympathetic to claims that banks' fraudulent statements didn't matter in light of the "unforeseeable" real estate crash and the financial market meltdown, banks will have a much harder time defending these cases.
At the D&O Diary, an online journal that focuses on liability issues relating to corporate directors and officers, Kevin LaCroix points out that this decision is the tenth securities fraud verdict since 1995, when Congress made it harder for shareholders to win these cases, and of those 10, plaintiffs currently have six wins. That's 10 alleging any kind of fraud, not just real estate market related claims. LaCroix notes that scoreboard is still in flux as several verdicts are still being appealed. He notes that in one of those cases, the Apollo Group securities suit, a plaintiff's trial win was set aside via a post-trial defense motion and then re-instated by the appeals court.
Regardless of what may eventually happen regarding this verdict, or what it means for other cases, the loss is bad news for BankAtlantic. The Florida bank has had to raise capital several times because it has consistently lost money since the third quarter of 2007, reports the South Florida Business Journal, and this verdict is likely to make raising additional funds from investors even harder.