By Stewart Bishop
Additional reporting by Linda Chiem. Editing by Richard McVay.
All Content © 2003-2016, Portfolio Media, Inc.
Law360, New York (August 11, 2014, 5:34 PM ET) — The Federal Deposit Insurance Corp. and two former top executives of failed Advanta Bank Corp. are nearing a deal to resolve the independent agency’s $219 million lawsuit accusing the pair of crippling the bank by increasing credit card interest rates to unprecedented levels.
Advanta’s former chairman and CEO Dennis J. Alter and onetime president and board Vice Chairman William A. Rosoff are in the process of finalizing a settlement with the FDIC, according to a filing in Pennsylvania federal court, which would end the lawsuit seeking to hold the former bank principals responsible for its demise.
The FDIC claims the executives stubbornly raised annual percentage rates on its credit card customers to prop up parent company Advanta Corp.’s crumbling stock price and maintain the bank’s dividends in the midst of the recent recession.
It was a move that drove off customers by the thousands and prompted the Utah-based bank’s collapse in 2010, according to the agency.
FDIC spokesman Greg Hernandez said the agency doesn’t comment on pending settlements or litigation. An attorney for Alter and Rosoff could not be reached Monday for comment.
The repricing campaigns, during which customers’ APRs would be hiked from either 7.99 or 14.99 percent to as high as 37 percent, lasted from Jan. 1, 2008, to May 31, 2009. It devastated the bank’s customer base after 400,000 customers closed their credit card accounts and left the bank, the FDIC claims.
Not only did the customer flight result in a direct $59 million loss for the bank, more than 40 percent of the bank’s remaining customers defaulted on their credit card accounts, causing the bank at least another $140 million in credit losses, according to the agency.
Furthermore, Alter and Rosoff, who jointly held the formal position of “office of the chair,” ignored or rejected the bank’s internal reports and warnings from bank management advising against raising APRs so high and tuned out more than 35,000 complaints from outraged customers, the FDIC contends.
Alter and Rosoff have responded by launching their own suit in Utah federal court alleging the FDIC is trying to shift the blame for Advanta’s failure — which really was a result of the FDIC’s own wrongdoing — by cherry-picking Alter and Rosoff as targets when clearly, there were other bank directors involved in decisions surrounding the repricing campaigns at issue.
They defended the repricing campaign, which was one component in a plan to spur Advanta’s recovery with bond buybacks, saying it was properly vetted by Advanta’s board of directors and was even given the greenlight by the FDIC. But it was the FDIC that later revoked its approval of the plan and barred bond purchases after the plan was in full swing, according to their complaint.
Alter, Rosoff, other former bank leadership and auditor KPMG LLP agreed in February to pay $3.55 million to settle a putative securities class action alleging the accounting firm, along with the defunct credit card company’s directors, concealed dour financials from Advanta investors.
The once highly profitable Advanta was one of the nation’s leading credit card issuers to small businesses before it got hit with a spike in customer delinquencies and defaults beginning in 2007 due to the recession, according to court documents. The bank declared bankruptcy in November 2009, the Utah Department of Financial Institutions shut it down in March 2010, and the FDIC was named Advanta’s receiver.
Rosoff and Alter are represented by Steven B. Feirson, Michael L. Kichline, Stuart T. Steinberg and Asha T. Mehrotra of Dechert LLP.
The FDIC is represented by David Mullin, Mark S. Logsdon and Richard Biggs of Mullin Hoard & Brown LLP as well as Sam Stretton.
The case is Federal Deposit Insurance Corp. v. Dennis J. Alter et al., case number 2:13-cv-03361, in the U.S. District Court for the Eastern District of Pennsylvania.