First Union Corp. fought back Thursday against allegations that it had improperly contributed to a regulatory takeover of a Miami bank.
A complaint filed by First Union in U.S. District Court in Miami asks that the trustee representing creditors of defunct Southeast Banking Corp. be halted from promoting "prejudicial pretrial publicity" about First Union. The nine-page filing also details, for the first time, some of First Union's defenses to the allegation that it misused confidential information to push federal regulators to seize Southeast and sell it to First Union.
Improper Influence Alleged
Attorneys representing Southeast bankruptcy trustee William A. Brandt Jr. had sued First Union in the same court on June 22 seeking damages "in excess of $500 million" for improperly "attempting to influence" the federal seizure of Southeast, which occurred on Sept. 19, 1991.
The crux of Mr. Brandt's allegation is that First Union shared with federal regulators - including the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency - information about Southeast that it had obtained from its own confidential due diligence investigation.
The failure of Southeast proved a windfall for First Union because the Charlotte-based bank had emerged as the winning bidder in an FDIC auction. First Union paid only $81 million to acquire Southeast, with substantial FDIC protection on losses from bad loans.
Prosperity and Profitability
Since the Florida economy subsequently recovered from recession much faster than expected, the former Southeast franchise, which had $9.5 billion in assets at the time of the seizure, has become enormously profitable for First Union.
In press interviews, Mr. Brandt's lawyers have said First Union found it was cheaper to buy Southeast from the regulators rather than pay a market rate prior to the bank's failure. First Union complains that these criticisms, as well as comments made by Mr. Brandt himself, have generated "an avalanche of pretrial publicity so false and misleading that a fair judicial process will be impaired."
First Union cites an article in The Charlotte Observer which quotes Mr. Brandt as saying: "I firmly believe that I will win against First Union on all counts and hit them for half a billion. They can call me crazy. All I care about is that they spell my name right on the check."
A First Union spokesman declined further comment Thursday. Neither Mn Brandt nor his attorneys could be reached for comment.
In its filing, First Union argues that it did not violate the confidentiality agreement it signed with Southeast.
For one thing, according to First Union, troubled Southeast should not have held any secrets back from the regulators. Secondly, the agreement "expressly contained an exception to confidentiality based on discussions of change of control in 'an assisted transaction.'"
First Union says that early in the due diligence period, it "announced both publicly and privately the fact that it would only be interested in a Southeast deal if connected with regulatory assistance of some kind, thereby plainly putting Southeast on notice that First Union was triggering the applicable provisions of the confidentiality agreement."
Arguments' Strength
Part of the difficulty for First Union is that strong arguments can be made that the regulators did seize Southeast prematurely. The bank retained about $900 million in capital and loan loss reserves in September 1991 and could have been considered technically solvent.
The problem was liquidity. To compensate for a hemorrhage of deposits, Southeast had borrowed $568 million from the Federal Reserve Bank of Atlanta. When the Fed called Southeast in default on this loan, the regulators did have a legal right to seize the bank.
However, last March, the FDIC announced that instead of losing $350 million on Southeast, as projected in 1991, the agency had actually made $28 million, after liquidating the bank's assets and paying off its creditors.
Mr. Brandt subsequently recovered $152 million from the FDIC on a claim related to debts Southeast's bank subsidiaries owed to the holding company.
