Wescorp Ruling Raises New Issues

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LOS ANGELES — Parties involved in the lawsuit filed against the former board and management team of failed Wescorp are still sorting through their options following a tentative decision in the case.

The decision, which was favorable to former members of the board but not as kind to former members of the management team, came as a surprise to many when Judge George Wu of the U.S. District Court for the Central District of California here handed his decision to attorneys for both the plaintiffs (NCUA, which took over the suit from a group of credit unions that originally filed it) and the defendants (WesCorp) and essentially challenged the government to return in an hour and explain to the court if and why they had reason to amend their complaint.

The court has set a Jan. 10, 2011 date for NCUA to offer proof as to its second amended complaint, and given the defendants a Jan. 24 deadline for response. The court will then hear arguments on Jan. 31.

"We are continuing to study the tentative opinion and have no additional comment given that the court has ordered further briefing and argument," NCUA's John McKechnie said.

In the case of the board members, the court has granted defendants' motion to dismiss complaints alleging breach of fiduciary duty and gross negligence, stating NCUA was unable to show how those directors personally profited from their decisions. For former directors the decision could mean an end to legal fees many have had to pay personally.

Judge Wu ruled the directors are protected under the business judgment rule and that NCUA did not present a sufficient argument that those board members acted with poor judgment. Indeed, the court ruled that fraud, breach of trust and bad faith are "glaringly absent" in the allegations made by NCUA against the board members. The court similarly dismissed a similar complaint against former EVP/CIO Bob Burrell, but unlike the ruling related to the board, said it will allow for an amended complaint against Burrell. The directors in the case include current CUNA President Bill Cheney, along with Gordon Dames, Robert Harvey, James Jordan, Timothy Kramer, Robin Lentz, John Merlo, Warren Nakamura, Brian Osberg, David Rhamy and Sharon Updike.

Issue of Gross Negligence

On the motion alleging gross negligence, the court ruled the claim is not available as a matter of law.

The court, however, was not as supportive of the arguments made by members of WesCorp's former management team. It denied a motion by former CEO Bob Siravo and former CFO Todd Lane that they also did not violate the state's business judgment rule, but the court stressed that NCUA must improve support for its position if a plausible claim is to be made against either Siravo or Lane. Similarly, the court denied a motion by Siravo and Thomas Swedberg, the former head of HR at WesCorp, to dismiss charges of misrepresentation related to a Supplemental Executive Retention Plan (SERP) that NCUA alleges was manipulated by the two men as part of a quid pro quo, and which led to Siravo being paid millions of dollars after the one-time $34-billion WesCorp was placed in conservatorship.

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