Signet Banking Corp. has been hit with a second lawsuit stemming from its leadership of a loan participation gone awry.

Bank of Montreal, which had the largest exposure to the $324 million participation, sued Signet last Friday for $87.3 million, alleging negligence, negligent misrepresentation, and breach of contract. The suit, filed in U.S. District Court for the Southern District of New York, argues that Signet should have discovered that the loans to a company supposedly involved in top secret research for the Philip Morris Cos. were apparently fraudulent.

After the alleged fraud was uncovered, in March, Bank of Montreal's $87 million exposure was revealed to be the largest of the seven banks involved, larger even than the $81 million held by Signet itself.

Philadelphia-based CoreStates Financial Corp. sued Signet last month over its smaller $18 million exposure.

A spokeswoman for Richmond, Va.-based Signet said Monday that bank attorneys had not yet had time to study Bank of Montreal's filing.

The Canadian bank would not comment on the case.

Analysts who follow Signet took the news in stride, anticipating a long, drawn-out legal battle. "It's predictable that the banks would do this, but not predictable what the outcome will be," said Merrill Lynch & Co.'s Livia Asher.

Signet has previously argued that the six other lenders in the participation were obliged to conduct their own due diligence on the credit that Signet initiated. This position has solid legal footing, according to John Douglas, a partner with Alston & Bird in Atlanta.

"The regulations and the regulatory environment is pretty straightforward: participants in a loan are required to do their own credit evaluations," Mr. Douglas said. "You're not entitled to rely on the credit evaluation or analysis of the lead lender."

But Mr. Douglas, a former general counsel of the Federal Deposit Insurance Corp., also said attorneys for CoreStates and Bank of Montreal may be able to dispute whether Signet correctly performed its obligations under the loan agreement. "While each participating bank has the right to do its own due diligence, you also have the right to get accurate information," Mr. Douglas said.

According to press reports, Bank of Montreal's suit alleges that Signet was negligent in failing to determine whether the company that received the loans actually represented Philip Morris.

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