A U.S. District Court judge awarded $500,000 in punitive damages to a Kansas community bank that successfully sued Shearson Lehman Brothers Inc. over a false credit reference.
Citizens State Bank, Liberal, Kan., sued the New York City-based brokerage firm in August 1993, alleging that it relied on an untrue positive reference from one of Shearson's New York brokers for a bank customer whose loan later defaulted.
In October 1994, a Kansas jury ruled in favor of the bank and granted $236,000 in actual damages for the unpaid principal balance of the loan.
In Kansas, a judge determines punitive damages, and $43 million-asset Citizens sought $5 million, the maximum amount under state law.
In his order late last month, U.S. District Judge John W. Lungstrum wrote that his award, "is not an inconsequential sum and places a significant price tag on the conduct which Shearson engaged in here."
"We're pleased with the result," said Matthew Keenan, an attorney with Shook, Hardy & Bacon, Kansas City. Mo., which represented Citizens. "The bank . . . really has been made whole for its losses."
John Shaw, an attorney with Bryan Cave, Kansas City, Mo., said his client, Smith Barney - which acquired Shearson in 1993 - has not yet decided whether to seek a new trial or appeal to U.S. Court of Appeals for the 10th Circuit.
In its complaint, Citizens said that TransAmerica Equities Inc., Irvine, Calif., requested a $350,000 unsecured line of credit from the bank in 1991. The company, which was involved in real estate development, among other businesses, is not affiliated with Transamerica Corp., the San Francisco-based life insurance and financial services firm.
One of TransAmerica's references, Ephraim Yurowitz, a Shearson stockbroker, provided the bank with an upbeat, yet false, picture of the Irvine company, the complaint said.
The bank alleged that Mr. Yurowitz overstated the amount of time TransAmerica had done business with Shearson. He also told the bank that TransAmerica had large accounts with Shearson, when in fact, he lied about their size.
Citizens also alleged that Mr. Yurowitz did not disclose that O.Z. Finkel, a TransAmerica director, was Mr. Yurowitz's brother-in-law, as well as a convicted felon, or that Mr. Yurowitz owned TransAmerica stock.
Based on other information and the positive reference from Shearson, Citizens extended the line of credit in December 1991 and TransAmerica opened a checking account at the bank. But by March 1992, the loan was in default and the checking account overdrawn, the bank said. Mr. Yurowitz was fired that July.
The complaint also alleged that after TransAmerica received the line of credit, it paid Mr. Yurowitz $300 and leased him a new Jeep Cherokee.
Although Mr. Shaw said, "Smith Barney does regret the conduct of this one Shearson employee, who was immediately terminated," he questioned the bank's credit check for a $350,000 unsecured loan to an out-of-state company it had not done business with before.
"I think there's a substantial question in our mind on the making of the loan based on a three-minute telephone call from Liberal to New York City," he said.
Expert witnesses at the trial testified, however, that phone calls were "standard operating procedure" for banks checking references, according to Mr. Keenan.
In his decision, Judge Lungstrum said although Shearson was "one step removed from the actionable misconduct," it "rehired and loosely supervised" Mr. Yurowitz despite previous problems with his performance.
