A federal judge in Detroit this week refused Michigan National Corp.'s request to dismiss a shareholder suit accusing it of fraud.
The suit involves the Farmington Hills-based bank's repurchase of more than two million shares of stock at a price substantially lower than what National Australia Bank Ltd. later agreed to pay in a merger deal.
Judge Anna Diggs Taylor of U.S. District Court for the Eastern District of Michigan ruled there was sufficient evidence to continue the case against the $8.5 billion-asset bank and its top officers.
"Plaintiffs have sufficiently pled allegations of fraud, which, if proven, would also constitute a breach of fiduciary duty by the defendant directors," Judge Taylor wrote.
The suit claims chairman Robert Mylod, chief executive Douglas Ebert, and former chief financial officer Joseph Whiteside violated federal securities laws, breached their fiduciary duties, and committed fraud.
Filed by six shareholders who sold their stock in a restructuring buyback held before the merger, the suit claims management entered into the agreement with National Australia because it allowed the officers to keep their jobs and reap a financial windfall of more than $32 million in stock payments and other options.
Lawyers are seeking class-action status for the suit, which asks for an unspecified amount of financial damages.
Last year, prior to the announcement of the $1.5 billion merger, Michigan National solicited shareholders to sell back stock to the company to aid in the bank's reorganization. But the price of $78 per share was far below the $110 received by shareholders who later sold out to the Australian acquirer.
The suing shareholders charge officers held onto their own stock during the first tender period because they knew they could sell at a higher price later to National Australia.
Bank officials steadfastly denied these allegations. They said it is standard practice for directors not to sell their stock during such auctions because it shows long-term faith in the company.
"The standard in a tender offer is directors don't tender," Mr. Ebert said. "It has nothing to do with any alleged offer from NAB."
Moreover, Mr. Ebert, who was hired two years ago to salvage an ailing Michigan National and became chief executive a month ago, said there were no negotiations between his company and the Australian bank until after the first of this year.
"We have very strongly and very categorically said there were no discussions before Jan. 1, 1995," Mr. Ebert said.
The merger with National Australia also infuriates shareholder William McMaster, who has sued Michigan National in an Oakland County court but is not a plaintiff in the federal suit. Mr. McMaster said Mr. Mylod received a handsome bonus for selling the bank, even though - in the shareholder's view - he was responsible for mismanagement over a 10-year period. Just two years ago, Mr. McMaster said, Michigan National had the worst return on assets among banks above $10 billion in assets, reporting 0.23%.
Mr. McMaster added that as the federal fraud case proceeds, he and other shareholders will present evidence that Michigan National spurned advances made by another banking company that may have given shareholders a better deal.
Mr. Ebert did not deny that the bank had other offers. He added that the bank doesn't plan to appeal Judge Taylor's decision, which was handed down Monday, but will fight back at the next procedural stage.