Huntington Bancshares in Columbus, Ohio, will add $45 million to its litigation reserve in the third quarter after a judge ordered it to repay $71.8 million to the victims of a fraud scheme.
The judgment, in the U.S. District Court for Michigan's Western District, follows nearly ten years of litigation and affirms an earlier ruling by a bankruptcy court. The trustee for two bankrupt software companies, which worked together in a Ponzi scheme to defraud lenders and investors, sued Huntington in 2006 to recover money transferred to the bank before the scheme fell apart. Huntington was not entitled to benefit from fraud and needed to return the money, the trustee argued.
Huntington said Wednesday it will continue to contest the case. It disclosed the court's ruling in a regulatory filing Tuesday.
"Huntington disagrees with this ruling and will move forward to appeal," a company spokesman wrote in an email Wednesday. "We continue to maintain that this opinion exceeds legal precedent."
Huntington had previously built up its reserves against loss in this case, and with the additional $45 million the bank is now fully reserved in case the ultimate judgment goes against it, the spokesman added.
The lawsuit stems from the actions of two software companies, Cyberco Holdings and Teleservices Group, founded by Barton Watson, who killed himself in 2004 after his offices were raided by the Federal Bureau of Investigation. His scheme involved borrowing money on behalf of one company ostensibly to buy equipment from the other, then keeping the money, according to court documents.
Huntington lent money to Cyberco and served as its depository bank until 2002, when it dropped Watson as a client and sought to reduce its exposure to his companies, the documents state. The nearly $72 million judgment equals Cyberco's deposits and loan repayments to Huntington.
The additional $45 million provision will not be a huge hit to Huntington's third-quarter earnings, Sandler O'Neill analyst Scott Siefers wrote in a note published Tuesday. The cost is "unfortunate," but "we consider the impact of the heavier litigation reserve manageable," he wrote
Investors appear to agree that Huntington will be able to withstand the legal loss. Its stock had risen 2% between Monday's closing price and early-afternoon trading Wednesday.
The expense is also a relatively small contribution to the $68 billion-asset company's total reserves. While Huntington did not disclose its total litigation reserve in its latest earnings statement, its total reserve against loan losses was about $655 million.