A federal judge in Pennsylvania has rejected a mutual thrift's effort to quash a challenge to the so-called local depositor preference.
U.S. District Court Judge Donetta W. Ambrose last Friday denied without comment a motion by Great American Federal Savings and Loan Association to delay a depositor lawsuit until after March 21, when the Pittsburgh thrift is to have completed its initial public offering in a stock conversion.
The lawsuit, filed Feb. 23 by investor Jerome H. Davis and five other thrift customers, accuses directors of self-dealing by giving preference in filling stock orders to depositors who live in Allegheny and Westmoreland counties in western Pennsylvania.
The preference would apply only if the $480 million-asset thrift faced enthusiastic demand for the $6.75 million offering.
That means the directors themselves would qualify to receive all of their stock, the suit says, since they are required by law to be local residents.
By contrast, the suit claims, the six plaintiffs - who live out-of-state - might get little or no stock in the offering, even though they've been depositors for at least three years and meet other criteria. The thrift is also limiting the offering to depositors with more than $50 in their accounts.
Mr. Davis and another plaintiff live in Connecticut. The remaining four are former local customers who moved to Florida several years ago.
Thrift officials and Mr. Davis declined to discuss the suit.
Great American had sought to have the judge delay depositions, claiming that the suit could be moot if depositors don't approve the conversion and if the plaintiffs do receive their stock. The thrift also asserted that the case would have to be heard in a federal appeals court, not a district court, because the Office of Thrift Supervision had approved the conversion.
The judge rejected these objections.
No previous court challenge to a local depositor preference has ever been based on questions about the fairness of the policy.
Local preference, allowed but not required under a 1994 OTS regulation, was designed to address the activities of so-called professional depositors.
Such individuals deposit money in mutual thrifts across the country in hopes of being able to get first dibs on stock when the institutions convert. They typically cash out shortly afterward, as the stock price increases after the initial public offering.
Requiring local residency in order to get stock helps thrifts ensure that their owners contribute to their future health and growth, according to a 1994 press release from the OTS.
The lawsuit, if successful, would "give people like Jerry Davis the opportunity to participate in the conversions when they would otherwise be excluded," said Richard Garabedian, a lawyer with Silver, Freedman & Taff in Washington.
The Davis suit notes that the directors have retained the right to purchase up to 25.53% of the stock and have authorized the company's employee stock ownership plan to buy 8%.
And it points out that the directors could receive a "substantial windfall" from their holdings if the thrift's stock surged in value right after the conversion.
Claiming that the directors "have engaged in unjustifiable discrimination," the suit calls for money damages and a declaration that the local preference is a breach of fiduciary duty and implied covenants with depositors.
