The banking, finance, insurance, and investment industries are the source of an increasing amount of litigation, not just from government investigative agencies and regulators, but from shareholders and aggrieved investors and consumers. Litigation may involve allegations of errors, omissions, violations of law, or damages caused by the financial institution or its employees, officers, and directors. Here are some common types of litigation affecting the financial industry:
Mergers and Acquisitions
A common result of any announced merger or acquisitions are lawsuits from shareholders or other controlling entities or officers squeezed out of the resulting company. The claims usually include the allegations that the price is too low and that the target company directors failed in their duty to get the best price for shareholders. Shareholders also usually claim that the target company did not release complete and accurate information to shareholders before obtaining approval for the transaction. Lawsuits surrounding mergers and acquisitions are typically brought by law firms that specialize in this type of litigation and usually through class-action lawsuits.
Insider Fraud and Self-Dealing
One of the most significant risks to financial institutions is fraudulent acts by corporate insiders.
Insiders have inside knowledge of corporate opportunities and assets and the relevant corporate control systems to protect them. Using their inside knowledge, these insiders can develop fraudulent schemes that are designed to avoid internal controls. Self-dealing is a common form of insider fraud, in which an insider uses his or her position to obtain property or money that would otherwise belong to the financial institution. This can be through theft or misappropriation of funds or by fraudulently obtaining or using company property for personal use and benefit. Lawsuits from shareholders or regulatory agencies can arise from these schemes and the cost to the financial institution can be both pecuniary and reputational.
Compliance Violations
Financial institutions may be subject to lawsuits and/or regulatory enforcement actions for failure to comply with applicable laws and regulations. Litigation resulting from noncompliance can be costly as plaintiffs can seek actual and punitive damages as well as compensation for lost opportunity.
For example, some Regulation Z (Truth in Lending Act) violations can result in treble damages. Similarly, litigation arising from a bank’s failure to comply with fair-lending and anti-discrimination laws can have a significant financial impact.
Compliance violations generally arise with financial institutions that fail to have professional and dedicated compliance staff and resources with adequate authority to do their jobs. Lawsuits and regulatory enforcement actions frequently exploit the inherent conflict of interest between well-meaning compliance employees, who generally cost the financial institution money, and business managers, who generally make money for the financial institution.
Bank Secrecy Act/Anti-Money Laundering
Most financial institutions are subject to the anti-money laundering (“AML”) and reporting requirements imposed by the Bank Secrecy Act (“BSA”), but many do not adequately maintain an AML/BSA compliance program. Particularly weak in this compliance responsibility are many brokerages, investment, insurance, and other non-bank financial institutions. Banks and credit unions are generally audited on their AML/BSA compliance program at least annually and are in a better position to routinely identify gaps and weaknesses and to take corrective actions.
However, non-bank financial institutions do not generally have dedicated AML/BSA compliance personnel and have not conducted an adequate AML risk assessment. Accordingly, these non-bank financial institutions are subject to expensive regulatory enforcement actions that can include significant fines and penalties.
Loan Servicing Litigation
Lawsuits arising from borrowers alleging unfair or misleading mortgage servicing practices reached a high point following the 2007-2008 housing market crash, particularly as it related to the government’s TARP bailout program. In the context of COVID-19 and rising unemployment claims, many financial institutions are already reaching out to borrowers offering “help” concerning managing their debt obligations. While most of these financial institutions are sincere, these efforts will undoubtedly result in lawsuits by borrowers alleging false, misleading, or even fraudulent practices. Adequate program guidance and supervision must be based on sound risk assessment and mitigation strategies to avoid costly litigation and/or regulatory enforcement actions.
Class Action Lawsuits
Any time a single lawsuit or regulatory enforcement action is brought against a financial institution, the company needs to be concerned with class-action lawsuits. Many law firms closely study lawsuits and regulatory enforcement actions brought against financial institutions, especially large companies, to determine whether there might be any other victims of the alleged offense.
If so, those law firms will use their substantial marketing resources to enlist similarly situated “victims” to file a massive lawsuit against the company on behalf of hundreds if not thousands of “victims.” These types of litigation defense attorneys can represent shareholders, debt holders, customers, consumers, or employees of your company.
%MCEPASTEBIN%
