Two federal lawsuits, both filed by parties trying to recover money lost in the failure of Valley Bank, formerly headquartered in Moline, have been dismissed.
However, a lawsuit alleging fraud and violations of Florida state securities laws is expected to move forward in Florida against River Valley Bancorp, the now-defunct bank holding company, and Larry C. Henson, former CEO of both the holding company and the bank.
Valley Bank, with offices in the Quad-Cities and elsewhere in Iowa and Florida, was shut down by federal regulators on June 20, 2014, because of its "critically deficient capital condition." The FDIC stepped in as receiver to protect depositors and arranged for Great Southern Bank to take over.
In the first of the lawsuits, a group of Florida businessmen claimed Henson induced them into a fraudulent investment scheme involving Valley Bank Florida in which they lost $1.85 million.
A federal judge ruled last month that the businessmen, identified as the Fernandez Group, had failed to prove federal securities violations, and dismissed that portion of the suit, remanding state securities laws violations back to state court.
In the second, bank holding company investors Brian Tugana, of Clinton, and Russell Weaver, formerly of Galesburg, Illinois, now living in The Villages of Florida, filed suit against the Federal Deposit Insurance Corp., alleging the agency's negligence led to the bank's failure and their loss of investment.
They filed their suit in October 2016, about two months after the FDIC Office of the Inspector General issued a review critical of the FDIC's handling of Valley Bank.
Contacted by a reporter, Tugana said he knew that, "realistically, the lawsuit had a very slim chance — you can't touch the government."
The purpose was more about shedding light on what he calls "sloppy work" for which employees are not held accountable.
"Attention has to be drawn to this," Tugana said. "You see it in the VA (Veterans Administration) and the IRS. There needs to be reform. There needs to be accountability."
Here is a closer look at the cases:
The Fernandez Group claimed that in late 2012, CEO Henson approached them with a fraudulent scheme to raise $2.5 million.
Henson was desperate to sell the Florida bank, but in order to do so, he had to improve its appearance to potential suitors and financial regulators, according to the suit. He told the businessmen that the Florida bank's problems would be solved with a $4 million equity infusion, and he asked them for a little more than half of that in exchange for stock.
Once the sale/merger of the Florida bank went through, the men would get a "healthy return," Henson told them.
The investors ultimately agreed to a stock offering, financing it by mortgaging a piece of real estate in Fort Lauderdale, Florida, according to court documents. "Indeed, they agreed — as Henson had proposed — to secure a $2.5 million mortgage from Valley Illinois, River Valley Bancorp's other banking subsidiary," the judge's order states.
After the banks failed, the FDIC called in the mortgage, and the Fernandez group had to pay $1.85 million to get their property back, which is the amount of their claimed loss.
U.S. District Court Judge Kathleen M. Williams ruled last month that the Fernandez Group had failed to prove their federal claim.
"In federal securities litigation, courts universally acknowledge the truth that all securities frauds are bad deals, but not all bad deals amount to securities fraud. This case falls into the latter category," she wrote in her order.
She also noted that "a close examination of the ... allegations and the RVBC offering documents ... demonstrates that the (Fernandez Group) are not, in fact, complaining about the plan ... rather, (they) are complaining that their plan did not succeed."
She found that written documents explaining the stock offering warned of risks, including a statement printed in bold, capital letters that "the merits of the shares have not been passed upon by the SEC, Federal Reserve Board, the FDIC or any other federal or state agency."
She also noted that the group was familiar with the bank's problems and knew it was under "cease and desist" orders from the FDIC.
One investor in the Fernandez group, in fact, "served as a board director for seven years leading up to, and including, the events in this litigation and was well aware of Valley Florida's consent orders, capital requirements, and the fact that Valley Florida was subject to regular regulatory examinations," the judge wrote.
Contacted by a reporter, Jorge L. Guerra, attorney for the Fernandez Group, said he and his clients "are very happy being back in state court" where they hope to use the "same facts, the same claims, the same damages" to argue their case before a state jury.
Guerra filed a motion on Monday for a status conference to "set a schedule for moving the case forward."
Craig Sherman, a Florida lawyer representing River Valley Bancorp, said "we'll just have to see" what becomes of alleged state securities violations. "We've been successful so far."
Investors Tugana and Weaver
Tugana and Weaver alleged in their suit that the FDIC should be held accountable for the men's investment losses because it did not sufficiently rein in bank CEO Henson, whose risky business decisions led to the bank's failure.
Claiming negligence by the FDIC in allowing Henson to serve as CEO even though he had previously been convicted of a misdemeanor involving lending, the men asked for a judgment covering their losses of $4,838,500 and $2 million, respectively.
The issues of their case were not addressed by U.S. District Court Judge Sara Darrow, Rock Island, who dismissed the suit Friday, citing lack of jurisdiction.
The investors should have named the United States of America, not the FDIC, in their lawsuit, she wrote.
"A claim against a federal agency or employee as opposed to the United States itself must be dismissed for want of jurisdiction," she wrote, quoting case law. "Describing the FDIC as an agent of the United States does not make the United States a defendant."
She also ruled that time has expired to file a correct claim.
The FDIC does not comment on litigation, David Barr, FDIC representative, said.