Suit slams ex-insiders of bank

Racketeering, fraud and "negligent oversight" are juicy ingredients in any lawsuit.</p>

But a recently filed complaint against Bank of Indiana may take the trophy in the otherwise sound-but-sleepy world of Indiana banking, not just for the nature of the allegations but that they're aimed at the boardroom.

The 13 ex-directors and two former officers named in a suit filed Nov. 27 in U.S. District Court include former board chairman Frank D. Neese.

Bringing the complaint are four investors in Bank of Indiana's holding company, Indiana Bank Corp, which had its headquarters in Indianapolis. They seek unspecified financial damages for what they describe as years of insider dealings and lax oversight that ultimately forced IBC into bankruptcy in April.

That same month, under pressure from banking regulators, IBC sold most of Bank of Indiana's assets to Converse-based First Farmers Bank & Trust. That includes a branch in nearby Bargersville.

As a result of the bankruptcy, investors "have incurred the loss of all or nearly all of their investments in the stock and bonds issued by Indiana Bank Corp.," states the suit filed in U.S. District Court in Terre Haute.

While the amount of losses weren't specified, investors have plowed $10.5 million into Indiana Bank Corp. over the years. The four Indiana Bank Corp. investors bringing the suit are Vigo County residents Bryan K. Phillips, Michael A. Toney and Geoff Shuck, along with California investor Jessica Phillips

Their attorney, Mark D. Hassler of Terre Haute, did not return phone calls.

The unusually wide net cast in the lawsuit - essentially the entire board and some former top officers - may have something to do with limited financial resources of IBC now that it's in Chapter 11 and that Bank of Indiana is a shell.

"It has no assets left at all. They were all sold," said Jeffrey Hokanson, a Frost Brown Todd attorney representing Indiana Bank Corp., said of the bank.

"If you're an opportunistic plaintiff's attorney, you're going to include them (directors) simply to get as many targets as your can. Some directors may be wealthy," said Kevin LaCroix, an attorney who publishes The D&O Diary and is executive vice president of Beachwood, Ohio-based RT ProExec LLC.

Self-dealing theme

Indiana Bank Corp. is still working through bankruptcy in U.S. District Court in Indianapolis.

While the 14-page suit faults the entire board, it focuses on former chairman Neese and fellow director and chief financial officer Albert "Jack" Jackson.

Investors claim the two engaged in a pattern of self-dealing starting in 2007 when Bank of Indiana bought $1 million in three-year subordinated notes issued by The Estridge Cos., a central Indiana home builder that ultimately defaulted on the debt.

Neese, while chairman of the bank, also was principal of Indianapolis-based Indiana Securities, the underwriter of the Estridge notes. IBJ reported last year that Neese's Indiana Securities earned $375,000 in commissions on the sale of $5 million in Estridge notes.

In addition to this conflict of interest, investors allege Neese and Jackson were aware of financial difficulties at Estridge prior to the housing market collapse "but nevertheless hid such knowledge from Bank of Indiana stockholders and bondholders."

It's not the first indication of concerns about Neese. In fact, in 2010 the bank filed suit against him along with attorneys it alleged breached their fiduciary duty by simultaneously representing Bank of Indiana and Indiana Securities during the offering.

In 2010, Neese agreed to resign from the board as part of a settlement with the bank. He agreed to serve as guarantor of the notes. But last year, the Indiana Securities Division filed a complaint against Neese, saying he violated securities laws by entering into such an agreement and failing to disclose it.

IBJ reported that the state sought $1 million from Neese on behalf of the bank. In May, the state entered into a $3,000 settlement with Neese's firm.

The suit also takes issue with Indiana Bank Corp.'s 2007 decision to issue $15 million in notes, ostensibly to generate working capital and to buy back company stock from shareholders of Jasper-based German American Bancorp.

In fact, the suit says, most of the proceeds were used by Indiana Bank Corp. to buy certificates of deposit issued by Bank of Indiana at an interest rate of 5.5 percent.

Not only were those CDs at an unreasonably high rate not available to Bank of Indiana customers, but that the CD purchases effectively were a way to transfer assets from Bank of Indiana to parent company Indiana Bank Corp., investors contend. The idea was improve the appearance of Indiana Bank Corp's balance sheet "while at the same time draining funds and financial resources from the Bank of Indiana," the suit alleges.

The lawsuit makes numerous other allegations. Among them is that Neese "orchestrated" the leasing of real estate owned by his securities firm to Bank of Indiana, for an Indianapolis office. The rent and costs for the space was "far above" market value and that Neese profited from the deal, states the complaint.

Neither he nor Jackson returned phone calls.

Investors also allege that, following Neese's departure, his successor failed to consider offers from outsiders to buy the bank, which could have provided at least a partial return for investors. The suit contends the offers never were conveyed to directors or investors.

However, an investor in Indiana Bank Corp. who is not among the plaintiffs told IBJ the offers were paltry compared to what investors were hoping to receive.

The investor, who asked not to be identified, said the board instead decided to focus on improving performance of the bank. New management made progress, but it ultimately wasn't enough to save what once had been one of the largest U.S. Small Business Administration lenders in the state.

The investor expressed doubt the four fellow investors would prevail in the case.

"No insurer," he said of director and officer liability coverage that may be in effect, "is going to want to settle. It's going to be a protracted fight."

If plaintiffs prevail, however, the suit could have serious consequences for the former directors - including a ban from working in the banking industry, said Sarah Jane Hughes, a scholar and fellow at the Indiana University Maurer School of Law.

Hughes points to greater fiduciary responsibilities required of officers and directors under the Financial Institutions Reform Recovery and Enforcement Act of 1989. The federal government, particularly the Federal Deposit Insurance Corp., has cited that legislation in a flurry of lawsuits against bank officers of directors following the housing collapse.

Other defendants in the Bank of Indiana suit are former directors Terry Fulk, Richard Bush, Jay Reynolds, Jay Seeger, Merrill Wesemann, Michal Ennis, Peter Dvorak, Dale Conrad, James Spiros, Daniel Cook and Richard VonDerHaar.

Two former bank executives also were named, Jeff Salesman and Kurt Gore.

The defendants could not be reached for comment or declined to discuss the lawsuit.

Banking observers said suits against directors of Indiana banks are relatively uncommon. "I think it would have been unusual up until the Great Recession," said Mark Maddox, a local securities attorney and a former Indiana securities commissioner.

Indeed, a flurry of lawsuits against directors and officers of banks have been brought nationwide since the financial crisis, with the FDIC being perhaps the most litigious plaintiff.

Indiana's bank failures were few, however. The FDIC filed a case in May against four former officers of the defunct Irwin Financial Corp. of Columbus, Ind., saying they "closed their eyes" to known lending risks.

Bank of Litigation

Bank of Indiana's decisions from long ago are coming back to haunt its directors and officers.

2005

Group of mostly central Indiana investors forms Indiana Bank Corp.

2006

IBC buys tiny First National Bank of Dana, in Vermillion County, shifts focus toward central Indiana, and renames bank as Bank of Indiana.

2007

Bank buys $1 million of privately issued, three-year subordinated notes from Indianapolis-based home builder Estridge Cos.

2010

Bank sues Estridge in Marion Superior Court, alleging failure to repay. Also alleges malpractice and breach of contract against Indianapolis-based Krieg DeVault LLP for representing bank, Estridge and underwriter of the securities - Indiana Securities - during the offering.

2012

Indiana Securities Division files administrative complaint against Indiana Securities and its owner, Frank Neese, in connection with Estridge offering. Of note: Neese was also Bank of Indiana chairman when investment was made - putting him on both sides of transaction.

Bank of Indiana has $90 million in deposits, $55 million in loans, assets of $108 million.

April 2013

Indiana Bank Corp. files Chapter 11 bankruptcy, listing assets and liabilities of less than $10 million. Agrees to sell Bank of Indiana'sDana, Bargersville, North Judson and Hamlet offices to Converse-based First Farmers Bank & Trust.

Nov. 27, 2013

Four Indiana Bank Corp. investors file suit in U.S. District Court in Terre Haute against 13 bank directors and two officers, alleging racketeering, fraud, breach of fiduciary duty and "negligent oversight, management, administration and supervision."

Targeted are Neese and former director/chief financial officer Albert "Jack" Jackson. Suit says both were aware of financial problems at Estridge but failed to inform stockholders and bond holders. It accuses duo of self-dealing, with Neese benefiting from Estridge deal as head of Indiana Securities. Neese allegedly also leased real estate owned by his investment firm to bank as its Indianapolis office.

Suit alleges bank executives also used proceeds of a $15 million private placement to purchase certificates of deposit, intending to transfer assets to parent Indiana Bank Corp. to improve look of its balance sheet while draining bank funds.

Sources: U.S. District Court for the Southern District of Indiana, 181 research