BancorpSouth Fails to Foreclose on Shareholder Lawsuit; Plaintiff Secures $29.25 Million Settlement
Since the beginning of the recent financial crisis, Robbins Geller attorneys and staff have worked tirelessly to secure recoveries on behalf of shareholders and investors who were defrauded by what the Financial Crisis Inquiry Commission described as “dramatic failures of corporate governance and risk management” at financial institutions and “a systemic breakdown in accountability and ethics.” In one of their latest successes, Robbins Geller secured a $29.25 million settlement, subject to final court approval, on behalf of shareholders of BancorpSouth, Inc., who plaintiff alleged were defrauded by the company’s false and misleading statements about its loan loss reserves and purportedly conservative underwriting standards.
BancorpSouth is a regional bank based in Tupelo, Mississippi. The bank was founded over 130 years ago in the back of a hardware store in Verona, Mississippi, and today conducts commercial banking and financial services operations in Tennessee, Mississippi, Alabama, Arkansas, Texas, Louisiana, Florida, Missouri and Illinois.
By 2008 and 2009, the financial crisis was hitting its peak. The Federal Deposit Insurance Corporation (“FDIC”) was shutting down record numbers of struggling banks – as many as nine in a single day – and investors were looking for a safe port in the economic storm roiling the credit markets. Many such investors were attracted to BancorpSouth, which claimed to have a stronger loan portfolio that was more resistant to rising credit delinquency and foreclosure rates than its peers. BancorpSouth’s loan loss reserves – a balance sheet entry designed to reflect anticipated losses from loans that were currently at risk of not being repaid – appeared to support defendants’ claims. BancorpSouth attributed the purportedly high credit quality of the company’s loans to its extensive internal controls, detailed analysis of repayment risks, longstanding relationships with and granular insight into its borrowers, and conservative lending practices.
In truth, plaintiff alleged, BancorpSouth’s loan loss reserves were significantly understated because the company’s internal controls, credit loss analyses and lending standards were much weaker – and its borrowers’ risks much greater – than represented to investors. Indeed, plaintiff alleged that defendants deliberately disregarded the FDIC’s warning that BancorpSouth’s existing controls over problem loans were inadequate, ignored conditions revealing the declining credit quality of its borrowers, and repeatedly agreed to modify troubled loans to defer repayment obligations rather than record a bad debt expense or reserve for a loss that would decrease earnings.
In January 2010, BancorpSouth reported financial results for its fourth quarter and full year 2009. Defendants would later admit that these results were false because BancorpSouth’s loss reserves were significantly understated in violation of Generally Accepted Accounting Principles, thereby materially inflating the company’s revenues for the quarter and the year. When the company admitted the falsity of its prior results, BancorpSouth’s stock price immediately fell by nearly 14%, causing millions of dollars in damages to plaintiff and others who had purchased their shares at inflated prices in reliance upon the truth of defendants’ repeated misrepresentations.
While shareholders got cashed out, BancorpSouth’s top executives cashed in. The defendants, as well as over 60 other management employees, were awarded millions of dollars in bonuses based on BancorpSouth’s false financial results. Had their bonuses been based on the company’s true financial results, none of executives would have been entitled to any bonus at all. Nevertheless, the company refused to ask any of the executives to repay their lavish bonuses, and was simultaneously lobbying the FDIC to reject a proposed rule that would have increased costs on banks like BancorpSouth that engaged in risky compensation practices.
In November 2010, defendants filed a comprehensive motion to dismiss, contending that plaintiff’s complaint should be dismissed with prejudice for failing to plead loss causation or economic loss, an actionable misrepresentation or omission of material fact, and a strong inference of scienter. Plaintiff opposed defendants’ motion to dismiss, and in April 2011, Magistrate Judge John S. Bryant issued a Report and Recommendation that recommended defendants’ motion to dismiss be denied in its entirety. Defendants challenged Magistrate Bryant’s Report and Recommendation to the District Judge, which plaintiff successfully defended, and District Judge Kevin H. Sharp denied defendants’ motion to dismiss in January 2012.
In May 2012, after commencing discovery on plaintiff’s claims, the parties reached the $29.25 million settlement for BancorpSouth investors. “The settlement is a terrific result for investors that were harmed by the alleged misconduct,” said Dennis J. Herman, a partner in Robbins Geller’s San Francisco office who, together with associate Christopher M. Wood, prosecuted the action. “It provides a significant and immediate recovery while eliminating the significant risks of continued and protracted litigation.”
Winslow v. BancorpSouth, Inc., No. 3:10-CV-00463 (M.D. Tenn.).