Bank directors becoming an endangered species; the fear of being sued makes filling seats difficult.

L.A. County lawyers are providing consistent advice to their clients who are considering accepting a seat on the board of directors of a financial institution: Don't.

When an institution fails, government regulators have increasingly been seeking to recover losses from anyone involved in the management of that bank, savings and loan or thrift. And that often includes directors or officers.

While insurance is available to cover the costs a director or officer might incur from defending a claim, no insurance exists to protect an officer or director from regulatory action.

Regulators and lawyers alike confirmed that only about a dozen cases have been filed in L.A. County so far in which directors or officers were named as defendants. But lawyers said they expect a number of such lawsuits in the future because such cases often take years to prepare.

Lawyers also pointed out that, because many financial institutions today are operating with nominal net worth, it doesn't take many loan losses to cause an institution to fail.

"This is a very real threat," said Mark Weisman, whose Beverly Hills-based law firm Weisman Butler & Watson has been defending bank directors and officers since 1987. "As a director, you could get paid $300 or $400 a meeting and do the best job you can. But if a bank fails, you could be liable."

Weisman said he knows of a number of cases pending against directors and officers in L.A. County, but he declined to specify any particulars of the cases or identify any of the parties. In one case filed a few weeks ago, he said, there is no insurance to cover the defense. He said it's not rare for a director, who didn't even profit from a financial institution, to have to pay "substantial" fines to the government.

Weisman said a director's liability could be as high as $200 million to $300 million and that out-of-pocket costs for some directors have reached as high as seven figures.

Because of confidentiality agreements on the terms of settlement, lawyers are extremely reticent to give details on cases. All the lawsuits involve savings and loans, whose high-profile troubles are expected to cost taxpayers hundreds of billions.

The bailout of Columbia Savings & Loan Association, a Beverly Hills-based thrift that invested billions in high-yield, high-risk junk bonds, for instance, is expected to cost taxpayers $2 billion. The S&L's President and CEO Thomas Spiegel was handed a 55-count indictment by a federal grand jury in June 1992, alleging he had used corporate funds to buy a $1 million vacation condo in Palm Springs and spent tens of thousands of dollars to build a personal firearms collection.

Cases like these spurred the government to pass sweeping reform legislation.

What really has directors and officers worried most, said attorneys, is that courts have ruled that regulators can sue for "bad business judgment," as well as fraud. Even directors and officers who have resigned are not safe from liability.

Mike Alen, president and CEO of Vista Bank, a $100 million (assets) federal savings bank based in the City of Industry, summed up the situation this way: "It's a pretty well-known fact that if a bank is taken over by the regulators, they will sue anyone remotely involved."

Alen said he was advised by two law firms that, if Vista Bank went down, each director and officer would be subject to a lawsuit, even a former director or officer, and no insurance would cover them. He said the cost of defending each director or officer would range from $200,000 to $300,000.

This amount of risk is just too much for most directors to bear, especially since they are typically only paid $10,000 to $20,000 a year, said lawyers.

Alen said Vista Bank did find a director in 1992, but that person was a friend of another director and, in hindsight, probably didn't realize the risk factors involved with coming on board.

Regulators are quick to point out, however, that if directors use good judgment and make appropriate decisions, they should not be sued.

The Office of Thrift Supervision, the federal agency charged with overseeing savings and loans, issued guidelines last November for officers and directors of federally insured savings and loan associations.

Former OTS Director Timothy Ryan said the guidelines were to allay fears of "unwarranted lawsuits."

Failed L.A. thrifts
Local lawyers and regulators confirmed that lawsuits have been
filed against directors and officers of the following failed
L.A. County financial institutions, all of which were savings
and loans. Although fewer than a dozen institutions are listed,
lawyers said they expect directors or officers of a great many
more L.A. institutions to be sued in the future.
Institution                              City
Beverly Hills Savings & Loan             Beverly Hills
Brookside Savings                        Pasadena
Columbia Savings & Loan                  Beverly Hills
Gibraltar Savings                        Beverly Hills
Investment Savings & Loan                Northridge
San Marino Savings                       San Marino
Southern California Savings              Beverly Hills
Unity Savings & Loan                     Beverly Hills
Westwood Savings & Loan                  West L.A.

The Federal Deposit Insurance Corp., the federal agency charged with overseeing banks, released a study that found the FDIC had only brought suits or settled claims of former directors or officers in 24 percent of the cases of bank failures.

Although government officials estimate every financial institution director has about a one-in-five chance of eventually getting sued, lawyers insist odds are much greater.

"My impression is that it's much more than that," said James Walther, head of the corporate department of L.A. law firm McKenna & Fitting. "A major determinant of whether you get sued is whether you have a deep pocket."

The consistent advice in the legal community, Walther said, is, "Don't get on a board. It'll just get you in trouble."

The problem of recruiting directors for financial institutions has become a monumental problem, even for well-capitalized banks, said industry sources.

Jim Staes, president and CEO of $407 million (assets) Home Bank in Signal Hill, said his bank has only had to replace one director in the last four to five years, and the new director -- a medical doctor -- was very concerned about liability insurance. Staes tried to console the new director by saying that his chances of being sued are very remote and by pointing out that the bank has been in business 42 years and is well-capitalized.

Staes said he did not see how a thinly capitalized bank could ever attract a director.

"Anybody we know that has an expertise, knows better," said Dave Smith, president of L.A.-based Smith Banking Consultants.

Smith said he is getting two to three calls a month from people who are having a difficult time finding new directors. He said he never received such calls a few years ago. He said four to five years ago, serving as a bank director was considered a sign of prestige.

For institutions having financial trouble, the possibility of getting a new director is close to nil, said attorneys.

Henry Fields, a lawyer in the L.A. office of Morrison & Foerster, said, if a troubled institution is in need of a new director, it will either shrink its board size or hire a consultant skilled in financial services. Fields said a growing number of accountants and lawyers who served on the boards of banks and S&Ls in the past are now operating as consultants.

Fields said board members aren't quitting like they did in the past because they are often shareholders and feel that staying on the board and correcting a bad situation is in their own best interest.

The ultimate result of having qualified people turn down directorships because of fear of liability is that the country's entire financial system becomes weakened, industry sources said.

"If you can't get people to be on boards, it's frustrating the very purpose regulators are trying to accomplish," said Smith.