Coast Savings, CalFed managements sued over disclosure failings.

Coast Savings, CalFed managements sued over disclosure failings

In the wake of declining stock prices, slashed dividends, and rising loan losses, shareholders at some of the country's largest financial institutions are suing managements for allegedly painting unduly rosy pictures of their institutions' finances.

In the last month, three lawsuits have been filed against the management of Coast Savings Financial Inc., the Los Angeles-based parent of Coast Federal Bank, and one had been filed against officials at CalFed Inc., the Los Angeles-based parent of California Federal Bank.

The lawsuits, filed as derivative actions on behalf of the company and as stockholder class actions, involve allegations of poor management, failure to set aside adequate loan loss reserves, and failure to disclose potential loan losses.

Officials at both CalFed and Coast dismissed the charges as empty. "We believe the allegations are completely without merit and that they betray a conspicuous lack of understanding of the real estate industry," said James Hurley, senior vice president at CalFed.

The CalFed suit accused four directors of the company, including Chief Executive Jerry St. Dennis, of "misleading describing and failing to disclose material facts regarding CalFed's and/or California Federal's credit management policies, loan loss reserves, non-performing assets, earnings, assets, and net worth in CalFed's 1986, 1987, 1988 and 1989 annual reports."

The suit was brought by Haverford, Penn.-based law firm Greenfield & Chimicles on behalf of stockholder John Paul Decker.

The Coast suits had similar charges.

One of the suits, also handled by Greenfield & Chimicles on behalf of stockholder Rima Dubowski, charged that the thrift concealed the fact that loan loss reserves were inadequate and overstated the value of its real estate assets.

A Coast official denied the allegations.

"We think these suits are similar to other suits brought against large companies reporting losses and we think the suits have no merit," said Kirk Hallahan, vice president of Coast. "We won't comment on the substantive issues of the suit."

Both Hallahan and Hurley said these are the first suits involving disclosure that their institutions have faced.

Both institutions suffered third-quarter losses, slashed dividends and set aside large reserves for expected loan losses.

Coast reported a net loss of $24.4 million for third quarter, discontinued its quarterly dividends, and set aside $61 million in general loan loss reserves against possible losses.

CalFed reported a third-quarter net loss of $92.3 million, added $96.0 million in reserves against potential loan losses and reduced its quarterly dividend from 35 to 3 cent per share.

Stock prices of both companies were trading near their 52-week lows before the announcements.

Several analysts who follow the institutions' stock said they believe Coast and CalFed have done a good job disclosing information to shareholders.

"I think whenever an institution gets clobbered, lawyers crawl out of the woodwork and try to make a class action suit," said analyst Mike Abrahams of Los Angeles-based Bateman Eichler, Hill Richards. "Their (Coast's and other institutions') disclosure has improved markedly all year."

Another analyst agreed. "My feeling is that they have done a reasonable job disclosing," said a major investment bank analyst who requested anonymity. "It's hard for me to be critical of them for accurately predicting the real estate decline."

Abrahams said, however, that before the 1989 thrift bailout law which sought to raise thrift operating standards to those of banks, savings and loans trailed behind banks in adequate disclosure of important financial information.

"At most S&Ls in the past, disclosure wasn't up to banks', except for (H.F.) Ahmanson and Great Western (Financial Corp)," Abrahams said.

One of the attorneys at Greenfield & Chimicles argued that institutions should be held accountable for accurately predicting critical financial information such as projected loan losses.

"You can still debate that writeoffs have a lot to do with unsound practices," said Greenfield & Chimicles lawyer R. Bruce McNew. "Adequate disclosure means that you have done adequate research in estimating the amount of losses you are going to take."

While refusing to comment on potential cases, McNew said that his firm expects an increase in derivative lawsuits, which are cases in which a shareholder sues on behalf of the corporation against officers and directors to protect rights of the corporation. "A downturn in the economy will expose people who have been fudging things...and the nature of the financial business makes it different. There are certainly a lot of ways to coat the books."

Most disclosure lawsuits are settled out of court. "Seldom do they go to court and seldom do plaintiffs receive a significant judgement," said Paul Hall, who defends companies against such suits as co-chairman of the litigation department at Los Angeles-based Manatt, Phelps & Phillips.

In many suits, a ruling revolves around the relative decline of a given stock, said another defense attorney. "The real test is whether the fall in the stock price is greater than that in the industry as a whole for that time," said Christina Snyder, a defense lawyer at Los Angeles-based Wyman, Bautzer, Kuchel & Silbert.