IRVINE — In the wake of First Pension Corp.'s failure, some companies that did business with the Irvine pension management firm are worried that investors who lost money in the collapse might try to put part of the blame on them.
Despite a U.S. Supreme Court ruling in April that limits lawsuits by defrauded investors against third parties--lawyers, accountants and bankers--CommerceBancorp of Newport Beach and Monarch Bank of Laguna Niguel, both of which held funds for First Pension, are concerned about their exposure.
"We've done fairly exhaustive legal and audit work to recover records. I went through every wire transfer myself," said Lynn Caswell, president of Monarch, a two-branch community bank founded in 1980. "The cash assets are all accounted for, and we don't think we have any liability."
CommerceBancorp went even further. On June 27, the thrift, which is undercapitalized and at risk of being taken over by federal regulators, put off a $14-million stock offering that would have brought in badly needed cash.
"We postponed it until we can quantify what liability exists," said Dale E. Walter, the thrift's president.
The bankers' concern is that people who used First Pension to direct their retirement investments may take legal action against not only the management firm's owners but also against companies with which it had dealings. Lawsuits by investors in securities fraud cases in the past have targeted "deep pocket" companies--such as banks, law and accounting firms hired by the perpetrators--because the promoters were broke, having either spent or lost the money they gained illegally.
While there is some comfort in the Supreme Court decision, it does not erase the banks' fears that they might be caught up in costly and time-consuming First Pension-related litigation that could be damaging even if they are cleared, a banking attorney said.
"Even with the recent ruling, bankers take this very seriously," said Thomas J. Prenovost, a banking attorney in Santa Ana who is helping to evaluate Monarch's situation. "I think the dollar amounts involved with First Pension make it much more of a concern, and I think that's why Commerce pulled their stock offering."
The Securities and Exchange Commission has alleged that First Pension operated an elaborate pyramid scheme, misleading clients into investing in nonexistent mortgages. As much as $124 million of investors' money may have been lost to fraud and outright theft, the SEC has said. The company, which had an estimated 8,000 clients and accounts valued at $350 million, filed April 22 for liquidation under federal bankruptcy laws.
Attorney James Krause, who filed a class-action lawsuit for First Pension investors on Thursday against the investment company's owners, said the court ruling does not give banks immunity from investor lawsuits. He expects more legal action to follow.
"I believe we can still sue them, all third parties, if they did something wrong, but it may be for state negligence or other viable claims," Krause said. "If we think there was a legitimate cause for claims, we would take action."
Of the two Orange County financial institutions, CommerceBancorp, which held about $10 million in First Pension deposits, would appear to be at greater risk because of its precarious financial condition.
With assets of about $158 million, the thrift, as of March 31, had a capital-to-assets ratio of just 2.14%, far below the 6.5% required by federal law. The company's stock was taken off the Nasdaq trading system earlier this year and now trades on Nasdaq's SmallCap Market, a system for companies with little capital and low stock prices.
Because the bank has postponed its stock offering, it cannot beef up its capital as planned. "The longer the delay, the greater chance of actions taking place" by regulators, Walter said.
If the bank were seized by regulators, the Federal Deposit Insurance Corp. might cover any existing First Pension deposits for up to $100,000 in each account, depending on the circumstances, said Andrew Porterfield, spokesman for the FDIC in Irvine.
"We may cover for fraud after the bank is closed, but it would depend on many factors, such as how the deposits are booked and what the collateral was," Porterfield said.
Monarch Bank officials express confidence that they will not be harmed from their business association with First Pension, for which the bank served as a trustee from July, 1992, to September, 1993, Caswell said.
"I won't say we have no concern whatsoever," bank President Caswell said, "but as far as we can tell, every penny that we handled is accounted for."
But Andrew Snyder, trustee for Summit Trust Services, the custodian bank formed by Cooper in Denver to handle First Pension retirement funds, said he was examining wire transfers from Monarch to other First Pension entities.