GFG Liquidation Trustee Files Fraud Lawsuit Against Temple-Inland
Duane Morris is Plaintiff's Counsel in $1 Billion Case
DALLAS and NEW YORK, Aug. 23, 2011 /PRNewswire-USNewswire/ -- Kenneth Tepper, in his capacity as the liquidation trustee to the estate of bankrupt Guaranty Bank, has filed a billion-dollar-plus lawsuit against packaging and building products company Temple-Inland Inc., certain affiliates and several former and current executives of both Temple-Inland and GFG. The suit seeks recovery of damages to GFG creditors and American taxpayers through the Federal Deposit Insurance Corporation (FDIC), as a result of the spinoff and subsequent failure of Temple-Inland subsidiary Guaranty Bank in 2009.
HoldCo Advisors, a manager of over $50 million of debt issued by GFG, expressed its unwavering support for Tepper's actions. "We stand unified with Mr. Tepper and the American taxpayer in seeking restitution from Temple-Inland on account of its conduct," said Vik Ghei, a co-founder of the firm. Added co-founder Misha Zaitzeff, "Temple-Inland's flagrant disregard for fundamental estate and creditor rights must not go unpunished." HoldCo Advisors manages approximately $1.5 billion notional of distressed debt issued by more than 70 financial holding companies whose subsidiaries are in various stages of deep insolvency, including some of the largest bank failures in history.
The lawsuit, filed in the U.S. District Court for the Northern District of Texas, Dallas Division, alleges that the companies' directors participated in a scheme to fraudulently loot the bank and its direct parent company Guaranty Financial Group (GFG) of assets exceeding $1 billion, precipitating one of the largest financial institution failures in U.S. history. Tepper is represented by a team of lawyers from global law firm Duane Morris LLP, a leading provider of legal services for creditors seeking recovery from insolvent banks. The team is led by partner Hersh Kozlov.
Operated by Temple-Inland from 1988 until it was spun off in 2007, Guaranty Bank was a captive finance arm of the parent company's manufacturing operation and was used to extend the profitability of and promote its products. Beginning in 2004, after discontinuing its troubled mortgage operation, the bank began to invest heavily in mortgage-backed securities (MBS) – both those issued by government agencies and private-label investments which used high-risk option adjustable-rate mortgages as collateral -- as well as other highly risky financial instruments. It also began to issue risky loans to its construction industry customers. Tepper alleges that this was done at the direction of Temple-Inland to improve the bank's rates of return and to promote the homebuilding industry that the parent company served at the expense of GFG..
"The executives and directors of Temple-Inland and GFG acted with appalling self-interest at every step of their operation and spinoff of Guaranty Bank. The bank's investments became more and more risky and its capitalization shrank to dangerous levels, all to the benefit of Temple-Inland's balance sheet and the detriment of Guaranty and its shareholders and creditors. The housing crisis was the final straw," said Tepper. "The bank's creditors, and indeed the American taxpayers, deserve the maximum possible recovery from the defendants. This is an important step in realizing that goal."
"The defendants knew the bank was destined to fail, so they dumped toxic assets and other liabilities onto its balance sheet, and cut it loose when it was apparent that they could wring nothing more from their severely crippled subsidiary," said Kozlov. "We intend to prove that Temple-Inland's leadership committed fraud amounting to at least $1 billion, and we are confident that a jury will agree."
In addition, Tepper alleges that Temple-Inland used GFG as its "private ATM," taking dividends totaling $591 million from GFG and the bank in the six years prior to GFG's spinoff, constituting approximately 80 percent of GFG's net earnings during that time.
According to the complaint, Temple-Inland weighed GFG down with a series of agreements in connection with the spinoff that contributed to the bank's desperate financial situation. These include a tax arrangement that cost Guaranty nearly $300 million in refunds and an aircraft-lease accord whereby the bank covered certain corporate aircraft costs.
In December 2007, Temple-Inland divested itself of GFG and the bank, spinning it off and removing Temple-Inland as a source of financial support. As a result of this long-running and multi-faceted scheme, Tepper alleges, the post-spinoff GFG was severely undercapitalized, insolvent and "doomed to fail." On August 21, 2009, the bank failed with approximately $13 billion in assets and $12 billion in deposits, in the second largest bank collapse of 2009 and the tenth largest in U.S. history. It was taken over by the FDIC and its assets and deposits were sold.
Tepper also filed a related suit in the same court against financial advisor Keefe Bruyette & Woods Inc. (KBW). GFG had contracted with KBW to assist in acquiring new investors, an effort that ultimately failed. Despite its failure to garner new capital for the bank, KBW charged GFG nearly $20 million in fees. In addition, the complaint alleges that KBW used confidential inside information attained through its contract to short shares of GFG and the bank for its own benefit.
In addition to Kozlov, the Duane Morris team consists of partners Wayne Mack, Jim Steigerwald and Patrick Matusky and associate Vincent Nolan.
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