State Sen. Jack Murphy of Cumming has less than three weeks to respond to a civil lawsuit filed against him and seven other executives and directors of the failed Integrity Bank.
The FDIC is suing the group for what it contends were negligence, gross negligence and breach of fiduciary duties.
“I was disappointed and surprised that they would do this, that they would take this action,” said Murphy, who last fall was elected to a third term in District 27.
“I wasn’t expecting it. Period. It came out of the blue. There had been several meetings with the FDIC where they’d indicated that the board had acted responsibly based on the information that we were given internally.”
Murphy was recently appointed to serve as chairman of the Senate Banking and Financial Institutions Committee, on which he has served the past eight years.
The committee, he said, deals “exclusively with legislation aimed at banking law in Georgia and have absolutely nothing to do with the FDIC and their decisions.”
In a statement released Wednesday afternoon, Murphy noted that he is “working closely with legal counsel to address these personal, business issues.”
“I will continue to devote myself to the service of all Georgians in my role as chairman of the Banking and Financial Institutions Committee," he said. "We must work diligently in order to put Georgia back on the path to success and prosperity."
The FDIC filed the suit against Murphy, Gerald O. Reynolds of Atlanta, Don C. Hartsfield of Florida, Joseph J. Ernest of Norcross, Clinton M. Day of St. Simons, Douglas G. Ballard of Alpharetta, Alan K. Arnold of Alpharetta and Steven M. Skow of Alpharetta.
According to the complaint, the defendants “failed to exercise that degree of diligence, care, judgment, skill and good faith which ordinarily prudent persons would have exercised under similar circumstances.”
The eight defendants have 21 days from the day after they receive the summons to respond.
All five branches of the bank were shut down by the FDIC in August 2008. Regions Bank took over, acquiring Integrity’s deposits and purchasing assets totaling about $34.4 million.
Murphy joined the bank’s board December 2000, but left in February 2008 because of time constraints. The others resigned between October 2006 and August 2008.
Skow, the organizer and founder of Integrity, was fired in August 2007.
Murphy said he had about 340,000 shares of Integrity stock, worth about $6.5 million at one point.
“All that is gone,” he said. “I wanted to do everything I could to make sure the bank survived. I had a vested interest.”
Though he resigned about six months before the FDIC seized the bank, he still maintained all of his shares.
“I couldn’t pull my money out because I was a director,” he said. “That would have been insider trading. I just had to ride it down. I didn’t have any choice.”
Murphy said even toward the end, he didn’t know the bank was in trouble.
“We knew we had some loans in trouble like every other bank because of the economy, but that was going on with everybody,” he said.
When the slowdown in the real estate market began in 2006, instead of restricting high-risk lending, the suit contends the bank’s leaders “took actions that masked the bank’s mounting problems.”
The bank suffered more than $70 million in losses, all of which the FDIC is seeking to recoup, plus interest and additional costs.
Among the greatest loan losses were Diversified Executive Myrtle Beach for $22.2 million, Urban Blu LLC, for more than $10 million and the Chrisley Family Trust at nearly $10 million, according to the suit.
With these and several other investments, the complaint maintains the bank violated rules, including circumventing Georgia’s legal lending limit, falsely reported property purchasing price and offering undocumented, unexplainable and inappropriate disbursement of loan proceeds.
The documents also allege the defendants failed to inform themselves and each other of the true condition of assets and liabilities and failed to establish or adhere to policies in response to the numerous and repeated warnings and criticisms of federal and state banking authorities and regulators.
The suit also contends the defendants failed to establish and maintain an allowance for loan and lease losses consistent with the bank’s high-risk lending practices and allowed loans to borrowers known to be poor credit risks or who were in obvious financial difficulty.
According to its policies, the FDIC only pursues lawsuits if they are cost-effective.
From 1986 to 2009, the FDIC and Resolution Trust Corporation collected about $6.2 billion from professional liability claims. They also spent about $1.5 billion to fund the claims and investigations.
In 2010 alone, the FDIC authorized suits against at least 109 people with damage claims of about $2.5 billion.
FDIC spokeswoman LaJuan Williams-Young said the increase is simply because “more banks have failed.”
The suit involving Murphy, however, is one of just three nationally against officers and directors of a failed bank, said Williams-Young, and the first of its kind in Georgia.