Feds' suit targets state senator, other officials of failed bank

The 56-page lawsuit, filed in an Atlanta federal court, describes an uninhibited lending warehouse with slipshod controls and a loan committee of directors and executives who badly botched their duties. Integrity failed in August 2008.

Murphy, who was on the bank’s board from 2000 to 2008, was named last week as chairman of the Senate Banking and Financial Institutions Committee.

Murphy said Tuesday he knew nothing of the suit until The Atlanta Journal-Constitution called him about it. He said he had no plans to step down as the banking committee chairman.

“I have served on the banking committee for eight years in the House and the Senate,” he said. The committee deals with legislation aimed at banking law in Georgia, he added, and “has absolutely nothing to do with the FDIC and their decisions.”

During Integrity’s steroidal growth in the early 2000s,the defendants “increased the Bank’s already high risk exposure by implementing policies and procedures void of the most basic prudent lending controls and neglecting to adequately supervise lending personnel,” the FDIC suit says.

Integrity had numerous loans in violation of state lending limits, and its own internal loan policy permitted loans larger than allowed by state law, the suit asserts.

Other defendants are: Steven M. Skow, former Integrity president and CEO; Clinton M. Day, a former bank chairman; former senior lender Douglas G. Ballard; and former directors Alan K. Arnold, Joseph J. Ernest, Donald C. Hartsfield and Gerald O. Reynolds.

Day, a real estate developer, former state senator and one-time Republican candidate for lieutenant governor, was on the Senate banking committee during his stint in the chamber in the 1990s.

The defendants, all at times members of the bank’s loan committee, “caused the bank to pursue an unsustainable growth strategy designed to exploit the then-expanding ‘bubble’ in the residential and commercial real estate market,” the FDIC suit says.

The other defendants could not be reached for comment Tuesday.

Georgia leads the nation in bank failures since mid-2008, with 52. Integrity was among the first and largest. Its collapse cost the FDIC an estimated $211 million. Two former bank officers have pleaded guilty to federal criminal charges.

The suit is the first of an expected wave of litigation and civil penalties against insiders of some failed Georgia banks where the FDIC believes malfeasance, not simple mismanagement, was involved.

Murphy said he and other bank board members met with FDIC officials before he resigned in late 2008 as the bank crisis hit, and that the FDIC indicated to them that the board had acted responsibly.

Murphy said he had a personal stake in the bank and wanted it to prosper. He owned 340,000 share of Integrity stock, which at one time was worth about $6.5 million dollars, he said.

“All of that went away, and lot of my retirement,” Murphy said.

The FDIC brought the suit in relation to 21 individual loans that caused more than $70 million in losses to the bank. Among them were several soured loans to Atlanta real estate developer Lee Najjar, reportedly the “Big Poppa” of “Real Housewives of Atlanta” fame for his association with Kim Zolciak.

Integrity, which touted itself as a faith-based company and featured copies of the Ten Commandments in its branches, was founded in 2000. Over the next seven years its loan book mushroomed from $5.6 million to $900 million.

Like many banks that ran into trouble, Integrity profited on the northern metro’s once white-hot housing market. But it also made bets in real estate markets like Florida, South Carolina and California. Out-of-territory lending can be troublesome for small banks that don’t have a presence on the ground to make sure developers are meeting their goals.

The bank made profits of $23.2 million from 2004 to 2006.

The lawsuit describes inherent conflicts of interest at Integrity, with no senior officers minding the store. Lower level loan officers were responsible for both producing loans as well as quality control, and the senior lender and other loan officers were compensated by volume of loans made, not quality and performance.

As senior lender, Ballard was paid 10 percent of the fee income generated by the bank’s loan officers on top of his annual salary, the lawsuit notes. He made nearly $850,000 in total compensation 2007, according to SEC filings.

Ballard has already pleaded guilty to criminal charges of conspiracy to commit bank fraud, bribery and tax evasion, in connection to a borrower who funneled money, allegedly with Ballard’s help in return for kickbacks, into his private account to purchase such things as a private island in the Bahamas. Another bank officer pleaded guilty to insider trading for dumping shares when he learned of the allegations. Both Integrity executives await sentencing; the case against the borrower is pending.

Those cases are separate from the FDIC’s civil suit, which seeks to collect damages from the eight defendants.

Loans to Najjar and Paul D’Agnese, two of the bank’s biggest borrowers, were tens of millions above statutory lending limits, the FDIC suit asserts. Neither borrower is a defendant in the case. Najjar, for instance, had loans totaling $60.7 million with Integrity, more than two and a half times Integrity’s statutory cap.

The loans resulted in more than $12 millions in losses to the bank.

The bank also masked losses on development loans by using “interest reserves,” the suit claims. The reserves are pools of cash provided by the bank to pay itself the interest developers owed. The practice ultimately made loans that weren’t being paid look as though they were.

The suit says directors acknowledged rising loan delinquencies as early as 2005, but instead of heeding warning signs of a housing market slump and “repeated regulator warnings, instead continued to increase the volume of speculative lending.”

The suit said by the time the defendants received the bank’s 2007 regulatory review, “the die was cast for the ultimate collapse of Integrity. Only then did the Defendants begin to implement the corrective measures urged for years by regulators and auditors.”

Murphy was named to the Senate banking panel by the newly formed Senate Committee on Assignments. One member, Sen. Chip Rogers, R-Woostock, said Tuesday he will reserve judgment.

“These are allegations and anybody can allege anything in a lawsuit.. . . I don’t take allegations as worth anything more than the paper they are printed on.”

Senate President Pro Tem Tommie Williams, R-Lyons, also a member of the Committee on Assignments, said Murphy asked to be appointed as chairman of either the banking panel or the Insurance and Labor Committee. Williams said he knew Murphy had worked with the failed bank but had no idea further trouble was brewing.

Williams said the fact that Murphy had been a board member at a failed bank was not enough to disqualify him from heading the committee.

“How many banks have failed in Georgia?” Williams asked.

Contributing: Arielle Kass and Rachel Tobin