Bank Hit with Stock-Drop Charges

Montgomery, Alabama-based Colonial Bank, closed by authorities in August, has been hit with a stock-drop lawsuit by a retirement plan participant.

Lora McKay claims the bank violated its Employee Retirement Income Security Act (ERISA) fiduciary responsibilities by having company stock as a plan option despite suffering major losses from the nation’s mortgage crisis. The suit charges that because of the fiduciary breach, bank employees lost $50 million in retirement assets after the bank’s stock gave up 99.7% of its value.

McKay alleges the ERISA breach took place from April 18, 2007, to the present and requests that the suit be certified as a class action to represent other employees with company stock investments.

McKay charged the stock was artificially inflated during the named period because the bank:

  • engaged in high-risk loan origination, mortgage warehouse lending, and investment practices;
  • lacked adequate internal and financial controls;
  • grossly mismanaged risk and liquidity;
  • engaged in improper accounting practices; and
  • did not adequately set up a reserve for loan losses.

The complaint asserts that despite the fiduciaries’ knowledge of Colonial Bank’s risky lending practices, they continued to present a positive outlook regarding the bank’s stock as an investment for employees.

The case is McKay v. Colonial BancGroup Inc., M.D. Ala., No. 2:09-cv-00806.