Mobile, Ala. – Following a week-long trial in January, an arbitration panel has found that Regions Bank bilked a local sewer company out of millions of dollars. The panel concluded that Regions Bank defrauded Baldwin County Sewer by selling the company a series of complex, interest rate swaps. Regions Bank was ordered to provide Baldwin County Sewer with nearly $10 million in compensation. The case is believed to be one of the first cases in the country where a bank has been held liable for fraud in connection with the sale of an interest rate swap.

The interest rate swaps were part of a financing package that Regions Bank began marketing to small companies, churches, and non-profits in the early 2000s. As part of the financing packages, customers issued bonds that carried a variable interest rate. These bonds were more profitable for the bank than traditional loans. Baldwin County Sewer issued four series of these bonds. It also purchased three interest rate swaps from Regions Bank. Regions Bank told Baldwin County Sewer that the interest rate swaps would fix the sewer company’s interest rate. However, when the market crashed in 2008, the sewer company’s interest rate nearly doubled.

The arbitration panel found there was a “pervasive failure” within Regions Bank to communicate the true risks of interest rate swaps to its customers and that these failures constituted a “material misrepresentation.”

Regions Bank’s marketing and advertising campaigns were critical to the panel’s award. The panel emphasized that Regions Bank “through its advertising, repeatedly held itself out to the community as a ‘trusted advisor’” and “assumed the relationship of an advisor, as well as being a creditor.”

Billy Bonner, an attorney for Baldwin County Sewer and a partner at the Mobile, Alabama law firm of Cunningham Bounds, LLC, described the arbitration panel’s award as “unprecedented.” In these types of cases, “banks typically argue that the legalese in their loan documents bars a customer’s fraud claims,” said Bonner, “but here the panel did not buy that argument. The panel held Regions Bank accountable for the misrepresentations it made to its customer.”

Regions Bank had a limited right to appeal the award, but elected to satisfy the award in full.

Bonner and his partner, Skip Finkbohner, both of Cunningham Bounds, LLC, served as lead co-counsel in the case.

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