REGIONS BANK FOUND LIABLE FOR FRAUD, ORDERED TO PAY LOCAL SEWER COMPANY MILLIONS
May 19, 2014
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.