Directors’ Personal Risk Not Increased, Says Attorney
MAUI, Hawaii — Much noise was made following the NCUA’s issuance of its regulation concerning the responsibilities of federal credit unions’ boards of directors last year. But Brian Witt, partner with Farleigh Wada Witt, despite some insurance providers’ assertions, said “I don’t think your personal risk is greatly increased.”
Witt said the WesCorp suit against the officers and directors provided some insight into the matter. Seven credit unions sued the WesCorp board and officers for negligence and gross negligence, and later the NCUA took over the case, adding fraud to the charges against the corporates’ former executives. He noted that while the case against the officers rages on, the judge dismissed the charges against the directors, finding that they had acted with an acceptable level of business judgment and no breach of fiduciary duty.
“It’s not the decision that you make but how you make those decisions,” Witt emphasized. If directors document how they arrived at their decision, they should be safe. He added that the business judgment rule, however, does not apply to officers.
Witt also cited the failure of New London Security FCU, following a $10 million fraud committed by the small credit unions’ investment adviser, as evidence that directors’ risks have not increase greatly. The NCUA sued Wells Fargo, the successor to A.G. Edwards where the adviser was from, which in turn sued the directors as did some members that suffered losses from uninsured shares at the credit union. The suits against the board of directors were dismissed, though one was simply for lack of timely filing.
Essentially, according to the business judgment rule, a court will not substitute its business judgment for that of the directors, even if they make a really bad decision, Witt explained.
But, the NCUA does not like to lose, Witt stated, and when it does, it changes the rules. In the WesCorp case, the NCUA moved to deny indemnification claims. In January, the agency issued new financial education requirements as well as limiting FCU director indemnification in certain situations. One of these situations is when a matter arises affecting “significant rights and interests of FCU members.”