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CU System
NCUA case questioned but judge allows amended complaint
LOS ANGELES (2/3/11)--A U.S. District Court judge who tentatively ruled in favor of former directors of Western Corporate FCU (WesCorp) in the National Credit Union Administration's (NCUA) lawsuit on the corporate's investments will allow NCUA to file yet another amended complaint. However, he said the "end-result might very well be the same." To win its $6.8 billion lawsuit alleging breach of fiduciary duty and gross negligence in the U.S. District Court in Los Angeles, NCUA must prove that the directors are not protected by California's Business Judgment Rule. The rule provides directors "broad discretion in making corporate decisions and [allows] these decisions to be made without judicial second-guessing in hindsight," U.S. District Judge George Wu wrote in December, when he tentatively dismissed the case. That tentative ruling generally found in favor of the directors but left open the possibility of NCUA filing an amended complaint if the agency filed an additional "offer" of facts. NCUA's amended "offer," filed Jan. 10, proposed allegations in three categories related to budget and interest-rate spreads; concentration limits and option adjustable-rate mortgages; and damages. The judge's latest tentative ruling will allow the agency to file such an amended complaint based on its "offer," after which another round of legal arguments are expected. In the latest tentative ruling, the court noted "the conclusory allegations of improper motives or conflict of interest are insufficient, as are general allegations of a failure to conduct an 'active investigation, in the absence of (1) allegations of facts which would reasonably call for such an investigation, or (2) allegations of facts which would have been discovered by a reasonable investigation and would have been material to the questioned exercise of business judgment." The only allegations that "even come close to satisfying" are "actions which are 'clearly unreasonable under the circumstances known to them at the time' or are the product of a failure to conduct an 'active investigation,'" this week's ruling said. These allegations "are not significantly different than what were already included" in NCUA's original complaint. A "seemingly gigantic problem with plaintiff's case is that WesCorp never invested in securities graded lower than AA," he said. He noted that if the court would conclude NCUA had overcome the business judgment rule, it "would seemingly only do so with respect to those director defendants who were members of the budget committee" but then questioned "why a budget committee should be held responsible for investment decisions." NCUA's criticism of option ARM mortgage-backed securities is "irrelevant given the business judgment rule because there are no allegations that the director defendants were aware at the time any investment decisions were made of the details underlying the incredibly weak foundation for those securities at the time, or that such information was readily available to them," Wu added. In light of the fact "that it would be difficult to conclude" that NCUA's "amendment would be clearly futile, a fuller consideration of the adequacy of such allegations is arguably warranted," Wu said in allowing NCUA to amend its first claim. However, depending on the materials considered in new briefings, "the end-result might very well be the same." NCUA must file its second amended complaint by Feb. 22, according to the court documents, which were made public Wednesday.


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