When the federal government took over operations at Old Stone Bank Corporation in 1993 Beverly Najarian was a vice president in retail banking.
The West Greenwich resident had worked at the bank for nearly 42 years, and had invested heavily – buying nearly 20,000 shares of the company stock – in what she thought was a sound business.
Now she and more than 25,000 other Rhode Islanders invested in Old Stone Corporation find themselves holding stock worth less than the price of a can of soda, and are embroiled in a lawsuit against the government that has languished on the docket of federal claims court for nearly a decade.
Seifert Systems Invests in Energy Efficiency to Strengthen Operations
For manufacturers, energy is more than just another operating expense. It plays a critical role…
Learn More
The suit alleges that the once-thriving financial institution was enticed by the federal government to purchase smaller savings and loans, and was devastated when the government changed its accounting policies pertaining to how the company could write off such acquisitions.
The result, said Bernard V. Buonanno Jr., an attorney with Edwards & Angell and an Old Stone board member, is a breach of contract.
“In the 1980s the government was overrun with failing smaller banks and they came to banks like Old Stone and said if you take such and such bank over, you can write it off over 40 years,” he said. “In 1989 they changed that and Old Stone was immediately out of compliance. All of a sudden it had to sell divisions that were profitable. It wasn’t enough. In January of 1993 the feds came in and took us over.”
Old Stone’s case was one of 120 filed in the Court of Federal Claims in the early 1990s. Today there are more than 150 such cases pending, each individual lawsuits, but all arising, Buonanno said, from the same situation.
According to a summary of the case put together by Edwards & Angell, the Federal Home Loan Bank Board, predecessor to today’s Office of Thrift Supervision, and its affiliated deposit insurer the Federal Saving and Loan Insurance Corporation (FSLIC) found themselves losing millions of dollars in the early 1980s as savings and loan companies across the country continued to be under-capitalized by a high interest rate environment.
In order to prevent a huge drain on the Federal Deposit Insurance System, the FSLIC began marketing troubled savings and loan companies to healthier institutions. The organization enticed these healthier entities by allowing them to book the difference between the cash consideration being paid and the company’s market value, known as goodwill, as an asset, and to write-off that asset over 30 years. In addition, the FSLIC allowed banks to use “capital credit” which bolstered capital accounts and overall growth.
But the incentives were short lived. By 1989 the government had passed the Financial Institutions Reform, Recovery Act, and banks like Old Stone were required to write off the capital credit and goodwill on a sharply accelerated basis.
“This was a bank that had no misdealings,” Najarian said. “It was just a question of changes in the accounting rules. As a result of that we lost everything.”
The once thriving institution that at one time boasted assets of $4.4 billion and a coast-to-coast franchise, has been reduced to one surviving subsidiary – Old Stone Securities, a brokerage service based in Providence. The banking arm of the company was sold to Citizens in 1994. Value of the company stock has plummeted to its lowest level in history – 41 cents per share.
“You have to understand, we were so comfortable and confident with our bank, many of us through a profit sharing program had a decent investment in this company,” Najarian said. “In today’s economy I know they tell you not to invest that much in one company, or especially a company that you work for, but that wasn’t the case then. This has definitely had a long-term curb on what I thought I would be doing.”
And while Buonanno said a financial restitution is an ultimate goal of the lawsuit, right now shareholders are most concerned about being heard. So much so that they have written the Rhode Island delegation in Washington D.C. for help.
“We are at our wits end on how to get a judge to hear the case,” he said. “We are frustrated. We get constant calls from people wanting to know what’s happening with the case. Many of these people have just a few shares, but some have quite a few. It’s at a point now where we feel our case should be heard. These shareholders are getting older, they are getting upset because they don’t have their money.”
Some hope came in 1996 when the Supreme Court found the government liable in a similar case, but since then few other cases have been heard.
“I thought two or three years ago that we were going to court,” Najarian said. “Now we stop asking, and the attorneys have stopped telling us when they think it will happen. They feel foolish and so do we.”
For the complete current issue, visit our subscription Web site, or call (401) 273-2201, ext. 227 or 234.
