Renovations at the Cloister hotel resort, above, ran over budget and added to Sea Island Co.'s difficulty in making payments on several loans approved by Synovus Financial Corp.
Renovations at the Cloister hotel resort, above, ran over budget and added to Sea Island Co.’s difficulty in making payments on several loans approved by Synovus Financial Corp. ()

A Georgia bank that made more than $400 million in loans to a Sea Island real estate company that collapsed in bankruptcy has agreed to settle a suit with bank shareholders for $11.75 million.

Attorneys representing pension funds that held stock in Columbus-based Synovus Financial Corp. when the Sea Island Co. defaulted on the loans have filed a motion seeking preliminary approval of a class action settlement in the stock fraud case, which was filed in federal court in Atlanta in 2009.

The class of plaintiffs include shareholders who bought Synovus common stock between Oct. 26, 2007, and April 22, 2009. Senior Judge J. Owen Forrester issued an order certifying the class last year.

If he approves it, the settlement would resolve all claims against Synovus and co-defendants Richard Anthony, the bank’s former board chairman, president and CEO; Frederick Green III, a board director, president and COO who resigned in May 2009; and Mark Holladay, an executive vice president and the bank’s current chief risk officer.

The settlement agreement does not include any admissions of fault by Synovus or bank corporate officers named in the suit.

The settlement agreement resulted from mediation and “arms’-length negotiations” by lawyers for several pension funds that had invested in Synovus—among them the City of Pompano Beach General Employees’ Retirement System, the Laborers Pension Fund of Central and Eastern Canada, and the Sheet Metal Workers’ National Pension Fund, according to court documents filed in the case.

The deal dictates that the $11.75 million cash settlement will cover not only damages to Synovus shareholders but also the plaintiffs’ attorney fees and costs. Shareholder attorneys are seeking an estimated 30 percent of funds, with interest for fees and reimbursement of firm expenses incurred during the litigation. A team of lawyers from South Carolina’s Motley Rice and from national securities firm Robbins Geller Rudman & Dowd carved out the preliminary agreement on behalf of the shareholders with Synovus’ counsel at Atlanta’s Alston & Bird.

Attorneys representing the shareholders called the settlement “an excellent result for the class” in their motion.

Motley Rice partner James Hughes on Wednesday said, “A good settlement is one in which no one is happy.”

“We wish we could have gotten more. The bank wished it could have paid less.”

Hughes said he doesn’t yet have an estimate on how many shareholders will be included in the class.

Robbins Geller attorneys could not be reached for comment.

Alston & Bird attorneys John Latham and Brandon Williams, who defended Synovus, and a Synovus spokesman also could not be reached.

The suit accused Synovus of violating federal securities laws in an effort to artificially inflate the company’s stock price. The suit said Synovus hid from the public the extent of its lending relationship with the Sea Island Co., the real estate development company’s increasingly dire financial condition as the housing market began collapsing in 2007 and the growing risk that Sea Island would not be able to make payments on hundreds of millions of dollars in loans.

Before its 2010 bankruptcy, the Sea Island Co. owned and operated island resorts, developing and selling real estate on Sea Island and other coastal properties. Those properties included the Cloister, Sea Island’s historic luxury hotel.

The suit claimed that a close personal relationship between the CEOs of Synovus and the Sea Island Co.—each of whom sat on the other’s board of directors—led to “insider loans that were quickly approved with little more than a handshake on the ‘good ol’ boys’ system.”

The suit claimed that the loans—including three loans totaling more than $220 million and a revolving line of credit that eventually reached $235 million—”were quickly approved … with minimal oversight,” even though Sea Island from the beginning had difficulty making timely payments, while its renovation projects, particularly of the Cloister, soon ran over budget.

Bank officers at Synovus received “detailed monthly information concerning Sea Island’s deteriorating financial conditions,” according to the suit. But during quarterly calls with market analysts, Synovus executives chose to make what the suit described as “false and misleading statements and omissions” in order to hide its increasingly precarious stake in Sea Island.

According to the preliminary settlement agreement, the parties did not agree to settle the case until after Forrester ruled on the defendants’ second motion to dismiss the plaintiff pension funds’ claims.

In that 2012 order, Forrester refused to dismiss the case. But his findings clearly identified weaknesses in both the plaintiffs’ and the defendants’ positions.

To bolster their case that Synovus had engaged in securities fraud in order to hide from market analysts, shareholders’ lawyers pointed to a series of positive, reassuring statements that bank executives made publicly beginning in fall 2007 that Sea Island loans were performing and current when they clearly knew otherwise.

During those conference calls, bank executives had claimed that Sea Island “was doing very well,” that any weakness in the Columbus bank’s loan portfolio was confined to Atlanta and west Florida, that its hotel sector was growing, and that “sales are on target, their occupancies in the resorts are high” and that nothing in Sea Island’s financials generated any lack of confidence in the mortgagees.

In his 2012 dismissal order, Forrester wrote that Synovus “had far greater exposures to losses as a result of its loans to Sea Island than the company told investors, and Synovus’ problematic and risky loans in Georgia were not confined to Atlanta as defendants stated.”

Citing his earlier order in the case, Forrester also said that he recognized, “There is no general obligation on the part of a bank to tell analysts where all of the bank’s problems lie. However, once a bank chooses to suggest that there are not problems by means of stating that the loan problems lie in other geographic markets, the bank’s lack of discussion about Sea Island could tend to move into the category of a material omission.”

“The court finds, therefore that plaintiffs have sufficiently alleged false statements or omissions on the theory that the Sea Island loan had a potential great loss exposure that was not disclosed in a meaningful manner.”

The plaintiff shareholders also alleged that when news broke that Sea Island in 2009 was defaulting on its loan portfolio, Synovus’ stock price plummeted more than 26 percent.

But Forrester said that to make their case, Synovus shareholders and their lawyers needed to do more than simply allege Synovus’ stock price fell after Sea Island’s loan defaults became public. They must also allege “some facts which distinguish the movement of the stock plaintiffs contend happened because of fraudulent misstatements from the movement of stock that happened for other economic reasons obvious during the class period”—including collapse of the housing market.

After reviewing Synovus’ stock prices, Forrester noted that Synovus stock actually reached its lowest price in early 2009, “prior to the market learning of the scope of the Sea Island loan problem.”

The judge said: “The stock began to experience its greatest losses in November 2008, at a time at which plaintiffs did not allege any market revelations and at a time during which financial institutions were experiencing severe difficulties due to the general economic downturn.”

“These movements are not in lockstep with plaintiffs’ allegations of misstatements and revelations of truth,” Forrester said. “It is particularly problematic for plaintiffs’ theory that the stock reaches its low point in early March 2009. Under plaintiffs’ theory, the stock should be held artificially high while material information is being withheld from the market. … The stock should only begin to drop on April 22, 2009.”

Forrester also said that shareholder lawyers were trying “to fudge through the reality of the stock prices” by contending that some information questioning the viability of the Sea Island loans began leaking out as early as summer 2008. Said Forrester: “This theory does not fit reality in that the stock generally held at a certain range from June 2008 through November 2008,” when it began declining.”

“What plaintiffs must eventually prove is that the drop [in Synovus's stock price] from April 22 to April 23 is linked to the nonperforming loan announcement. That analysis … cannot be done in a vacuum and cannot ignore the trends and history in stock prices coming into the announcement which under plaintiffs’ theory allowed the market to fully understand the risk.”