A northeastern Pennsylvania regional bank, which was accused of providing dubious loans to board members—among them Michael T. Conahan, the former Luzerne County Court of Common Pleas president judge who is now incarcerated after his conviction on charges stemming from the “kids for cash” scandal—has agreed to settle a shareholder derivative claim for $5 million.
The settlement in Gray v. DeNaples will end the case against Dunmore, Pa.-based First National Community Bancorp and nine named individuals, including Conahan, who, according to the complaint, served as a director of the bank until 2008. Conahan was sentenced in 2011 to 17-and-a-half years after he pleaded guilty to one count of racketeering for accepting kickbacks from developers.
The settlement includes an agreement for the bank to make several governance changes as well.
According to plaintiffs counsel, Joseph R. Solfanelli of O’Malley & Langan Law Offices, the stipulation of settlement was filed Thursday. The plaintiffs will consider whether to continue to further pursue a claim against Demetrius & Co., a named defendant in the case that was allegedly the auditing firm when the loans were allegedly doled out.
“This settlement addresses all the issues raised in our complaint,” Solfanelli said. “The real value is in the corporate governance changes. It will change significantly the way the bank is operating and will have a tremendous impact on shareholder value.”
The defendants denied any wrongdoing in the stipulation of settlement.
The plaintiffs’ complaint alleges that the board members made faulty loans outside the bank’s usual lending practice and geographical area, and then falsely reported the activity, causing millions in losses. Lori Gray filed the derivative claim on behalf of the bank’s shareholders in the Lackawanna County Court of Common Pleas, and alleged breaches of fiduciary duties, abuse of control, corporate waste, unjust enrichment, professional negligence, negligent misrepresentation and breach of contract.
According to the complaint, among other allegations, the bank covered up more than $30 million in losses in 2009. The bank allegedly reported a net loss of $11.3 million in 2009, but later reports determined that the bank actually suffered a loss of more than $44 million, the complaint said.
The board members were also allegedly involved in “gross self-dealing” and “reckless attempts to cover up their wrongdoing,” according to the complaint.
The complaint also alleged that Conahan and another of the bank’s directors, Michael J. Cestone Jr., guaranteed three bank loans totaling $3.4 million. The loans allegedly went to a housing project on which Cestone was the builder. The loan allegedly went into default and a judgment was brought against Cestone and his wife; however, the bank allegedly did not attempt to execute on the judgment until 2012.
The complaint also mentioned that by 2009, defendant William P. Conaboy, also a bank director, had guaranteed $12.4 million in outstanding loans to, among other things, companies that he partially owned. By June 30, 2011, the complaint said, $10.3 million of those loans were still outstanding.
Along with the money, the settlement stipulates that the bank will appoint two independent board members, will adopt a new Risk Management Charter, appoint a chief risk management officer and enhance compliance with a consent order issued by the Office of the Comptroller of the Currency in September 2010.
The settlement remains subject to approval by the court.
According to the stipulation of settlement, the agreement was negotiated with the assistance of former federal Chief Judge Edward N. Cahn. He recommended $2.5 million be paid to the plaintiff’s counsel for attorney fees and reimbursement expenses.
Attorneys Michael F. Brown of Drinker Biddle & Reath, who, along with Gregory P. Miller, represented the bank; and Mark B. Sheppard of Montgomery McCracken Walker & Rhoads, who, along with Kingston, Pa., attorney Philip Gelso, represented defendant David Lombardi, declined to comment beyond the public statement in the filings.
Paul K. Leary and Patrick J. O’Connor of Cozen O’Connor represented the independent board members and could not immediately provide a further comment.