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Originally published July 5, 2011 at 4:15 PM | Page modified July 6, 2011 at 11:14 AM

Former WaMu execs, FDIC halt settlement talks, attorney says

Talks have ended between three former Washington Mutual executives and the federal government over possible settlement of a lawsuit alleging...

Seattle Times business reporter

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Talks have ended between three former Washington Mutual executives and the federal government over possible settlement of a lawsuit alleging that their "gross mismanagement" led to the giant thrift's demise, a lawyer for one said Monday.

"We were attempting settlement and we have not succeeded," said Barry Kaplan, attorney for former WaMu CEO Kerry Killinger. He declined to comment further on why the talks failed or whether any further discussions are planned.

The Federal Deposit Insurance Corp. in March sued Killinger; former WaMu Chief Operating Officer Stephen Rotella; and David Schneider, former head of WaMu's home-loans division.

The agency accused them of recklessly pushing WaMu into making billions in high-risk home loans, despite knowing the nation was in an unprecedented housing bubble and being warned that the company was unprepared to handle that level of risk.

Killinger's wife, Linda, and Rotella's wife, Esther, also are named in the suit, for allegedly helping their husbands transfer homes and cash into trusts to keep them out of creditors' hands.

WaMu collapsed in September 2008 after it had accumulated billions of dollars in losses — with more in the pipeline because of massive quantities of bad mortgage loans on its books — and had all but exhausted potential sources of new capital. It was the largest bank failure in U.S. history.

The FDIC took over Washington Mutual Bank, WaMu's main operating subsidiary, and sold it to JPMorgan Chase for $1.9 billion. WaMu itself remain mired in bankruptcy, as different creditor groups quarrel over its remaining assets.

The FDIC, which sued in its capacity as receiver for WaMu's retail-banking subsidiary, did not specify the damages it was seeking.

On Friday the defendants all asked federal Judge Marsha Pechman to dismiss the FDIC's suit, arguing they're protected by a legal doctrine called the "business judgment" rule.

The rule, according to Killinger's motion, "shields officers and directors from personal liability for business decisions made in good faith, on an informed basis, and absent fraud or dishonesty. ... [It] recognizes that corporate officers are hired to exercise business judgment in a complex world of competing risks and returns. Officers are obligated to make good-faith, informed decisions, but they are not required to make decisions that plaintiffs or courts would characterize, after the fact, as 'correct.' "

The two sides had been negotiating to settle the suit. Last month, the prospect of a deal seemed likely enough that Pechman — who is handling other WaMu-related litigation, including an investors' class-action suit that settled Friday, in addition to the FDIC suit — gave the parties two additional weeks to negotiate. That period expired July 1.

The FDIC and the defendants will exchange arguments over the motion to dismiss over the next few months. A hearing before Pechman isn't likely before September or October, Kaplan said.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com

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