Florida Court Allows Suit on Alleged CDO Misstatements

By Chris Bruce

Sept. 2 — A Florida appeals court Sept. 2 said shareholders may file direct claims that two directors misled them on the risks of collateralized debt obligations (CDOs) purchased by a bank unit that later failed.

A trial court dismissed the suit by Frank Strazzulla and others against Riverside Banking Co. of Fort Pierce, Fla., saying their claims should have been brought as a derivative action—a suit on behalf of the company itself.

The Florida Fourth District Court of Appeal reversed, allowing the shareholders to sue directly.

The decision clarifies what the court said is a “murky” question under Florida law—when individual shareholders may sue directly in their individual capacity, and when they must file a derivative action.

The court adopted a two-prong test requiring shareholders to allege both a direct harm and a special injury—injury separate and distinct from harm allegedly suffered by other shareholders.

Through its attorney, Curtis Alva of the Law Office of Curtis Alva in Jupiter, Fla., Riverside Banking Co. Sept. 2 said it disagrees with the decision and is considering a motion for rehearing.

Bank Holdings Questioned

The bank unit, Riverside National Bank, purchased large amounts of CDOs in the mid-2000s.

Shareholders raised questions about the CDOs following the adjournment of a March 2008 shareholders meeting of the holding company, Riverside Banking Co., when they engaged two directors in conversation.

According to the court, plaintiffs said the directors denied that the bank held any high-risk asset-backed securities. That statement carried significant weight, according to the plaintiffs, because it came as they were still absorbing news at that time about the collapse of Bear Stearns hedge funds that held CDOs, and what similar investments might mean for them.

Strazzulla and others took losses on their shares when the bank failed and was seized by federal regulators in 2010.

They claimed that, but for the alleged misstatements by the directors, they would have sold their shares and avoided their losses.

Special Injury Highlighted

The plaintiffs are represented by Casey Walker of Murphy & Walker in Vero Beach, Fla.

In a Sept. 2 telephone interview, Walker said the decision is important because the court distinguished the injury by these shareholders from harm to other shareholders.

Although all shareholders are injured in cases of mismanagement or other shortcomings, Walker said, in this case the plaintiffs focused on statements made to them personally by the directors, and how it affected their own investment decisions.

“That, I think, is a distinction that is not made in many of the cases in this area,” Walker told Bloomberg BNA.

To contact the reporter on this story: Chris Bruce in Washington at cbruce@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com

The ruling is at http://www.bloomberglaw.com/public/document/FRANK_J_STRAZZULLA_individually_CHERI_D_STRAZZULLA_individ_ally_a.