Friday, September 20, 2002

Shareholders file suit, seek class-action status against bank

By James McNair,
The Cincinnati Enquirer

        Already buffeted by lawsuits from homebuyers, contractors and banks, Peoples Bank of Northern Kentucky must now contend with a lawsuit from its shareholders.

        The lawsuit was filed Thursday in Campbell County Circuit Court on behalf of

        Jeffrey Eschenbach of Loveland, who owns 565 shares of Peoples stock. It seeks class-action status on behalf of the 40 or 50 people who own the 20 percent of Peoples' shares not owned by the bank's executives and directors. The stock, initially issued upon the bank's formation in 1992, is privately held and not traded.

        The suit, filed by Cincinnati lawyer Michael Brautigam, alleges that Peoples and its directors' “reckless conduct” and breach of fiduciary duties in the handling of Erpenbeck Co. home-sale closing proceeds caused the bank's assets to “evaporate,” damaging the value of its stock. It estimates that Peoples' stock fell to $10 million from $60 million in value after the bank's role in the Erpenbeck scandal came to light in April.

        The lawsuit also names former Peoples executives John Finnan and Marc Menne, who were forced to resign in April for having separate, undisclosed business dealings with Erpenbeck.

        Because the minority shareholders absorbed 20 percent of the alleged $50 million in lost value, the lawsuit asks for $10 million in compensatory damages. As one example, Mr. Brautigam said Peoples board member William Remke paid $38 a share in his $1 million purchase of bank stock from another shareholder in January.

        “My client made some inquiries as to whether there was a market for the stock at that price and he was laughed at,” Mr. Brautigam said.

        Mark Arnzen, who sits on Peoples' board and represents the bank on legal matters, could not be reached.

        Although the bank wasn't the biggest backer of the Erpenbeck residential construction empire, Peoples is at the vortex of the legal battle between Erpenbeck and its creditors because of its role as clearinghouse for checks remitted in the purchase of Erpenbeck-built homes.

        Erpenbeck employees deposited about $25 million in checks intended for construction lenders into Erpenbeck accounts at Peoples. About $16.8 million of the money is missing, and the unpaid banks continue to hold first mortgages on the homes. Peoples has agreed to cover the $16.8 million in hopes of persuading other banks and title companies involved to pay about $10.5 million. Accordingly, Peoples has already struck $6.25 million from its earnings statement.

        “Peoples Bank officers and directors failed to maintain internal controls to prevent these types of transactions, causing a substantial loss of value to the shareholders who were not officers and directors,” Mr. Brautigam said. “The next step is to determine what these defendants knew and when they knew it by placing them under oath in depositions.”

        Peoples is in the process of selling its banking operations, deposits and untainted loans to The Bank of Kentucky. The deal is subject to regulatory and shareholder approval. The proposal to be presented to shareholders in advance of their vote has not yet been disseminated.


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