Colonial faces lawsuit

Colonial Bancgroup (CNB) the holding company for Colonial Bank is facing a lawsuit alleging the company and certain of its officers lied to investors (or in the language of lawyers, made false and misleading statements.)

According to lawyers handling the case, “The Complaint alleges that the Defendants violated the federal securities laws by disseminating materially false and misleading statements contained in a press release and a related filing with the Securities and Exchange Commission concerning the Company’s participation in the Troubled Asset Relief Program (“TARP”). Specifically, during the trading day on December 2, 2008, Colonial issued a press release announcing that it had received TARP funding approval for an injection of $550 million. The press release also detailed the purported terms of the TARP funding with the United States Treasury Department including that the government would received preferred stock as well as warrants to purchase Colonial common stock. In response to that announcement Colonial’s stock price surged over 50 percent from its $2 per share close on December 1, 2008 to close at $3.08 per share on December 2, 2008.

“However, the Defendants did not disclose that Colonial would be required to raise additional outside capital of $300 million before it could receive the $550 million in TARP funding. Defendants belatedly disclosed that material fact after the markets closed on January 27, 2009. In response to that announcement, Colonial’s stock price plunged from its close of $1.58 on January 27, 2009 to $0.85 the next trading — a 46% drop — on extraordinary volume exceeding 26 million shares.”

Klafter Olsen & Lesser LLP filed the lawsuit in U.S. District Court for the Middle District of Alabama.

A lawsuit seems a natural outgrowth of Colonial’s omission. According to a Birmingham Business Journal report from February 6, analysts were upset by the failure of Colonial’s leadership to mention the strings attached to the TARP money. From the Birmingham Business Journal, “banking analyst Jaime Peters said she felt ‘deceived’ by the bank because it withheld important information.”

If a professional charged with following a bank felt deceived, you can understand how investors might feel that way too. Auburn’s Bobby Lowder and his Colonial Bank just can’t stay out of the headlines these days. Will things get better for the Alabama bank, or will it get worse?