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Robert J. Levy, Derivatively On Behalf of Suffolk Bancorp v. J. Gordon Huszagh

September 28, 2012

ROBERT J. LEVY, DERIVATIVELY ON BEHALF OF SUFFOLK BANCORP., PLAINTIFF,
v.
J. GORDON HUSZAGH, STACEY L. MORAN, TERENCE X. MEYER, THOMAS S. KOHLMANN, EDGAR F. GOODALE, JOSEPH A. GAVIOLA, JOHN D. STARK JR., SUSAN V.B. O'SHEA, JAMES E. DANOWSKI, AND DAVID A. KANDELL, DEFENDANTS, AND SUFFOLK BANCORP., A NEW YORK CORPORATION, NOMINAL DEFENDANT.



The opinion of the court was delivered by: Seybert, District Judge:

MEMORANDUM & ORDER

Plaintiff Robert J. Levy filed this shareholder derivative action against certain officers and directors of Suffolk Bancorp ("Suffolk") alleging certain improprieties in how Suffolk calculated and stated allowances for loan losses. Pending before the Court is Defendants' motion to dismiss for Plaintiff's failure to make a proper demand on Suffolk's board of directors. For the following reasons, this motion is GRANTED.

BACKGROUND

Suffolk is a bank holding company whose principal subsidiary is Suffolk County National Bank (the "Bank"), a full-service banking operation on Long Island, New York. At all relevant times, Plaintiff was a Suffolk shareholder. (Compl. ¶¶ 12-13.)

Defendants were directors and/or officers of Suffolk during the relevant period. (Id. ¶¶ 14-23.) As is pertinent here, J. Gordon Huszagh is the president and chief executive of both Suffolk and the Bank. Terence Meyer is a director of Suffolk and the Bank, and he is also a partner in the law firm Meyer, Meyer & Keneally, which receives significant business from the Bank. (Id. ¶ 15.) Four defendants, including Meyer, are alleged to have made suspiciously-timed trades of Suffolk stock. (See id. ¶¶ 14-23.)

Plaintiff asserts that Defendants breached their duties of loyalty and good faith by allowing or causing Suffolk to issue improper statements about the Bank's allowance for loan losses. (E.g., id. ¶ 34.) Under applicable accounting rules, Suffolk was required to take allowances for probable losses on its loans. The allowance is calculated based on management's estimate of the total amount of risk in a bank's loan portfolio. (Id. ¶ 42.) The figure should account for "impaired" loans, which are loans "for which it is probable that the lender will not collect all amounts due under the contractual terms of the loan." (Id.) Based on the allegations detailed below, Plaintiff asserts that Suffolk understated its loan loss allowance and failed to disclose significant risks of loan losses in its financial statements. (Id. ¶ 44.)

I. Alleged Improper Calculations and Statements On March 12, 2010, Suffolk issued its Form 10-K for

fiscal year 2009. This document reported that Suffolk's loan loss allowance was $9,051,000 as of January 2009 and $12,333,000 as of December 31, 2009. According to the Form 10-K, Suffolk believed that this loan allowance figure was high enough to absorb the Bank's estimated credit losses. (Id. ¶ 45.)

On April 13, 2010, Suffolk released its earnings for the first quarter of 2010. The release stated that net income was down but that, "[i]n many respects, our balance sheet is stronger than it was at this time last year." (Id. ¶ 46.) The release stated that Suffolk's allowance for loan losses was $14,994,000. This figure represented a 49.6 percent increase over the same quarter from the previous year. (Id.)

On April 26, 2010, Suffolk issued a corrected earnings release for the first quarter of 2010. (Id. ¶ 47.) The release stated that Suffolk had increased its loan loss allowance from $14,994,000 to $21,132,000. (Id.) Notwithstanding this significant correction, Plaintiff maintains that Suffolk was still not calculating its loss allowance appropriately. (Id.)

On May 10, 2010, Suffolk filed its Form 10-Q for the first quarter of 2010. The filing reiterated that Suffolk's allowance for loan losses was $21,132,000, and it further stated that "there has been no significant change in Suffolk's internal controls over financial reporting that occurred during Suffolk's most recent fiscal quarter that has materially affected, or is reasonably likely to materially effect [sic], Suffolk's internal controls over financial reporting." (Id. ¶ 48.)

On July 15, 2010, Suffolk issued its earnings release for the second quarter of 2010. The release stated that Suffolk's earnings were down and its loan loss allowance was $20,866,000, a more than ninety percent increase over the second quarter of 2009. (Id. ¶ 49.) Similar to Suffolk's past statements, the release mentioned that the loan allowance "adequately provides for the risks we now face in our loan portfolio." (Id.)

On August 4, 2010, Suffolk filed its Form 10-Q for the second quarter of 2010. The filing contained Suffolk's second quarter earnings and loss allowance figures, and it stated that there had been no significant changes in Suffolk's internal controls over its financial reporting. (Id. ¶ 50.)

On October 15, 2010, Suffolk issued its earnings release for the third quarter of 2010. Earnings were down again, and the loan loss allowance had been increased to $21,964,000. (Id. ΒΆ 51.) In the release, Defendant Huszagh noted that the Bank's non-performing loans were 3.2 percent of its portfolio, a figure that "compare[s] ...


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