Stockholder charges First Eastern with mismanagement

New allegations of mismanagement against First Eastern Corp., parent company of Peoples First National Bank of Hazleton and First Eastern Bank of Wilkes-Barre, have been filed by the firm's largest single stockholder, attorney Joseph Solfanelli.

In his original complaint, the Waverly lawyer alleged that First Eastern's directors caused him to lose about $5 million and then tried to conceal the bank's weakened financial condition.

In a 68-page amended complaint filed in federal court at Philadelphia, Solfanelli - who last year said he owns 195,000 shares of First Eastern - alleges proxy fraud violations in that the company failed to properly disclose financial deterioration of the bank's loan portfolio.

He also charges that the holding company failed to disclose mismanagement by the bank's directors and officers, resulting in the loss of nearly $200 million since 1990.

When First Eastern's President William Mainwaring, a defendant in the suit, was contacted Tuesday by the Standard-Speaker and asked to comment, he first asked if Solfanelli's lawyers had faxed the entire amended complaint to the newspaper.

When told they had, Mainwaring noted that several newspapers have been sent the lengthy complaint in its entirety.

"Apparently the lawyers are supplying the complaint report to the media," the bank executive said, "and are trying to present their case through the media rather than through the courts, where they started the action."

"It looks like this is a repeated effort to bring publicity that would force the bank to negotiate a settlement rather than have the court's process prevail."

Mainwaring said First Eastern's policy is not to reply to specific allegations at any time.

"However," he said, "we believe our directors and officers have always conducted themselves with high ethics and also in compliance with our corporate policy on conflicts of interest."

First Eastern officials cited an article in the Feb. 3 Wall Street Journal reporting the dismissal of a similar shareholders' suit against Citicorp, which alleged that management misrepresented Citicorp's financial health.

According to the article, approximately 200 lawsuits have been filed against banks in the past two years, including cases against Citicorp, Chase Manhattan Corp., Shawmut National Corp. and others.

A First Eastern spokesman said the article noted that, While banks view such lawsuits "as a thorn in their side, they do not expect they will have to pay money damages."

First Eastern, he said, expects to act promptly to dismiss Solfanelli's amended complaint.

When the banking industry was deregulated in 1980, the amended complaint states, First Eastern was a single bank with assets of $643 million and net income of $4.8 million.

"To keep any competitors at bay after the industry's deregulation," the complaint avers, "First Eastern embarked on an aggressive and unprecedented effort to expand its commercial banking franchises and diversify into finance-related fields.

"Pursuant to this strategy, First Eastern grew by acquiring a number of relatively smaller local banks and aggressively seeking out new lending business."

Peoples First National Bank of Hazleton was among the companies acquired.

By 1991, the complaint states, First Eastern was a multi-bank holding company whose assets had increased almost five-fold from 1980 to nearly $3 billion.

The company's rapid growth, however, came at substantial cost to shareholders, according to the complaint.

"By at least 1987 and certainly thereafter," says the complaint, "First Eastern had abandoned its historically conservative management approach and many of the principles of prudent lending."

As a result, the company "rapidly built a large portfolio of construction and development loans, among the riskiest types of loans made by banks."

"At no time," says the complaint, "did the individual defendants reveal the extent of First Eastern's speculative lending activities and the consequences thereof."

Solfanelli alleges that despite their knowledge of the situation, the defendants "intentionally and/or recklessly maintained inadequate reserves and established inadequate provisions for loan losses..."

"Despite management's purported confidence in 'future earnings performance,' credit losses continued to climb," according to the complaint.

"Company management also continued to minimize any negative information, moving quickly to falsely reassure the investment community that First Eastcrn was strong, healthy and insulated from the real estate and economic collapse plaguing other banks in the Northeast."

Meanwhile, the complaint alleges, the firm's earnings continued to plunge.

"Cashained and in a seemingly bottomless earnings, First Eastern halved its dividend on Aug. 21, 1991...(reporting) that the dividend cut was needed to replenish the company's equity capital," according to the complaint.

On or about Oct. 16, 1991, the complaint alleges, First Eastern reported publicly that its net income had plunged nearly 300 percent to a net loss of $8.1 million compared to a gain of $4.6 million in 1990's third quarter.

Solfanelli's complaint charges the firm with "ever-more creative means to avoid reporting loan losses to the public, including sham transactions, inflated appraisals, purported renegotiated terms and others."

"For example, First Eastern provided $14 million in financing to CBG Ltd., the developer of 'Valley of the Lakes' located in Luzerne and Schuylkill counties.

"In June 1991, the individual defendants caused First Eastern to restructure the $14 million loan in such a way as to conceal the borrower's default.

"To enable the defendants to do so, they secured a second lender who advanced $1.3 million to First Eastern to make it appear that the loan was 'current' when, in fact, it was not."

In order to get such new financing, the complaint avers, the board of directors authorized the company to subordinate its loan to the new loan.

The move, contends Solfanelli, put the entire obligation to First Eastern in jeopardy, yet concealing such risk of loss from First Eastern shareholders and the investing public.

"Thereafter, CBG Ltd. defaulted on its first payment due and, in August 1991, judgment was taken against it by the second lender," according to the complaint.

The complaint alleges that First Eastern directors approved $21 million in loans to LaBar Village, a retirement community in Stroudsburg, while knowing an appraisal "exceeds the true market value of the LaBar property by over 400 percent."

The complaint also claims that director William Cramer breached his bank role by representing LaBar Village in its dealings with First Eastern and not disclosing his personal interest in the LaBar development.

Solfanelli has asked the court to:

• Issue a mandatory inunction requiring First Eastern to implement court-supervised practices to prevent the recurrence of the allcged wrongdoing.
• Declare as null and void the results of re-elections of directors at the 1987 through 1991 annual meetings.
• Require a new election after full disclosure of all material facts in proxy materials prepared under court supervision.
• Award Solfanelli consequential and punitive damages.
• Order the defendants not to interfere in Solfanelli's contractural, business and social relationships.
• Award Solfanelli his attorneys' fees, accountants' and experts' fees and reasonable costs and expenses.

Solfanelli, caught up in a mortgage foreclosure dispute with First Eastern for several years, last year blamed his financial problems, including a filing for Chapter 11 protection fron creditors, on mismanagement at First Eastern.