Bank looks to relief in appeal

1st Union/Wachovia could easily pay, analysts report

March 28, 2002|By Andrea K. Walker | Andrea K. Walker,SUN STAFF

A $276 million judgment against First Union National Bank will not hurt the company financially and is likely to be significantly reduced or even thrown out completely on appeal, legal and industry experts said yesterday.

A Baltimore jury, in one of the largest legal judgments in Maryland history, awarded the money Tuesday to Scott Steele, a Catonsville man who accused the bank of using ideas from his software company to start a $2.4 billion business venture.

"I don't think it will impact the stock that much," said Tom Burnett, an analyst with Merger Insight, an affiliate of the New York brokerage firm Wall Street Access Inc. "You have to be patient because, historically, there are very often reductions or reversals on appeal."

Bank officials said they are still deciding what steps to take next, but have vowed to challenge the decision. Their options include asking the judge to reduce the award, sending the case to an appeals court or negotiating a settlement with Steele.

Analysts said the bank's revenues shouldn't suffer. The case could take years to move through court proceedings.

"This damage award is far from being paid," said Todd Davenport, an analyst and editor of banking publications at SNL Securities. "The company has asserted that it is going to defend itself. There are a lot of steps to go through from the jury making a reward and Wachovia writing a check."

(The bank became Wachovia Corp. after a merger late last year.)

The chances for reducing or negating the award are stronger because the brunt - $200 million - is in punitive damages, or those meant to punish companies, said Lisa Fairfax, a law professor at the University of Maryland. The remaining $76 million is for compensatory damages or those meant to compensate Steele for any money he may have lost because of fraud.

"It's not likely they'll end up paying that full amount, especially in punitive damages," Fairfax said. "When its compensatory courts are less likely to shave it down."

If the bank fights the charges vigorously enough, Steele's attorney may try for a settlement rather than risk losing the case in court later, said Abba D. Poliakoff, an attorney at the law firm of Gordon, Feinblatt, Rothman, Hoffberger & Hollander LLC.

"Often what happens in cases like this is a challenge is made by the defendant and, assuming some meritorious arguments are made in the challenge, it levels the playing field some," Poliakoff said. "The plaintiff then has to make a decision on whether the bank has a chance to become victorious."

Steele's attorney, Stephen L. Snyder, said yesterday that he will not back down from the amount of the award, which he called fair. He expects the case to stick and said other predictions are being made without knowledge of the facts.

If you want to teach companies like this that fraud will not be tolerated, then the courts should stand behind verdicts like this," said Snyder, who is principal partner with the law firm Snyder, Slutkin & Lodowski.

"To do otherwise means they're condoning misconduct. There has to be some disincentive not to cheat."

Steele, who owns Steele Software Systems Corp., accused First Union in his suit of fraud by taking many of his software ideas. The complaint stems from a computerized system he created for First Union to help the bank improve its loan approval process. He said the bank used many of his methods to start a new company called GreenLink, which was expected to bring in profits of $2.4 billion over the next five years.

Even if Wachovia is ordered to pay damages, analysts said, that wouldn't significantly affect the company. Banks are often sued and normally have money set aside for such payments. Wachovia didn't list the lawsuit in its annual 10K report it filed with the Securities Exchange Commission earlier this month.

"Given the size of Wachovia, it's certainly not going to pose any significant threat to the bank's viability," Poliakoff said.

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