Ex-official Pileggi sues Mercantile over firing

Former division chief also claims bank CEO was holding merger talks

July 20, 2004|By Paul Adams | Paul Adams,SUN STAFF

John J. Pileggi, one of two Mercantile Bankshares Corp. executives fired last March in an ethics flap, sued the bank for $240 million yesterday, claiming that his dismissal had deprived him of a potential payout in the event that Mercantile was sold.

In his suit filed in Baltimore Circuit Court, Pileggi said that the bank's chief executive had held regular meetings with a senior officer of another Baltimore bank to explore a possible merger.

He also alleged that representatives of two investment banking firms told Mercantile board members in January that the best way to enhance shareholder value was to sell the company.

Pileggi, former head of Mercantile's Investment and Wealth Management division, stood to receive a severance package worth three times his annual salary if fired in connection with the sale of the bank. Mercantile officials were anticipating a sale at the time he was dismissed, the suit claims.

He is seeking $60 million in actual damages and $180 million in punitive damages for breach of contract and defamation. The suit claims Pileggi was wrongfully terminated and that Edward J. Kelly III, Mercantile's chairman, president and chief executive, made false statements about the circumstances of the firing.

Kelly, who said bank officials had not seen the complaint, denied the allegations and said Mercantile is not up for sale. He described the presentations by investment banking firms as part of the board's routine annual strategic review.

"As I have said repeatedly, we are intent on remaining independent," he said. "We have no plans to sell. In fact, we are optimistic about our future prospects as the leading independent bank in the region."

The accusations provide new details about the ethics scandal that ensnared one of Baltimore's venerable financial institutions, which has long managed the fortunes of some of Maryland's wealthiest families. The firings came after disappointing earnings and a series of management changes in the bank's trust division, which has struggled for business in a fiercely competitive environment.

Mercantile fired Pileggi and Michael R. Donnell, a division senior vice president, for failing on "several occasions" to disclose to senior management that Donnell's mother stood to collect a six-figure referral fee if the bank selected a Minneapolis advisory firm to manage one of its investment funds.

In announcing the firings, Kelly said in a press release and interviews with The Sun that even if the fee was legal, he considered it a breach of ethics that threatened the bank's reputation.

But in his suit against Mercantile, Pileggi says he twice disclosed the fee to bank officials - a fact he says was not detailed in a company press release announcing the firings. An internal memo Kelly distributed to employees also failed to include such details.

First, the suit says, Pileggi told company lawyer Jennifer E. Vollmer that Agio Alternative Assets, the Minneapolis firm hired to manage a Mercantile hedge fund, had sought advice about making the referral payment to Donnell's mother, Barbara Donnell. Barbara Donnell, who recommended Agio to Mercantile, was then employed by the brokerage AXA Advisors.

Vollmer subsequently drafted a letter to the firm that said, in part, that Mercantile didn't object to the payment, the suit says.

Pileggi says he also informed Wallace Mathai-Davis, who was chief executive of the bank's Wealth Management Division before Pileggi took over the post in a management shake-up in August 2003.

Pileggi's suit argues that he had no further obligation to inform management of the payment, since Mathai-Davis was part of the bank's senior management team at the time.

"Mathai-Davis and Vollmer were thoroughly familiar with [Investment and Wealth Management's] relationship with Agio, having played major roles in the negotiations and due diligence process leading to Agio's retention," the suit states.

James P. Ulwick, an attorney for Donnell, made a similar argument in March, saying his client had informed his superiors about the proposed referral fee to his mother. Ulwick declined to comment on Pileggi's suit yesterday.

But Kelly discounted the two fired executives' arguments, saying the disclosures should have gone to the top of the bank's executive team, including himself.

"I have addressed Mr. Pileggi's conduct in the past," he said in an interview yesterday.

The suit comes at a time when Kelly is trying to rebuild the bank's wealth management division after a series of missteps. Kelly, who has made bolstering the division a top priority, fired Mathai-Davis, one of his first hires as CEO, after the former Offitbank executive clashed with the bank's old-money clientele. Pileggi was then promoted to the post.

Despite persistent speculation that Mercantile is itself a candidate for an acquisition, the company continues to seek strategic purchases aimed at growing the bank.

It recently completed its purchase of F&M Bancorp of Frederick and was reportedly in the running to purchase Riggs National Corp.

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