Bank investor sues Smithtown Bancorp for $110M

Developer Robert Toussie Thursday became the latest to file a lawsuit against Smithtown Bancorp, but his is different from the several filed earlier this year that claim the company misled investors about its financial health.

Toussie's suit, filed in State Supreme Court in Brooklyn, seeks $10 million in compensatory damages and $100 million in punitive damages from the company, which owns Bank of Smithtown; its president and chief executive, Bradley Rock; and his son, Bradley Rock Jr., a loan officer at the bank.

Like the previous suits, this one claims the bank disguised its growing collection of bad loans and poor earnings in an attempt to keep the stock price high. The stock crashed at the end of 2009, trading at less than $5 per share, as its bad loans were revealed. The bank later acknowledged it was in a consent decree with federal and state regulators that limited its ability to make loans and required it to improve its financial health.

In the suit, Toussie, of Brooklyn, said that before he became one of the bank's largest individual investors in 2008, he had dozens of conversations with the elder Rock, who assured him that the bank had just two bad loans.

But the suit said the bank had "a deeply insolvent and irresponsibly underwritten loan portfolio created by none other than Rock's own son."

Bank officials declined to comment Thursday, citing a policy against speaking about pending litigation.

Among the steps the bank took to mask its bad loans was a practice of loaning even more money to businesses that were behind on payments so that they could then pay interest on the bad loans, according to the suit.

The suit also criticized the Manhattan investment bank Sandler O'Neill, which offered Smithtown stock for sale while investing in the company itself. From February 2007, when Smithtown's stock was at $24.58 a share, Sandler O'Neill recommended that investors buy it, even as its price plummeted to a fraction of that by the end of 2009, when Sandler O'Neill dumped its stake of more than 649,000 shares.

The investment bank was not named in the suit, but Toussie's attorney, Scott Balber of Manhattan, said it's possible Toussie may sue the bank. Sandler O'Neill officials did not respond to a request for comment Thursday.

In February, Smithtown Bancorp posted a loss of $19.8 million for the fourth quarter of 2009 and reported having $130 million in bad loans, more than double the amount reported in the previous quarter.

Rock said then that the bank's lending standards were not insufficient and that he expected the company to become profitable again this year.