Lawsuit offers a painful look at Advanta's collapse

Peggy Randall, co-owner of a cafe in Hoboken, N.J., cheered the Federal Deposit Insurance Corp.'s effort this week to win $219 million in damages from executives Dennis J. Alter and William A. Rosoff in the collapse of Advanta Bank Corp.

"I hate them. I just felt so bilked and so robbed by them," Randall said Tuesday.

In 2004, Randall used an Advanta small-business credit card with an enticing 2 percent interest rate to pay for renovations to open Little Grocery, a breakfast and lunch place. Four years later, as the economy cratered, Advanta, which was based in Springfield, Montgomery County, abruptly raised Randall's interest rate to 24 percent, where it has stayed to this day.

"I think I still have about $1,000 that I owe them," Randall said. "What they've taken from me in terms of cash is thousands and thousands of dollars."

Randall was not alone in seeing the interest rate on her Advanta card skyrocket for no apparent reason.

Widespread interest-rate hikes - reaching 36 percent for some - from January 2008 through May 2009 slammed 60 percent of Advanta's small-business customers, leading 400,000 of them to cancel accounts, and ultimately caused the Advanta Bank - the credit card-lending arm of Advanta Corp. - to fail, as 40 percent of the remaining customers defaulted, the FDIC alleged in a civil lawsuit Monday.

The FDIC lawsuit provides an inside look at the final two years of the defunct firm that was once a major philanthropic force in the region, sponsoring two major Cézanne exhibits at the Philadelphia Museum of Art as well as women's professional tennis.

Alter, who was chairman and chief executive of Advanta, and Rosoff, who was president and vice chairman, countered with a suit in Utah, also on Monday, blaming the failure of Advanta Bank in March 2010 on capricious moves by FDIC officials.

The FDIC's seizure of Advanta Bank and its main operating subsidiary is expected to cost the federal deposit-insurance fund $610 million, according to the latest estimate.

Steven B. Feirson, a lawyer in Dechert L.L.P.'s Philadelphia office representing Alter and Rosoff, said he had "no comment beyond what is set forth in the complaint."

The FDIC does not comment on litigation, spokesman David Barr said.

During the economic crisis it was common for credit-card companies to raise interest rates on some customers, said David Robertson, publisher of the Nilson Report on the credit card industry. "They acted preemptively," Robertson said.

The FDIC's argument is that Advanta's strategy, spearheaded by Alter and Rosoff under the guidance of consultants from Opera Solutions L.L.C. and against objections by Advanta managers, went far beyond what any other credit card company did.

Another outside consultant, Argus Information & Advisory Services L.L.C., warned Alter and Rosoff in January 2008 that jacking up interest rates was causing four times as many customers to voluntarily close their accounts as was normal for the industry.

By early May of 2009, it was clear that the strategy had backfired. That's when Advanta - in an unprecedented move - announced that it was voluntarily suspending all of its customers' credit cards.

FDIC attorneys will try to make the case that the widespread and massive interest rate hikes were such a bad idea that they amounted to "breaches of fiduciary duties and gross negligence."

Under law in Utah, however, where Advanta Bank was based, there is a high bar for gross negligence. It is defined as "reckless disregard" and the failure to show even "slight care," Alter's and Rosoff's suit against the FDIC says.

Randall, the Hoboken businesswoman, has no doubt that Advanta was wrong. "I just want to see them get theirs," she said.