What PFF Bank & Trust lacks in capital it more than compensates for in litigation.

Former employees have filed suit against the Rancho Cucamonga based-bank at a time when the bank is in the process of settling a lawsuit filed by shareholders in June.

In the most recent lawsuit, employees who took part in the bank's 401(k) and employee stock-ownership plan seek to "recover millions of dollars in losses arising from the imprudent purchase and investment in the common stock of PFF Bancorp Inc."

The suit was filed by Pittsburgh-based Stember, Feinstein, Doyle & Payne in conjunction with Agoura Hills-based Schwartz, Daniels & Bradley.

Both suits make similar claims that the bank's board of directors acted in their own interest by claiming they were not forthcoming about the health of the bank; and in some cases, unwilling to work with concerned shareholders.

"The employees were discouraged from diversifying," said Walter Hackett, a former member of the PFF compliance committee. "I have a client who actually instructed one of the trustees to cash in some PFF stock and put it in another investment, they dragged their feet for six months, as a result he lost a substantial amount."

Hackett, who now operates his own law firm, is not an attorney of record in the most recent suit filed on behalf of the employees. Hackett said he left the bank because he was "sick and tired of fighting with them.

"They just didn't care," he said.

"Participants invested and bought stock we believe at a time when the shares were highly inflated," said Stephen Pincus, a lawyer with Pittsburgh-based firm.

"Had PFF been forthright with the health of the bank, employees would have had complete information," Pincus said. "Had they known the company was heading for severe financial trouble, participants would not have bought stock when it was trading it the 30s, knowing their investment was going to be worth $1.25 per share."

A resolution to the lawsuit may take some time, Pincus said.

PFF has a pending merger with Los Angeles-based Cal National Bank set to take place before the end of the year.

Merger proceeds

Officials of the Los Angeles-based bank are undeterred by the lawsuit and still plan to proceed with the merger.

"We anticipated litigation," said Greg Mitchell, chief executive officer of Cal National. "We believe that once the facts are revealed, this will be resolved."

"This will not have an impact in our continued interest in PFF," he said.

If the case goes to trial, PFF's attorneys will need to prove the bank made reasonable decisions based on the information at the time, according to Ron Dean, a pension lawyer in Pacific Palisades.

"Was it a good decision at the time? No Monday-morning quarterbacking is allowed," Dean said. "It's not enough that they could have made a better decision. The plaintiffs' attorneys have to show no one in their right mind would have held on to this stock."

If PFF fiduciaries knew the bank was in trouble, and advised employees and shareholders of the matter, the Securities and Exchange Commission would hold them accountable for violations, Dean said.

"If fiduciaries knew non-public information that the bank was going to bust then the question arises is how can they react on that information without violating securities law," he said. "The law says you can't act on inside information and if they sell the stock based on inside information, they would be liable.

Dean said it is an issue that has "bedeviled courts for years."

However, the issue would not have come to that had the bank diversified employee portfolio rather than invest heavily in the bank's stock, Hackett said.

"They locked up the employees," Hackett said. "The employees were discouraged from diversifying and heavily discouraged from cashing in their stock."

Dean stated if the bank performed due diligence and made a reasonable decision at the time, the housing market crumbling after the fact would not matter in a court decision.

But both attorneys were in agreement that diversification would have aided the situation.

"Normally you would want diversification," Dean said. "You're putting all your eggs in one basket."

PFF officials did not immediately return phone calls.