updated 2/7/2005 12:25:16 PM ET 2005-02-07T17:25:16

PNC Financial Services Group Inc.’s $779 million deal for embattled Riggs Bank has fallen apart and Riggs parent company is suing the regional bank for damages.

Riggs National Corp. said Monday its board has rejected a reduced merger bid of $19.32 a share from Pittsburgh-based PNC that was made after Riggs pleaded guilty to violations of a law to prevent money laundering. The original deal was valued at $24.25 a share.

The parent of Riggs Bank said it has sued PNC because Riggs “had been damaged by PNC’s decision not to proceed with the merger after Riggs had devoted the last six months preparing for the merger and taking various actions at PNC’s insistence.”

Riggs said it was seeking damages, which it did not specify, or for PNC to be compelled to proceed with the merger under the original terms agreed upon in July. The cash-and-stock merger deal valued Riggs shares at $24.25 each.

Riggs also said it expected to report a loss of $60 million for the fourth quarter of 2004 and a full-year loss of $100 million.

Riggs, an old-line Washington institution that had a near-monopoly on business with the capital’s diplomatic community, shed all of its diplomatic and international businesses as part of the merger deal with PNC. Under the deal, PNC, which is more than 12 times bigger than Riggs, had the right to walk away if significant new regulatory troubles arose for Riggs before completion of the merger.

Riggs pleaded guilty on Jan. 27 to failing to report suspicious transactions in the accounts of foreigners, including former Chilean dictator Augusto Pinochet, and agreed to pay a $16 million fine — the largest criminal penalty ever imposed on a bank of Riggs’s size, according to federal prosecutors. It came atop a record $25 million civil fine levied on the bank by a Treasury Department agency last May.

The plea agreement still needs the approval of U.S. District Judge Ricardo Urbina, who expressed some skepticism about the penalty’s adequacy at a hearing.

PNC representatives reportedly told Riggs after the guilty plea that they believed there had been a “material adverse change” in Riggs’s condition in the last six months, allowing the Pittsburgh bank to walk away from the deal under terms of the merger agreement.

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