Federal regulators may be close to settling their lawsuit against three former top executives of Washington Mutual.

Barry Ostrager, attorney for former WaMu chief operating officer Stephen Rotella, said in an email message Wednesday that "there is a settlement" but that he couldn't discuss any details.

The Federal Deposit Insurance Corp. in March sued Rotella, former CEO Kerry Killinger, and former home-loans chief David Schneider, accusing them of "gross mismanagement" of WaMu's mortgage business that ultimately led to the lender's failure in September 2008.

Killinger's wife, Linda, and Rotella's wife, Esther, also were sued for allegedly helping their husbands transfer homes and cash into trusts to keep them out of creditors' hands.

The defendants had asked the federal judge overseeing the case, Marsha Pechman, to dismiss the FDIC's suit, arguing that they had made legitimate business decisions in good faith.

The two sides spent the summer and fall exchanging motions for and against dismissal and preparing for a lengthy discovery process; the actual trial wasn't set to begin until September 2013.

But on Oct. 27 Pechman halted all proceedings, saying in a terse order that "the court has been notified of a pending settlement." She gave the parties 60 days to reach a final deal.

On Wednesday, the Puget Sound Business Journal quoted Ostrager as saying a proposed settlement probably would be filed with the court within a week. Pechman would have to approve any deal.

Bruce Larson, a Seattle lawyer who is representing the FDIC, did not return a call Wednesday afternoon seeking comment. Barry Kaplan, the Killingers' attorney, declined to comment.

The suit alleged, among other things, that Killinger, Rotella and Schneider took "extreme and historically unprecedented risks" with WaMu's home-loans business, despite knowing that "the real-estate market was in a 'bubble' that could not support such a risky strategy over the long term."

The suit also claimed that the executives knew, or should have known, that WaMu lacked "the technology to adequately manage and evaluate the higher risks associated with the (loan) portfolio," and ignored "continuing warnings from WaMu's internal risk managers" in pushing the company to make billions in high-risk home loans.

The FDIC was suing in its capacity as WaMu's receiver. As the giant thrift began running dangerously low on operating cash in September 2008, it was seized by regulators and placed into FDIC receivership. The FDIC then sold substantially all of the company's banking operations to JPMorgan Chase.

Most if not all of any settlement likely would be paid by WaMu's directors' and officers' (D&O) insurance. The company has $250 million in coverage from 17 separate D&O policies, according to court records.

However, some of that money already has been earmarked to cover the settlement in a separate lawsuit brought by a group of WaMu shareholders. That suit, which named several WaMu directors, securities firms and the thrift's audit firm in addition to top executives, was settled in July for $208.5 million, with about $105 million paid from the D&O insurance.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com