The Israel Discount Bank of New York can’t catch a break. The latest hit for the beleaguered bank is the departure of Alexandra and James Lebenthal, the father-daughter team that was recruited in 2006 to head up the bank’s broker-dealer unit. As of next week, their firm, known as Alexandra & James, will be officially independent.

The departure comes as IDB, which has more than $9 billion in assets, struggles to reclaim funds it has lost from the subprime crisis. It is suing MetLife and BlackRock, alleging the firms mismanaged a $100 million fund in which IDB is an investor by buying risky mortgage securities that are now illiquid. The bank is also still reeling from a 2005 money-laundering scandal, which has cost it $47 million in expenses and remediation work that it has yet to complete. Finally, last April, it suffered the departure of several high-profile board members, including beverage heir Matthew Bronfman and its board chairman, lawyer Leonard Grunstein.

IDB, a subsidiary of Israel’s third-largest bank, Israel Discount Bank Ltd., in which Messrs. Bronfman and Grunstein, as well as real estate investor Rubin Schron, own a controlling stake, has seen its deposits shrink more than 15% in the last year. It had $6.1 billion in deposits as of September 2007, the most recent data available, compared with $7.2 billion one year before that, according to the FDIC. IDB is the city’s ninth-largest commercial bank, according to Crain’s New York Business.

“Deposits are down as we are reordering our business, and we are still dealing with the residual affects of the cease and desist order,” the IDB’s Office of General Counsel said in a statement, referring to the compliance that is required as part of the settlement over the money laundering case.

Ms. Lebenthal, whose firm focuses on wealth management for high net-worth families, said, “We are entrepreneurs and wanted to be in an environment where we could run the business as we see fit.” According to one source familiar with the operations of IDB, Ms. Lebenthal was frustrated with management.

“It was an amicable parting,” IDB’s Office of General Counsel said of the split.

In addition to contending with the departure of the well-respected Lebenthals, the firm is also suing MetLife and BlackRock in New York State Supreme Court, alleging they were in breach of contract and fiduciary duty by investing an alleged 42% of a fund in subprime mortgage-backed securities that have seen their values plummet. It also alleges that MetLife has refused to transfer its money out of the account despite repeated requests to do so.

“They have not been forthright at all,” an attorney for IDB, Marc Dreier, said. IDB has $9 million invested in the fund, and has seen losses reach nearly $3 million. “We have continued to lose money every month, and there is no reason not to think we won’t lose the entire investment.”

A MetLife spokesman, Chris Breslin, told the Wall Street Journal the company plans to defend itself against the allegations.
The chairman and CEO of BlackRock, Laurence Fink, has consistently said his company stopped investing in subprime debt in 2005.
“We never really trafficked in subprime,” he told Fortune in a September interview. “Our CDO [collateralized debt obligation] complex has been a historical buyer of subprime, but as a firm we cut back in late 2005.”

In the lawsuit, IDB also alleges that BlackRock removed subprime investments it had made on its own books, and placed it in the fund “in order to reduce its own financial and reputational exposure.”

“If they personally think subprime is a bad investment, then why expose their own funds to it? We believe that to protect its claims that they had no subprime exposure, BlackRock was putting other accounts at risk,” Mr. Dreier said.

On Wednesday, IDB published a half-page advertisement in the Wall Street Journal looking for other investors who are also struggling with losses from this fund. So far, they have not received a response. “We wouldn’t expect anyone would have picked up the phone and contacted us yet, but investors may be conferring with their counsel now to figure out a next step,” Mr. Dreier said.

Despite all of its woes, IDB officials say they are optimistic the bank can rebound. It recently received a “favorable” result from an examination by the FDIC and the New York State Banking Department, its General Counsel said. In the fourth quarter the bank posted a return on equity of 6.3%, and while meager, it was an increase of 1.2 percentage points from 2006. It also posted a net profit of $37.4 million for the year, a 32.3% increase over the fourth quarter of 2006.

“We are in the process of correcting all of our issues, and we are very optimistic about the business,” IDB’s chief operating officer, David Cohen, said.