By Chris Irons, GeoInvesting Equity Analyst
- Banc of California (BANC) makes the stunning revelation for the very first time to shareholders that it has been conducting a previously undisclosed ongoing internal investigation related to fraudster Jason Galanis that has been underway for “more than a year”
- BANC calls their internal investigation “independent” on their conference call and, more importantly, in an 8-K exhibit filed with the Securities and Exchange Commission
- It was revealed yesterday that the “independent” law firm conducting the investigation has personally represented the company before and is also a client of the bank
- I believe the company can in no way be trusted to perform its own investigation into these matters and until further notice should not be taken at its word
- Given the company trying to pass this firm off as “independent”, I believe the Securities and Exchange Commission now has little choice but to use subpoena power to find out what exactly is going on at Banc of California
Fresh light shed on the controversy surrounding Banc Of California, Inc. (NYSE:BANC) Banc of California on Thursday has solidified my opinion that chances of a regulatory intervention have gone from unlikely to extremely necessary. I believe that the Securities and Exchange Commission is going to be left with little choice but to intervene quickly with Banc of California, and I want to summarize how I’ve arrived at such a stark conclusion that all Banc of California investors should understand in full.
Statements made in Banc of California’s 8-K exhibits filed with the Securities and Exchange Commission on October 19, 2016 should be scrutinized at length by regulators and investors considering new evidence that was presented on Thursday by blogger Aurelius. If regulators find these statements half as potentially deceiving as I do, they should step in with subpoena power and get to the bottom of exactly what is going on with the management of Banc of California.
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On Tuesday of this week, a blogger on Seeking Alpha named Aurelius published an article claiming that Banc of California executives had deep and uncomfortable ties to a man named Jason Galanis. Galanis pled guilty to pump and dump charges brought by the SEC and Department of Justice in 2015 and was recently again charged by the SEC and Department of Justice – this time for running a Ponzi scheme - in May of this year.
Standing alone, allegations of ties to Galanis and his father were enough to give Banc of California investors pause. The stock fell from about $15.90 to a low of about $11.25 in just mere hours the day that Aurelius’ original blog post describing these ties was released.
Consequentially, the company issued a response and held a conference call on Wednesday of this week where they declined to comment at length on the situation. Investors on this call and reading the company’s press release learned for the first time that the company already had an ongoing investigation into the company’s ties with Jason Galanis. The company also told the public that “outside” counsel is “independently” investigating the company.
Banc of California’s general counsel stated on the company’s conference call:
The Board of Directors determined to retain outside counsel to independently investigate the matters raised and report any information that might indicate the possible existence of any potential impropriety. The results of that investigation, which has continued over the course of more than a year, failed to disclose any ownership interest by Galanis in the company or the Bank, and affirmatively confirmed that he exercised no direct or indirect control over the company or the Bank or any entity owned or affiliated with Steven Sugarman or any other member of the Board of Directors.
Most importantly, in an exhibit to an 8-K filed with the Securities and Exchange Commission, the company not only disclosed what had been an undisclosed yearlong internal investigation, but they again refer to Winston & Strawn’s investigation as “independent”:
Banc of California, Inc. (NYSE: BANC) today announced it is aware of allegations posted in a financial blog. The Company’s Board of Directors has been aware of matters relating to Jason Galanis including certain claims he had made suggesting an affiliation with members of the Company, its Board, and/or its Executive team. The Board, acting through its Disinterested Directors, immediately initiated a thorough independent investigation led by Winston & Strawn, and has received regular reports including related to regulatory and governmental communications over the past year.
For some reason, I was willing to take this at face value. Stunned by the revelation that the company had just, for the first time, disclosed an ongoing yearlong investigation into the matter that Aurelius’ blog was bringing to light, I believed that the company was at least going to try and have an independent investigation.
I did find it extremely odd that the company admitted that they were investigating these allegations for longer than the past year and this blog post was the first time these concerns seem to have been aired out publicly. The company declined to comment further on its call when analysts asked additional questions about the blog and the company spent a majority of its call just talking about earnings.
I waited in the conference call queue for over an hour while other analysts’ questions were answered. My question was never addressed. Here’s what I was going to ask:
Given the company has just disclosed that an investigation has been ongoing for more than a year, are directors Brownstein and Sugarman involved at all with the independent investigation surrounding ties to Mr. Galanis? Given that these two are alleged to have been involved with an off-balance-sheet company run by Mr. Sugarman and loaning to Mr. Galanis and lead “independent” director Brownstein, I didn't think it would be appropriate for either of them to be involved in liaising with Winston & Strawn.
Why did I want to ask this question? Because it is extremely important that when the company assures the market it is performing an independent investigation that all parties involved have nothing to do with the allegations being brought against the company in the first place.
As a reminder, the company called this investigation by Winston & Strawn “independent” in a press release, on their conference call and in an exhibit to an 8-K.
When it was revealed on Thursday that the law firm conducting the yearlong “independent” investigation is actually a client of both the bank and its CEO personally, my jaw dropped. If the SEC wasn’t thinking about getting involved prior, I believe this would prompt them to take notice of BANC immediately. Aurelius revealed in a follow up post that Winston & Strawn were both clients of the bank, as well as personal clients of the CEO. Aurelius wrote:
Banc of California’s website specifically highlights Mr. Aronoff and Winston & Strawn as an example of a California entrepreneur "who we serve." The profile of the purportedly independent Mr. Aronoff calls Banc of California "my bank" and states that "I'm constantly impressed with Banc of California."
He then continues:
In 2014, Mr. Aronoff represented Steven Sugarman personally against allegations made by a judicially-recognized whistleblower.
Obviously, I was giving the company way too much credit with the question I was prepared to ask them. It never even occurred to me that something as obvious as this type of conflict of interest would even be an issue.
Investors that were reassured by the company’s release of its earnings and subsequent commentary on these allegations should now be even further alarmed. In my opinion, it is materially irresponsible and misleading for a company to come out and call this an independent investigation when, even if the law firm is acting totally objectively, the glowing appearance of a conflict of interest exists.
This furthers the case against the company more than just pointing out the ties to Galanis. The company coming out and severing ties with Galanis is one thing – I expected regulatory oversight down the road, after the internal investigation concluded. As I was thinking after the initial allegations, ties to Galanis likely won't change the quality of the company’s assets or what it earns. But now, we have just the opposite to think about. The company has come out and made a statement – just days ago – that show draw it significant immediate attention by regulators.
I went into Thursday thinking that the chance of a regulatory intervention was relatively small, at least while the company finished conducting its internal investigation. Now, I am left to believe that a regulatory intervention has a significantly higher chance of happening on the basis of the company’s statements that it made while defending itself this week. I believe the nature of the recent statements to speak volumes about governance at the company and I think using the “independent” language to describe this firm is significantly more alarming then the initial claims about the company’s ties to Galanis.
My intention for writing this blog note today is to educate investors, offer potential portfolio protection and highlight the potential risks of the company for those considering both long and short positions.
