One of California's massive public pension funds and an L.A. investment firm are pushing for a board shakeup and possible sale of embattled Banc of California following the resignation of its chief executive and chairman this week.
In a Jan. 24 regulatory filing, the California State Teachers' Retirement System and Legion Partners said the board of the Irvine bank has done a poor job of overseeing the fast-growing institution, signing off on deals that benefited bank insiders and the family members of now-former CEO Steven Sugarman.
Those deals raise questions about whether the board has been “making decisions for the benefit of insiders rather than for the benefit of all stockholders,” CalSTRS and Legion wrote in the
Bradley Vizi, a managing director at Legion, said the bank appears to be a healthy institution, but that a lack of "adult supervision" has depressed the bank's share price and harmed shareholders.
"It's the fastest growing bank in the country, but it trades at half the valuation of its peers," Vizi said. "It's no wonder why. The bank demonstrates some of the worst corporate governance I've ever invested in. The folks that have been at the helm have been asleep at the wheel."
The filing indicates that the hedge fund and CalSTRS plan to actively lobby the company to add more independent directors to its board, pursue a possible sale and make it easier for shareholders to change the company's bylaws.
Specifically, they want to be able to amend the bylaws with a majority vote of shareholders. Now, amendments require support from 80% of shareholders, which Legion and CalSTRS say gives shareholders only "a façade of control over the company."
They say they tried to work with the company before this week's filing but that the bank has not responded to them. "It's been total radio silence," Vizi said.
In an emailed statement, Banc of California spokesman Ian Campbell said Wednesday that the board will "carefully consider shareholders' input" and is willing to meet with Legion to discuss the firm's concerns.
Campbell also said the bank is conducting a "comprehensive review of bank governance, including policies to restrict related-party transactions in the future."
Sugarman declined to comment through a spokesman.
The investors' demands come at a tumultuous time for Banc of California, which has grown rapidly over the last few years and recently sought to raise its profile with a $100-million stadium naming-rights deal with the Los Angeles Football Club, an MLS expansion team.
However, the deal prompted questions about the bank's penchant for insider transactions because the team is part owned by Sugarman's brother, Jason. he bank has also faced scrutiny over *apparent* ties between insiders and Jason Galanis, a local financier who pleaded guilty to securities fraud charges last summer.
On Monday, the bank reported that it is being investigated by the SEC over its public response to allegations that Galanis may have secretly controlled the bank.
The bank in October issued a news release stating that members of the board of directors were leading an internal investigation into the Galanis matter when in fact company management was in charge of the inquiry. The company also did not disclose in its October statement that the law firm hired to investigate the allegations had previously represented the bank as well as Sugarman himself.
The bank announced Sugarman's resignation Monday, the same day it reported the SEC investigation and acknowledged inaccuracies in the news release.
The bank said that another investigation, this one handled by an outside law firm, was almost complete and had found no evidence that the bank broke any laws or that Galanis had any control over the bank.
Legion and CalSTRS don't mention Galanis in their filing, instead focusing on insider transactions that they say have gone unchecked by the board.
In an interview, Vizi and Legion analyst Justin Albert listed a handful of deals — all of them gleaned from Banc of California's regulatory filings — that Vizi said straddle the line between unethical and simply not looking good.
For instance, the bank in September 2013 acquired asset management firm Palisades Group. Jason Sugarman, the former bank CEO's brother, was an advisor to Palisades and was paid more than $1.3 million by the firm between 2013 and 2015, according to the bank's SEC filings.
A month after acquiring Palisades, the bank acquired mortgage lending firm CS Financial, a firm controlled by former bank board member Jeffrey Seabold and partly owned by Sugarman's father, brother and sister in-law.
"The related-party transactions and the lack of sound judgement seems pervasive," Vizi said.
In its filing, Legion reported that it owns 6.3% of Banc of California's shares, making it the bank's second-largest active shareholder behind PL Capital Advisors, an investment firm that has also complained about the bank's corporate governance. CalSTRS, the nation's second-largest public pension fund, is one of Legion's investors and also directly owns about 100,000 Banc of California shares.
Legion and the pension fund have worked together on shareholder campaigns before, jointly pushing for changes at clothing company Perry Ellis.
Banc of California's stock price topped $23 in August before a Bloomberg News report about its history of insider transactions. It then fell to less than $12 in October after a short-seller accused the bank of being controlled by Galanis.
Like other bank stocks, Banc of California shares rallied in the wake of President Trump's election. But they fell sharply Monday when the company announced Sugarman's resignation.
The bank's shares closed at $14.95 on Wednesday, down about 5%.
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4:35 p.m.: This article was updated with details throughout and a comment from Banc of California.