Crown Bancorp Sues Shareholder, Alleges Fraud

Crown Bancorp on Monday filed a $10-million lawsuit against dissident shareholder Ed Schmidt, accusing him of trying to illegally gain control of the bank holding company and asking for a temporary restraining order to prevent him from gathering additional proxies in his bid to land at least two seats on Crown’s board.

Concurrent with the lawsuit, filed in San Diego Superior Court, Crown announced that the annual meeting scheduled for next week would be delayed until Aug. 1.

The lawsuit also asks for a permanent injunction and accuses Schmidt of fraud, breach of fiduciary duty and also with violations of state banking law and of the business and professional code.

Crown alleges that Schmidt has attempted to gain control of Coronado-based Crown--parent of Bank of Coronado and Capital Bank of Carlsbad--without the prior approval of state banking officials. Schmidt is a former president of Capital Bank.

In addition, Crown said in its lawsuit that Schmidt tried to pry confidential information about the company’s “strategy for opposing his candidacy” from a Capital Bank officer and that he asked a Bank of Coronado employee for information about some of the bank’s loans. The lawsuit implies that both requests were turned down.

Crown also claims that Schmidt failed to disclose key nuggets of information about his proxy solicitation effort, among them that he made “tender offers to certain shareholders” for their Crown stock. Crown’s lawsuit also alleges that Schmidt improperly signed a $4.8-million loan commitment to an unidentified party and that he failed to disclose that he authorized a loan to World Communications Inc., a Carlsbad-based company whose owner, Jay Kholos, was a Capital Bank director. When Schmidt resigned his post last June, he went to work for Kholos’ firm.

Crown President Mike Justice said that Schmidt’s “past misdeeds are responsible for huge losses.”

Schmidt denied any wrongdoing and criticized Crown officials for “using the capital of the bank to create a frivolous lawsuit.”

Crown’s legal action caps weeks of escalating tension between Crown management and Schmidt, who has accumulated between 10% and 25% of Crown’s voting proxies. Schmidt has criticized management for Crown’s $2.5-million loss last year and has pledged to raise up to $2.5 million in new capital.

Schmidt has maintained that he is but a lone shareholder--he owns only about 2,000 shares--while Crown management contends that Schmidt is backed by unidentified people who want to capture control of the 6-year-old Bank of Coronado and its 1 1/2-year-old Capital Bank.

Earlier this month, Schmidt announced that he had the irrevocable proxies of former Crown Chairman Richard Maitland and founding director Fred Swenson. Schmidt disclosed last week, however, that the proxies were given to him by an unidentified person or people who had bought the stock.

Schmidt has gathered a curious group of supporters, including factions that previously had been warring with each other--specifically Maitland, Swenson, former president James Klingensmith and former chairman Dustin Rose.

It had seemed something of an unholy alliance to begin with--the group seemed unlikely to agree on a change of management at Crown.

One common link may be lawyer James K. Sterrett II, who represents Schmidt and Klingensmith (who last week sued the Bank of Coronado over disputed severance pay).

Moreover, Sterrett also is the attorney for two local investors, Milton Sorokin and Roque De La Fuente, both of whom have reportedly expressed an interest in Crown or its subsidiaries.

Sorokin last year had proposed a $1.7-million cash infusion into Cal Heritage Bank, but the deal fell victim to controversy and delays, and Cal Heritage was eventually taken over by regulators.

De La Fuente is a well-known car dealer who also is a member of the board of Pacific Commerce Bank.