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Banc of California under pressure to investigate links to convicted fraudster

Banc of California is under pressure from a major shareholder to launch an independent investigation into the relationships between people close to the bank and an L.A. financier who pleaded guilty to securities fraud.
(Katie Falkenberg / Los Angeles Times)

Banc of California, a fast-growing lender that made a splash this summer by announcing plans to put its name on a new soccer stadium being built in Exposition Park, has seen its stock tumble in recent weeks amid concern over its connections to a convicted con man.

Now, the Irvine bank is under pressure from one of its largest shareholders to start a wide-ranging investigation into the web of relationships between people close to the bank and Jason Galanis, a Los Angeles financier who this summer pleaded guilty to securities fraud charges — and whose father, John Galanis, was convicted of an array of fraud and racketeering charges in the 1980s.

In a letter sent last week to bank Chairman and Chief Executive Steven Sugarman, investment firm PL Capital, which is the bank’s second-largest shareholder, said Banc of California is facing “a crisis of confidence and credibility” and should immediately hire an outside firm to investigate.

Richard Lashley, principal of PL Capital, said the investigation should focus on “why there appears to be a significant amount of interconnectedness” between people and entities named in fraud cases filed against Galanis and “the executive officers of Banc of California and their immediate families.”

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The bank, which over six years has grown from less than $1 billion in assets to more than $10 billion and become one of Southern California’s largest local banks, said in a news release that it is “aware of matters related to Jason Galanis.” It told investors on a conference call last month that it started an investigation last year.

But the investigation is being handled by a law firm that is a Banc of California client — one that’s featured in the “Who We Serve” section of the bank’s website — and that has represented the bank and a separate firm run by Steven Sugarman. In his letter, PL Capital’s Lashley said the law firm, Winston & Strawn, is “not sufficiently independent.”

“We believe the company, its board and shareholders must have completely independent counsel with no ties to the company leading the investigation,” Lashley wrote.

Through a spokeswoman at crisis communications firm Sitrick & Co., Sugarman and others at the bank declined to answer questions, saying that “the company expects to continue to provide updates to the market, as appropriate, through our public filings.”

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The connections between Banc of California and Galanis were first mentioned in a Sept. 7 Bloomberg story about the bank’s history of related-party transactions, which included its 2013 purchase of a mortgage business partly owned by members of Sugarman’s family and the bank’s naming-rights deal for the new soccer stadium being built by the L.A. Football Club, a deal valued at $100 million by Bloomberg.

Jason Sugarman — the bank chief’s brother — and his father in-law, Hollywood producer Peter Guber, are part owners of the team.

The day before the story ran, Banc of California shares closed at $22.52. But shares started to slide afterward, losing about 30% of their value over the following six weeks.

Shares then plunged Oct. 18, falling 29% in a single day, after a SeekingAlpha blog post written by an anonymous short seller — an investor who has bet against the company — detailed numerous alleged connections between Galanis and people close to the bank, including the Sugarmans. He even alleged that Galanis may have gained control of Banc of California.

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The short seller, who spoke with The Times but would identify himself only as Aurelius — the name he used when posting on financial website SeekingAlpha — said he is a stock researcher and has a bet of more than $1 million against Banc of California. He said he cannot prove Galanis has or had control of the bank, but believes it is at least possible.

“There’s a risk,” the short seller said. “If he did gain control of Banc of California, the consequences would be severe.”

The same day the short seller posted on SeekingAlpha, Banc of California sent a letter to the site, saying the post was libelous and should be deleted immediately. It has not been taken down. Neither has a website, bancexposed.com, where the short seller has posted a bevy of documents used to make his case.

On an Oct. 19 conference call, John Grosvenor, the bank’s general counsel, said the Winston & Strawn investigation did not turn up any direct connection between Galanis and the bank or any direct or indirect control of the bank by Galanis.

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But, as one analyst on the call noted, Grosvenor did not disclose what, if anything, that investigation had found about other, less direct connections between Galanis and the bank.

UBS Securities analyst David Eads asked whether the investigation would “get into some of the other allegations made of indirect ties between executives and board members and other entities involved in the frauds that Jason Galanis was involved in.”

Grosvenor responded, “We’re not going to talk about Galanis.”

In his letter to Sugarman and Banc of California last week, Lashley of PL Capital said that he does not believe the short seller’s assertion that the bank “is a criminal enterprise secretly controlled by Jason Galanis.” He also said PL has upped its stake in the bank, now owning 6.7% of the bank’s shares.

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Still, Lashley said his firm’s “own due diligence has uncovered many of the same troubling connections and questions” raised by the short seller and urged the bank to investigate connections between Banc of California and Galanis gleaned from fraud cases brought against Galanis and various co-defendants.

Neither Banc of California nor Steven Sugarman nor other bank executives or insiders are named in those cases, but the cases do name several firms connected to bank insiders — including a board member and Sugarman’s brother, who was an early investor in the bank and a former advisor to one of the bank’s subsidiaries.

In one set of cases filed last year, the Department of Justice and the Securities and Exchange Commission charged Galanis, his father, two of his brothers and other parties with civil and criminal securities fraud, saying they manipulated the stock price of publicly traded insurance firm Gerova Financial. Galanis and his father pleaded guilty to the criminal charges this summer.

The SEC alleged that some of the $20 million in gains from that scheme was transferred in 2010 and 2011 by Galanis and his family members into various corporate entities that Galanis “owned, controlled or was associated with.” One of those entities was mining company Prospect Global Resources Inc.

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Chad Brownstein, a Banc of California board member, joined Prospect’s board of directors in 2011, and a private investment firm run by Brownstein was a major investor in Prospect and had been an advisor to the company since at least 2010, according to SEC filings. It’s not clear how Galanis was associated with Prospect, though Galanis’ wife owned a stake in a company that merged with Prospect, according to securities filings.

In 2014, real estate firm Stillwater claimed in a bankruptcy case that Gerova and a related firm bilked it out of numerous real estate holdings, and that a firm run by Jason Sugarman was one of the entities that improperly received property in the deal. Jason Sugarman and his firm, Camden Real Estate Opportunity Fund I LLC, settled with Stillwater in February.

There are other connections in a separate set of cases filed in May. In those cases, the SEC and Justice Department have charged Galanis, his father and others with fraud, saying they talked a Native American tribal corporation in South Dakota into issuing bonds, duped unsuspecting investors into buying them, then misspent the proceeds on luxury goods and legal fees.

Hugh Dunkerley, a defendant in both the criminal and civil cases stemming from those bonds, is a former board member of COR Capital, a firm that Steven Sugarman founded and still manages and was an early investor in Banc of California. Dunkerley did not return calls seeking comment.

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Attorneys for Galanis and other defendants in the case did not respond to requests for comment.

In the criminal case over the tribal bonds, the Justice Department describe Valor Group and Burnham Securities as firms that were integral to the scheme. The SEC, in its civil suit, described Valor as being controlled by Galanis.

Jason Sugarman works for Valor and, as of late 2013, was listed as a director and part owner of Burnham Securities. Jason Sugarman could not be reached through Valor and did not respond to a request for comment made through the L.A. Football Club.

james.koren@latimes.com

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Follow me: @jrkoren

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UPDATES:

8:20 a.m.: This article was updated with information about Banc of California’s growth and with additional comments from Richard Lashley.

This article was originally published at 3 a.m.

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