SEC investigating Banc of California, CEO resigns
Steven Sugarman, who built Banc of California into a prominent regional lender, resigned as chief executive and chairman Monday — the same day the Irvine bank announced it is under investigation by the Securities and Exchange Commission.
The bank offered no explanation for Sugarman’s resignation, but the move — and the SEC investigation — could be continued fallout from questions about connections between bank insiders and a convicted fraudster.
The bank said it has received a formal investigative order and a subpoena from the SEC. It said the agency is demanding information related to an October press release that laid out a response to a blogger’s allegations that the bank was connected to and possibly controlled by Jason Galanis, an L.A. financier who pleaded guilty to securities fraud charges over the summer.
In the Oct. 18 release, the bank reported that members of its board of directors had hired a law firm to conduct an independent investigation of the blogger’s allegations. But the bank on Monday acknowledged that release was inaccurate and that the investigation had been initiated and overseen by the bank’s management, not its board.
The bank also noted that the Oct. 18 release did not disclose that the law firm hired to conduct that investigation had previously represented the bank and Sugarman himself — facts noted in a Nov. 1 article by the Los Angeles Times as well as by PL Capital, a major Banc of California shareholder that urged that bank to hire a firm with no ties to the institution.
The bank later hired an outside firm, WilmerHale to conduct an investigation into the blogger’s claims. That investigation is almost complete and has found no evidence that the bank broke any laws or that Galanis had any control over the bank, according to the bank’s Monday news release.
Sugarman, through a spokesman, declined to comment beyond his statements in a company press release in which he said he was proud of the bank’s growth over the past several years. He had been a board member since 2010 and chief executive since 2012.
During his tenure, Banc of California acquired a handful of banks and grew its assets from about $1 billion to more than $11 billion. As the bank grew, Sugarman sought to raise its profile, including through a stadium naming-rights deal with the Los Angeles Football Club. The MLS expansion team is part owned by Sugarman’s brother, Jason, and is building an Exposition Park venue.
A team spokeswoman said the club does not intend to withdraw from the naming rights deal, which was reportedly worth $100 million.
The bank also signed a sponsorship deal with USC athletics and hired former Los Angeles Mayor Antonio Villaraigosa as a consultant.
The bank has started a search for a new chief executive and named Hugh Boyle, its chief risk officer, interim CEO.
Robert D. Sznewajs, a Banc of California board member who took over the chairmanship Monday, was not immediately available for comment, a spokesman said.
Shares of the bank closed at $14.65 Monday, down more than 9% from Friday’s close.
Timur Braziler, an analyst at Wells Fargo Securities, said Sugarman’s resignation is not surprising, seeing it as a way for the bank to attempt to distance itself from any allegations of impropriety.
“Whenever there’s a reputation risk, the easiest thing to do is to eliminate the primary person causing the risk — in this case, Sugarman,” Braziler said.
At issue are connections between Galanis and bank insiders — including board member Chad Brownstein and Sugarman’s brother Jason, who not only is a part-owner of the MLS team but was an adviser to the bank. In October, an anonymous blogger and short-seller posted a lengthy article on financial blog Seeking Alpha alleging that Galanis might have secretly gained control of Banc of California.
The bank rejected that claim, and PL Capital’s Richard Lashley wrote in a letter that he did not believe Galanis controlled the bank. But Lashley also noted that “there appears to be a significant amount of interconnectedness” between bank insiders and entities named in various fraud cases brought against Galanis.
In 2015, the SEC and U.S. Department of Justice filed civil and criminal fraud charges against Galanis, his father John Galanis and others, accusing them of manipulating the stock of publicly traded insurer Gerova Financial. Galanis and his father pleaded guilty to the criminal charges last summer.
The SEC alleged that some of the gains from that scheme were transferred to firms owned, controlled or associated with Galanis, including mining company Prospect Global Resources Inc. Brownstein, a Banc of California board member, was an investor and board member at that company.
In 2014, real estate firm Stillwater claimed in a bankruptcy case that Gerova and another firm bilked it out of numerous real estate holdings, and that a firm run by Jason Sugarman was one of the entities that benefited. Jason Sugarman and his firm, Camden Real Estate Opportunity Fund I LLC, settled with Stillwater last year.
In its statement Monday, the bank said the SEC’s investigative order is focused on some of the same issues that are the subject of the internal investigation now being completed by WilmerHale.
The agency’s subpoena, however, sought documents related primarily to the bank’s Oct. 18 press release, according to the bank’s statement. That could indicate that the agency’s investigation is focused on whether the bank misled investors.
The bank said it expects WilmerHale to make a final report on its investigation in the coming weeks, but Braziler said the SEC investigation will likely take much longer.
“I think they’re going to get into the nitty gritty,” he said. “It’s not going to be a quick process. It may go well into next year.”
The SEC declined to comment.
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5:00 p.m.: This article was updated with a comments from Wells Fargo Securities analyst Timur Braziler and the Los Angeles Football Club.
3:30 p.m.: This article was updated with information about Steven Sugarman’s tenure at Banc of California, bank insiders’ alleged connections to Jason Galanis and Galanis’ legal history.
1:50 p.m.: This article was updated with a comment from Banc of California CEO Steven Sugarman on his resignation.
This article was originally published at 1:15 p.m.