One of the defendants in this case, Steven Sugarman, co-authored a book called Don’t Get Fooled Again by Corporate Fraud. Ironically, the complaint for this class action uses quotations from this book to introduce its sections, as it sets out relationships between Banc of California officials like Sugarman and ties to “convicted fraudster” Jason Galanis. At issue are Banc’s public statements on these connections, which the complaint calls “false and misleading” and violations of the Securities Exchange Act of 1934.
The class for this action is all persons who bought Banc publicly-traded securities between October 29, 2015 and January 20, 2017.
Banc of California is a financial holding company with interests in commercial banking, corporate banking, mortgages, and financial advice.
Banc began as First Pactrust (FPB), which was recapitalized in 2010 by a company called COR Capital, LLC. COR’s owner, Steven Sugarman, joined FPB’s board and in 2012 became CEO. The following year, FPB became Banc of California and, under Sugarman’s leadership, grew from a mere $1.5 billion in assets to more than $10 billion in assets.
On October 18, 2016, SeekingAlpha.com published an article entitled, “BANC: Extensive Ties to Notorious Fraudster Jason Galanis Make Shares Un-Investible.” The article detailed ties with Banc and some of its officers and directors, including Sugarman and Lead Independent Director Chad Brownstein.
The article said that Galanis had a “long history of secretly gaining control of banks and public companies via front men [and] looting assets…” It laid out ties between Galanis, Sugarman, COR, and other Banc insiders; between Sugarman, other insiders, and an entity that financed and assisted Galanis; and between Sugarman, COR, and Brownstein. These last ties raised questions about Brownstein’s approval of transactions that benefitted Sugarman.
The article caused Banc’s stock to fall by 29%.
Banc responded it had been aware of these allegations for a year and had made an “independent” investigation which uncovered no ties between Galanis and Banc or Sugarman. However, the complaint claims that that investigation had not been independent, since it was directed by management and conducted by counsel for Banc and Sugarman.
On January 23, 2017, at the end of the class period, Banc revealed that the SEC was now investigating it. It admitted that its own investigation had not been independent and said that it had hired another company whose preliminary findings showed no evidence that Galanis had any control over Banc. However, the complaint points out that the company did not refute the allegations of ties between Galanis and Sugarman or other Banc officials.
The stock price fell again, by 10%. Sugarman resigned the day of the announcement, and two weeks later Brownstein resigned.
After this, the company admitted that during the class period it had a material weakness in its internal controls over disclosures and financial reporting.