The Walls Are Closing In On The Branchless Bank

| About: BofI Holding, (BOFI)

Summary

A recent securities fraud lawsuit against BOFI in a Federal District Court shows that many more former BOFI employees have come forward to share stories of fraud at the company.

Almost one dozen former employees tell a tale of Salvadoran gambling gangs, felonious executives, opaque Venezuelan trusts, corrupt appraisals, CEO check forgery, and falsified audits.

Multiple formers claim BOFI regularly and potentially inappropriately used an appraiser named Brendan Flynn who reportedly has personal ties to the Chief Credit Officer.

BOFI's CEO already alluded to this lawsuit on the last earnings call - the company was clearly aware that more formers had stepped forward to expose suspected wrongdoing.

The smoke from last October is turning into fire and we reiterate our belief that this company’s eventual demise will come as a result of government intervention.

A record 70 days have now passed since the last BofI Holding (NASDAQ:BOFI) article was published on Seeking Alpha, leaving small cap stock prognosticators across the country baffled. "Are the shorts running out of material?" "Is the Friendly Bear in hibernation?" "Did Aurelius return to Rome?" "Does Real Talk Investments really wear a bathrobe while writing his reports?"

Based on our projections, we think that BOFI was on course to see slippage in its industry leading efficiency ratio as a result of crossing the key "days without a short report" threshold. Rumor has it that management promised all BOFI employees a company-wide cupcake celebration if a whole quarter went by without a short report.

Source: Blogspot, Friendly Bear Graphics

After reviewing the recently filed case of Houston Municipal Employees Pension System v BofI Holding (amended on April 11th, 2016), it is clear that a whole host of new issues have emerged. A chorus of former BOFI employees have stepped forward and outlined numerous new fraud allegations against BOFI. It is worth remembering that investigations take time. The lawyers representing the Houston Municipal Employees Pension System took months to develop their case and probe their witnesses - and they are backed by robust resources, financial motivation, and a lack of due process burden (versus the government that inevitably must move very carefully and deliberately).

We believe in the doctrine of the presumption of innocence until being found guilty, but note that these new allegations (from former employees, NOT short sellers) continue to suggest something is horribly wrong at this company and that the company's legal woes are only just beginning.

So far, bulls have taken comfort in thinking that only one employee has stepped forward and alleged wrongdoing at BOFI. However, the recent filing in Houston Municipal Employees Pension System v. BofI Holding suggests that almost one dozen other former BOFI employees have provided investigators with mounds of evidence against BOFI.

We take a deep dive into the lawsuit below, but wanted to give readers a quick summary of the case's contents below:

Source: Case No. 3:15-cv-02324-GPC-KSC, April 11th 2016 filing

The case is riveting and we encourage readers to go through it in detail. Allegations from former employees combine the money laundering sex appeal of the Panama Papers, the grow at any cost mantra of Enron, a culture of sweeping wrongdoing under the rug, the appraisal fraud dynamics made famous by Indymac, and a loan book overseen by a convicted felon whose employment at the bank was hidden from bank examiners.

Some of the loans formers discuss include a loan tied to a Salvadoran gambling gang and one to a Venezuelan trust where underlying borrower information was (according to the case) never verified for the purposes of OFAC (which if true is a crime).

Formers also tell stories of being strong-armed by BOFI's Chief Credit Officer to originate paper of dubious quality - including to unverified foreign nationals and borrowers who were unable to demonstrate their ability to repay borrowings.

But most noteworthy is the frequent mention of an appraiser named Brendan Flynn who appears to dominate market share of BOFI loan appraisals. One former claims that Mr. Flynn is a friend of BOFI Chief Credit Officer Thomas Constantine, and numerous formers called the relationship between BOFI and this appraiser into question. One also questioned the merits and veracity of Flynn's appraisals.

If their claims are even remotely accurate, the entire foundation of BOFI's financial statements may be based on fraud, as the strongest argument bulls have are BOFI's supposedly low LTVs - which experienced bank investors will know are only as good as the quality of BOFI's appraisals.

We conducted an AppraiserUSA search on the individual named Brendan Flynn and found that an individual going by the same name has a record of being registered with FINRA. We found that the individual corresponding to that FINRA record previously went by a different name - specifically, according to records, he previously went by the name Brendan Matthew Gilbert.

We note that the FINRA registered individual named Brendan Matthew Flynn (who lists an alternate name of Brendan Matthew Gilbert), also lists himself in his FINRA profile as the President of The Flynn Group (also based in Long Beach, CA) - matching employment records related to the Brendan Flynn we found on AppraiserUSA and matching the name of the firm identified in the Houston lawsuit (The Flynn Group):

From FINRA records - Brendan Matthew Flynn (Gilbert) Employment History:

Source: Finra Records

From AppraiserUSA.com - Brendan Matthew Flynn:

Source: AppraiserUSA.com

We leave readers with the opportunity to conduct their own due diligence into Mr. Brendan Flynn, Mr. Brendan Gilbert, and The Flynn Group. We also encourage investors to ask BOFI whether or not it is true that the company was providing a disproportionate market share of its nationwide appraisals to an individual based in Long Beach.

Finally, we decided to take a pause for comic relief and explore one of the most odd yet talked about themes that surfaced in the lawsuit - the theme of forgery at BOFI:

We now turn our attention to a summary of the most pertinent and new issues that surfaced in the securities fraud lawsuit, but encourage readers to conduct their own due diligence:

Conclusion - Not One, Not Two, Not Three...

We take readers back to a cryptic comment made on the most recent BOFI earnings call that was now (with the benefit of hindsight) apparently an allusion to the recently filed Houston case against BOFI:

A variety of what appears to be short-seller funded attorneys and short-seller funded investigators have continued to call and harass our former employees. Although we have good relationships with the vast majority of our ex-employees, it is possible and perhaps even anticipated that other baseless lawsuits might be filed by the same or different attorney in what will be a futile attempt to pressure us. This will not change the bank's sound policy of terminating poor-performing employees. BofI is not in the business of settling meritless lawsuits. So we will ride out the temporary storm while focusing on continuing to grow our business in a safe and sound manner and deliver positive earnings growth.

As usual, Garrabrants blamed all of his upcoming legal woes on short sellers and "disgruntled" former employees.

This excerpt straight from the plaintiff securities fraud court document proves that short sellers had nothing to do with the Houston v. BOFI case.

Our short seller spideysense has been active ever since the cryptic earnings call commentary by Garrabrants. We wondered - what in the world could he be so concerned over? We believe that we now know the answer to that question. We also now understand why the company has gone to such extreme measures over the past few months without explaining their rationale to investors.

Since late last year, BOFI has undertaken a series of extreme measures, summarized below:

  • BOFI assaulted the 1st amendment and unsuccessfully sued Seeking Alpha to compel the identities of the bloggers writing about the company, putting itself in a unique class of companies that have sued Seeking Alpha unsuccessfully, including NanoViricides (NYSEMKT:NNVC) and Chinese RTOs
  • In an about face and in a move highly uncharacteristic of a "growth" company, BOFI raised debt with the intention to buy back stock - why in the world would BOFI buy back stock when the company supposedly has so many exciting growth avenues in front of it? Why not use the capital to grow loans? We are sure there are some Panama Papers borrowers who are looking to get easy credit in these trying times for money launderers…
  • BOFI announced that Dentons LLP had given the company the all clear following an investigation into Erhart's claims. The mysterious thing about this announcement is that BOFI NEVER ONCE disclosed to the public that it had even hired Dentons LLP to conduct a third party investigation… in fact, the company in multiple instances denied that it even needed to have a 3rd party firm look into Erhart's claims
  • It is even more troubling that BOFI never disclosed that Dentons LLP recently acquired McKenna, Long & Aldridge, the firm that represented BOFI on the H&R Block deal, throwing into question whether Dentons was an appropriately impartial group to handle this type of investigation in the first place (hint: we doubt it)
  • BOFI bought a low quality furniture and fixture leasing business from PacWest while simultaneously burying negative information relating to the upcoming quarter's results in the pre-recorded earnings call that was broadcast at a time when no one was paying attention
  • BOFI had Craig Hallum (a firm that should be well known to short sellers) initiate on the stock with a comical price target only days before the Houston lawsuit was filed

Therefore, combined with the CEO's comments from the last earnings call and the recent fact pattern of odd behavior, it appears that BOFI was preparing for this lawsuit given how poorly it reads.

Based on the Houston case, it also appears that Erhart is not the only former employee of BOFI who believes that the company has engaged in fraud.

It's also one thing to say you have one former disgruntled employee. When almost one dozen were willing to step forward and speak with investigators and recount stories of fraud, it seems apparent to us that the issues at BOFI are more likely systemic than one-off. Given the culture described in the lawsuit, just think about how many formers were too scared to talk to investigators...

In summary, if there is one thing to take away from this report it is simple. Almost one dozen former employees interviewed by investigators have now made serious allegations against BOFI.

Not one.

Not two.

Not three…

Source: USA Today

Disclosure: I am/we are short BOFI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am/we are short BOFI. All information for this article was derived from publicly available information. Investors are encouraged to conduct their own due diligence into these factors. Additional disclosure: This article represents the opinion of the author as of the date of this article. The information set forth in this article does not constitute a recommendation to buy or sell any security. This article contains certain "forward-looking statements," which may be identified by the use of such words as "believe," "expect," "anticipate," "should," "planned," "estimated," "potential," "outlook," "forecast," "plan" and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This article is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this article and undertakes no duty to update its contents. The author may also cover his/her short position at any point in time without providing notice. The author encourages all readers to do their own due diligence.