The Walls Are Closing In On BOFI Bears

| About: BofI Holding, (BOFI)
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Summary

Court filings show egregious actions by Erhart and his attorney, Carol Gillam, shedding new light on a potential planned attack-for-profit by short sellers.

Gillam sent a pre-filing copy of the Erhart complaint to both The New York Times and Citron Research, a known short-seller, hours before it was publicly available.

A court order forcing Gillam to disclose communications with short sellers, proves she forwarded BOFI confidential information, apparently provided by Erhart, to the New York Times.

Most BofI Holding, Inc. (NASDAQ:BOFI) shareholders are fully aware of the ongoing litigation regarding a complaint filed by a disgruntled former junior employee, 29 year old Matt Erhart, on October 13, 2015 with the Southern District Court of California. That night, a scathing article was published in The New York Times by Peter Eavis. The following day, shares of BOFI dropped more than 30% at the open and closed down more than 25%, wiping out hundreds of millions of dollars in market cap. In the whistleblower complaint, Erhart claims he was threatened and fired for uncovering apparent violations of federal and state law. In The New York Times article, Greg Garrabrants, President and CEO of BOFI, responded:

Mr. Erhart has made all of these allegations in great detail to federal regulators, who have reviewed them in depth and have found them to be wholly without merit.

The federal regulators referred to above include the Office of the Comptroller of the Currency (OCC), the bank's primary regulatory agency, the Occupational Health and Safety Administration (OSHA), and the Securities and Exchange Commission (SEC). The Erhart whistleblower complaint has been under consideration to dismiss and has sat stagnant since March 14, 2016. Greg Garrabrants summarized the litigation clearly on the latest quarterly conference call:

The events alleged by former junior employee, Erhart, happened almost 1.5 year ago, by his account. One of the world's largest law firms conducted an independent investigation and found his allegations to be without factual basis and cleared management of the alleged wrong-doing. Subsequently, the bank has completed two record-setting fiscal years, closed two acquisitions that both required regulatory approval and successfully completed multiple OCC and Federal Reserve Regulatory examinations.

Six days after Erhart's complaint was filed, BOFI submitted a complaint seeking sanctions for damages against Mr. Erhart (BofI Federal Bank v. Erhart et al). Recent court documents filed under this action uncovers a likely planned attack-for-profit, strongly putting into question the credibility of Erhart, his claims against BOFI, and of the motives of his attorney, Carol Gillam. Namely, Gillam sent confidential BOFI information to The New York Times, information which was apparently provided by Erhart. [Update 8/31/2016: Gillam has denied via court filing that she disclosed confidential information to The New York Times and others.] Furthermore, Gillam sent pre-filing copies of the Erhart complaint to Citron Research, a known short-seller firm, hours before the complaint became public on the court website. On the latest quarterly conference call, Greg Garrabrants summarized the shocking nature of events surrounding the Erhart case:

In a decisive victory, one of motion requiring Erhart's attorney Gillam to disclose her communications with short sellers, the media and other third parties. The shocking evidence shows Gillam providing BofI confidential information she apparently obtained from Erhart to the New York Times as well as communicating with a number of short seller funds and sending celebratory e-mails about the stock price decline following the filing of Erhart's complaint.

Filings show BOFI subpoenaed Gillam to determine the extent of confidential BOFI information being disseminated to third parties. Under court order, Gillam was forced to comply. The documents revealed that while Erhart was still employed by BOFI, as early as May 2015, Gillam was communicating and providing information to Peter Eavis of The New York Times:

Source: BofI Federal Bank v. Erhart et al, Case No. 3:15-cv-023530BAS-NLS (U.S.D.C., S.D. Cal.) Link to Filings

As shown in court filings, Gillam's communications with Eavis contained confidential BOFI information, including supervisory information in violation of federal law (as confirmed by the OCC). Eavis' initial article on BOFI, dated August 22, 2015, highlighted accusations which ultimately arose in Erhart's complaint filed nearly 2 months later.

Gillam's dissemination to Eavis culminated when she provided a pre-filing copy of the Erhart complaint on October 13, 2015 and asked him to not discuss with BOFI until it was publicly available on the court's website:

Source: BofI Federal Bank v. Erhart et al, Case No. 3:15-cv-023530BAS-NLS (U.S.D.C., S.D. Cal.) Link to Filing

The morning after the complaint was filed, Gillam further provided copies of the Erhart "whistleblower" complaint to known short-selling investors, including Ascend Capital, LLC, Grizzly Rock Capital, and Eric DeLamarter (founder of Half Moon Capital, LLC):

Source: BofI Federal Bank v. Erhart et al, Case No. 3:15-cv-023530BAS-NLS (U.S.D.C., S.D. Cal.) Link to Filing

Source: BofI Federal Bank v. Erhart et al, Case No. 3:15-cv-023530BAS-NLS (U.S.D.C., S.D. Cal.) Link to Filing

Source: BofI Federal Bank v. Erhart et al, Case No. 3:15-cv-023530BAS-NLS (U.S.D.C., S.D. Cal.) Link to Filing

Beyond providing and directing her coworkers to provide the complaint to known short-sellers, Erhart's attorney's motives can best be illustrated by her unabashed gloating over the 30% drop in the share price on October 14, 2015 - the day following the complaint filing:

Source: BofI Federal Bank v. Erhart et al, Case No. 3:15-cv-023530BAS-NLS (U.S.D.C., S.D. Cal.) Link to Filing

Most damning, Gillam provided a pre-filing copy of the complaint to Citron Research on October 13, 2015 at 2:40 PM - hours before it was publicly available on the court website. Citron Research, awarded the "2015 Short-Seller of the Year" award by "Activist Shorts Research," is a pure-play short-seller operation led by Andrew Left. Note the date and time of the below case exhibit:

Source: BofI Federal Bank v. Erhart et al, Case No. 3:15-cv-023530BAS-NLS (U.S.D.C., S.D. Cal.) Link to Filing

To summarize, Erhart's attorney provided the pre-filing complaint to both The New York Times and Citron Research, a known short-seller operation, PRIOR to sending to BOFI lawyers and before it was publicly available on the court's website. The above highlights the lengths to which Erhart's attorney went to affect the share price of BOFI. This begs the question: What benefit does Gillam's client receive from such a concerted attack on the share price? Does poor stock performance increase the likelihood of a successful trial OR does such a blatant attack intend to enrich those betting against BOFI? We believe this evidence strongly challenges the credibility of the Erhart complaint and the motives of Erhart's attorney.

Investment Thesis:

We believe the egregious actions of Erhart and his attorney significantly undermine the credibility of their case and open the door to further subpoenas by BOFI on those who may have participated in an organized attack-for-profit against the bank. With more than 40% of float shares held short per Yahoo Finance, we expect a short squeeze - of epic proportions - to develop over the next several months. Catalysts for such an epic squeeze include:

  • Upcoming court decision on a motion for preliminary injunction filed by BOFI against Erhart et al - oral arguments expected on August 31, 2016 (Source: pacermonitor.com).
  • Any new subpoenas which may arise from the recently disclosed communications between Erhart's attorney and short-sellers - particularly Citron Research, who received a pre-filing copy of the Erhart complaint PRIOR to extended hours closing on October 13, 2015.
  • Dismissal of the Erhart complaint, increasing likelihood as the credibility and motives of the Erhart team are exposed.
  • With time, the market is digesting the immaterial nature of the Erhart complaint and the accusations which have not resulted in any significant action against the bank.

We believe, due to the above reasons and in light of quarter after quarter exceptional financial statements, savvy investors have an opportunity to benefit from an unfairly beaten down stock.

We urge you to make your own conclusions. In our opinion, the answers are clear and written on the walls - the walls which are quickly closing on BOFI bears.

Disclosure: I am/we are long 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 long BOFI. All information for this article was derived from publicly available information. Investors are encouraged to conduct their own due diligence. 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 represents the opinion of the author as of the date of this article. 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," "refute," "intend,", "wrong," "indicate," "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 change his/her position at any point in time without providing notice. The author encourages all readers to do their own due diligence. The author may increase or decrease his/her long position at anytime without providing notice. 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.