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BANC: Extensive Ties To Notorious Fraudster Jason Galanis Make Shares Un-Investible

|Includes: Banc of California, Inc. (BANC)

"Despite the experience of recent years, corporate rogues continue to find their way to positions of power at the top companies. Thousands of people every year are fooled into investing in companies that turn out to be dishonest, unethical, or even downright criminal."

- The Forewarned Investor, a treatise on identifying corporate fraud co-authored by BANC CEO, Steven Sugarman

VISIT WWW.BANCEXPOSED.COM TO DOWNLOAD SELECT SOURCE MATERIAL.

IMPORTANT - Please read this Disclaimer in its entirety before continuing to read our research opinion. 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 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," "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.

Background

In 2010, COR Capital ("COR"), an obscure investment firm most visibly known for its associations with Pink-Sheet stocks, led the recapitalization of a Los Angeles based regional bank named First Pactrust ("FPB"). In 2012, Steven Sugarman, COR's Managing Member, became the CEO of the bank and began a "transformational" growth strategy fueled by a combination of (oftentimes related party) acquisitions and loan growth.

Growing its balance sheet by a factor of 10x and now having crossed the critical $10 Billion asset threshold, the renamed Banc of California (NYSE:BANC) has touted itself as a "community reinvestment" lender. The bank has cultivated relationships with politicians and celebrities to project an air of success and credibility as California's Bank. Investors have increasingly adopted these promotional narratives and BANC's shares had doubled over the past year.

The PR effort hit new highs in August when BANC agreed to pay $100 million, roughly 10% of its market cap, for soccer stadium naming rights to the LA Football Club (which just happens to be part-owned by Steven's brother Jason Sugarman and Jason's father-in-law Peter Guber).

With our interest piqued by yet another related party transaction, we conducted exhaustive due diligence into BANC's leadership team, collecting tens of thousands of pages of publicly-available state, federal, and international documents. Taken together, these form to assemble one of the most ominous fact patterns we have ever seen.

Our research establishes that BANC's senior-most officers and board members have a broad mosaic of extensive and indisputable ties to Jason Galanis. We believe this introduces a significant un-discounted risk that notorious criminals gained control over the $10 Billion taxpayer guaranteed Banc of California.

Jason Galanis and his infamous father, John Galanis, have a long history of secretly gaining control of banks and public companies via front men, looting assets, and leaving unsuspecting investors and taxpayers with hundreds of millions in losses. The mere presence of a bank leadership team associated with Galanis should send diligent investors running for the hills.

We see striking similarities between BANC and Gerova Financial, a $1 Billion NYSE listed financial institution that collapsed on the revelation of Galanis' secret control. Like BANC, Gerova's executives had significant ties to Galanis and touted their community reinvestment efforts with politicians to establish credibility. In the end, the promotion was a diversion from a giant fraud that left investors with devastating losses.

As a result, we believe Banc Of California is simply un-investible.

A summary of key research conclusions we are releasing in this report include:

  • Jason Galanis Controlled COR, BANC's Founding Shareholder. SEC documents detail how Galanis gained control of COR portfolio companies to orchestrate the Tribal Bonds Ponzi Scheme. Galanis laid claim to Banc of California to display his financial wherewithal and even managed the scheme out of an office in the same building as BANC's headquarters.
  • An Off-Balance Sheet Lender Controlled By BANC's Senior-Most Officers Financed Galanis. Steven Sugarman holds an undisclosed interest in Camden Capital, an off-balance sheet lender controlled by BANC's Vice Chairman, Jeffrey Seabold. Camden was used to finance Galanis amidst the recent Tribal Bond Scheme and engaged in transactions with Galanis during the Gerova Financial fraud.
  • BANC's Lead "Independent" Director Has Strong Ties To Galanis. BANC's Lead "Independent" Director, Chad Brownstein, has strong ties to Jason Galanis, his indicted associates, and COR Capital. Mr. Brownstein also accepted an undisclosed loan from Camden that is secured by his Los Angeles Mansion but appears to finance his outside business ventures.
  • We See Similarities Between BANC And Galanis' Gerova Financial fraud. In wrapping BANC in the flag of "community reinvestment", Steven Sugarman has recycled a nearly identical narrative to what Galanis propagated at Gerova Financial. Further parallels include a leadership team and founding shareholder with undisclosed ties to Galanis, a bevy of suspect related party transactions, and the use of opaque assets as regulatory capital.

Note: Neither Banc Of California or its executives have been named in any government indictments.

All information for this article was derived from publicly available information. The author(s) have a short position in Banc Of California. Investors are strongly encouraged to conduct their own due diligence into these factors.

Steven Sugarman's COR And Jason Galanis Control The Same Offshore Insurance Company

Seasoned readers will likely recall that John Galanis was one of the most notorious financial criminals of the 1970s and 1980s. Before being served with a 58-count RICO indictment in 1987, Galanis defrauded investors out of hundreds of millions through a variety of stock scams, frauds, and ponzi schemes that led to the seizure of at least four banks. Specific historical examples include:

  • A fraudulent tax shelter scheme orchestrated by gaining control of two banks, bribing officials of another and gaining control of three California mutual funds. Rudolph Giuliani, called this "one of the largest white-collar crimes the FBI has ever had."
  • The looting of Chase Bank in the early 80s as part of an "inside job" in which a series of fraudulent loans were made to Galanis companies.
  • Charges brought by Canadian authorities in 1973 that allegedly involved fraudulent investment securities that were purchased by a Montreal Bank that Galanis indirectly controlled through his control of the bank's largest shareholder.

John has reportedly had a "heavy if not controlling influence" over his son, Jason Galanis, who became known in the early 2000s as"Porn's New King" and subsequently settled SEC accounting fraud charges related to Penthouse's bankruptcy.

In September 2015, father and son were charged by both the SEC and Department of Justice (having since pled guilty) for their role in secretly gaining control of Gerova Financial (OTC:GVFG), a Bermuda-based reinsurer. This now infamous heist of what was then a nearly $1 Billion NYSE listed company saw its stock decline 95% after a short seller's report exposed Gerova's ties to Jason Galanis.

In May of 2016, Jason & John Galanis, while out on bail for the Gerova fraud, were again charged by the SEC and Department of Justice along with five associates for a complex ponzi-scheme. The alleged fraud involved sham tribal bond placements, the proceeds of which were transferred into shell corporations and used to purchase luxuries and pay legal expenses.

Central to the scheme was the Valor Group ("Valor"), also a large Bermuda-based insurance holding company that, according to the SEC, "was controlled by Jason Galanis." Valor was used to finance the acquisition of asset managers who, in turn, purchased the fraudulent tribal bonds on behalf of their clients.

Source: SEC Complaint

Two troubling ties to Steven Sugarman, who remains the Managing Member of COR Capital, immediately emerged:

  • Hugh Dunkerley, a former COR-executive, was indicted along with Galanis as being a key alleged player in the fraud. Mr. Dunkerley's involvement in the scheme dates back to 2013, when he incorporated Valor while still at COR.
  • Jason Sugarman, is the Founder, Chairman & CEO of Valor(according to both an SEC filing and an interview). During the same period, Jason served as a paid BANC consultant and continues to be described as an advisor. (Note: Jason Sugarman was not named in the complaint or accused of wrongdoing.)

Given these associations, the Tribal Bond Scheme was briefly mentioned in Bloomberg's recent profile of BANC's related party dealings. The article reported that:

Steven Sugarman said his company had no role, and there's no direct link between Galanis and the bank or its CEO.

Mr. Sugarman's assertion is directly contradicted by SEC obtained documents and mysteriously deleted COR websites,all of which indicate that COR owns Valor.

1) The sworn declaration of an SEC enforcement attorney (below) states that Valor's primary insurance subsidiary (Wealth-Assurance AG) and Burnham Financial (the placement agent for the Tribal Bonds Scheme) are among COR's family of businesses. The SEC documents also describe Valor as a "strategic component of the COR Group."

(Case 1:15-cv-09764 Document 5)

2) Valor Group's corporate factsheet also declares COR as its owner and points readers to www.corgroupworldwide.com. The site has been deleted, but in late 2015 the home page (below) included logos of the companies in which "COR is a principal investor." Notably included under COR's umbrella are BANC, CS Financial (a 2013 BANC acquisition), Valor's Wealth-Assurance and Burnham.

Source: Wayback Machine

COR Capital's website (www.corfunds.com) previously included executive biographies of Steven Sugarman and Hugh Dunkerly. This website has also been completely deleted.

Experience has taught us that when websites start being erased, it's time to start asking serious questions.

The critical question for BANC shareholders is how Jason Galanis could control an offshore insurance company that was simultaneously owned by COR Capital, an entity ostensibly led by Steven Sugarman?

We believe Jason Galanis Controlled COR.

Our belief is directly supported by the aforementioned SEC enforcement attorney's declaration (below) which states it was "understood that Galanis was associated with COR Capital.

Source: Case 1:15-cv-09764

In a related court transcript (below), the SEC names a "host of other companies… [that are] part of the COR Group" and that "all of these entities…seem to be controlled by [sic] Jason Galanis."

Source: Case 1:15-cv-09764. Note: the above document mis-transcribed Jason Galanis as "Chase and Gollanis"

The same SEC declaration also describes how Galanis installed officers at COR portfolio companies to conceal his control. Michelle Morton, an indicted Galanis associate who was put in charge of the asset managers "primary contact with any of the Galanis-related companies was always Jason Galanis" but "other individuals were presented to her as officers of the companies."

Galanis even used Banc of California to portray his financial wherewithal. SEC investigators obtained an email from Galanis that attached a document titled "Introduction to COR Capital" that was used to "demonstrate who [the] financial sponsors are." BANC of California was featured as the marquee name amongst COR companies claimed by Galanis.

Source: Galanis' COR Capital Document publicly filed by the SEC pursuant to case 1:15-cv-09764.

But most shocking is that Jason Galanis and Hugh Dunkerley orchestrated the Tribal Bond Scheme out of a Burnham officelocated in the same building as Banc of California's corporate headquarters.

Source: Burnham Securities Tribal Bonds Placement Agency Agreement. Publicly filed by the SEC pursuant to case 1:15-cv-09764.

Galanis' demonstrated control over COR's portfolio companies combined with his physical presence at BANC's headquarters building, introduces the material risk that Galanis also gained control of Banc of California. This risk is amplified by the trail of indisputable ties between BANC's senior-most officers and Jason Galanis.

An Off-Balance Sheet Lender Controlled By BANC's Senior-Most Officers Financed Galanis.

In May 2013, BANC acquired an option to purchase a mortgage lender, CS Financial ("CS"), from then Board Member, Jeffrey Seabold. As part of the deal, Mr. Seabold stepped down from the board to become BANC's Chief Lending Officer (and was subsequently promoted to Vice Chairman). In 2014, BANC exercised the option to acquire CS for $10 Million.

Two former affiliates of CS, Camden Capital Partners ("Camden") and Camden Escrow, were not acquired by BANC. In fact, Mr. Seabold'sinitial employment agreement specifically carved out his ability to continue to direct these outside companies but restricted him from serving as a loan officer (curiously, this restriction was lifted in Mr. Seabold's 2015 amended agreement).

We found that Steven Sugarman holds an undisclosed interest in Camden Capital and its managed real estate entity, Camden Real Estate Opportunity Fund I, LLC. A May 2015 reconveyance document obtained from the L.A. County Deed Records, signed by Jason Sugarman and Jeffrey Seabold, lists JAS Partners I, LLC as a managing member of Camden.

Source: L.A. County Deed Records.

We retrieved a Delaware "Certificate Of Revival" for JAS Partners 1, LLC filed in August of 2014 that is personally signed by Steven Sugarman as the Authorized Person (below). Mr. Sugarman's ownership is further confirmed by his current FINRA disclosure report, which states that he is the managing member and 67% majority owner of JAS Partners I, LLC (also below).

Source: Delaware Division of Corporate Records.

Camden has been actively transacting with employees and insiders, including at least one independent board member. For example, Camden made a complex series of loans to one of BANC's top mortgage producers to finance this expensive Beverly Hills home.

The crucial fact is that Steven Sugarman and Jeffrey Seabold are using an off-balance sheet entity (Camden) to make loans to insiders.

But it gets far worse.

In June 2015, deed records show that Camden made a loan to Jason Galanis in the midst of the alleged Tribal Bond Scheme. The loan (below) was secured by Galanis' Beverly Hills mansion and was made directly to his Thorsdale Fiduciary and Guaranty Company.

Source: L.A. County Deed Records. Pictured above is Jason Galanis' Beverly Hills mansion that secured the loan.

According to the SEC, Thorsdale was used as Galanis' "piggy bank" to spend ill-gotten proceeds on items such as Prada & Gucci gear. In a post-indictment court transcript, John Galanis states that he received funds from Thorsdale in 2015 (case 1:15-cr-00643 Document 153).

An FBI agent attests that Galanis also used Thorsdale to transfer ill-gotten funds directly into the Valor Group to finance an acquisition:

Source: Unsealed Criminal Complaint

The facts are irrefutable: BANC's senior-most officers financed the Galanis' and the entity used as a centerpiece of the Tribal Bonds Fraud.

In addition, the Justice Department's complaint describes how allegedly ill-gotten Tribal Bond proceeds were transferred. In an email supplied by the FBI, Bevan Cooney, Galanis' "best friend of 23 years", states that a large transfer "went out to Camden Escrow for the down payment for the 1920 bel air purchase":

Source: Unsealed Criminal Complaint

According to his current Bloomberg profile as well as corporate record websites, Mr. Seabold remains the President of Camden Escrow.

Sugarman and Seabold also used Camden to engage in transactions with Galanis-controlled entities during the Gerova fraud.

Galanis Transferred Gerova Real Estate Assets To Camden

One of the key alleged facets of the Gerova fraud, which is still subject to civil litigation, was that Galanis and his associates stripped tens of millions in real estate assets from the Stillwater Funds. Galanis allegedly used Gerova and a related entity, Net Five, to enrich himself and insiders by transferring and diverting the assets without consideration.

Public records indisputably confirm that Galanis' Net Five transferred the Miami St. Augustine Hotel to Camden. According to the Stillwater receiver, Camden paid just $400k for a property that was appraised for $6.4 Million.

Source: Miami-Dade County Recorder's Office

The Stillwater receiver also alleged that Galanis diverted Stillwater's $18.3 million note on the Pali House Hotel in West Hollywood, CA but said, "It is unclear what happened to this loan interest." We discovered that Galanis acquired an overt financial interest in the Pali-House Hotel (through his River Ranch Assets, LLC).

Source: L.A. County Deed Records.

Prior to that, an SEC filed document reveals that a Gerova affiliate transferred the Pali-House loan interest to BANC's senior-most officers (through Camden). Camden subsequently transferred it to NORe Capital (below), a British Virgin Islands LLC. NORe's Tortola address (which is listed in the Panama Papers), matches that of two Galanis-controlled entities (NatProv Holdings and Allius Ltd.) as well as that of Valor.

Source: SEC Filings.

In a transaction that appears to have monetized the note and sent millions offshore, NORe exchanged the Pali-House note for $19 million in shares of a now-defunct penny stock named Inspired Builders (OTCPK:ISRB). Inspired Builders was registered to COR Capital's address and was formerly managed by Carlos Salas, the President ofCOR Clearing (a clearinghouse owned by COR).

Salas' involvement in Inspired Builders, in our opinion, is revealing. COR Clearing was fined $1 million by FINRA for Anti-Money Laundering ("AML") violations related to OTC securities that occurred during the same time period as these transactions. In fact, a COR compliance whistleblower (who Steven Sugarman and Carlos Salas allegedly ordered to "stop digging" and engaged in "abusive behavior" towards) alleged that the clearing operations were being used to "facilitate material or significant money laundering activities." (Note: the case was settled in February, 2016. COR, Steven Sugarman, and Carlos Salas denied the whistleblower's accusations. Case Number: 8:12-cv-00238.)

That is why we think shareholders should be dismayed to discover that BANC has failed to disclose its recent hiring of none other than COR Clearing's Carlos Salas in a "Consulting Role as Chief of Staff" to "recommend governance, operational and process improvement." The fact that BANC would task the former head of a penny stock that engaged in transactions with both Camden and Galanis-controlled entities with operational "improvement" is farcical.

Importantly, the Camden transactions during both the Tribal Bond Scheme and Gerova fraud confirm the long-standing ties between BANC executives and Galanis. In light of the Galanis' history of concealing control of financial institutions behind undisclosed associates, we believe the indisputable ties between BANC's senior-most officers and Galanis increase the material probability that Galanis gained control of Banc of California.

Our concerns are further increased by the board's undisclosed ties to Galanis and substantial conflicts of interest.

BANC's Lead "Independent" Director Has Strong Ties To Jason Galanis

One of BANC's largest investors, PL Capital, and its principal, Richard Lashley, have thoroughly detailed BANC's governance and board independence issues in a series of 13D filings (here, here, here). The firm has implored BANC's Lead "Independent" Director, Chad Brownstein, to enact governance improvements. In return, BANC has sent a subpoena to Mr. Lashley as part of a bizarre defamation case and hired a "special counsel" to send (in our opinion) a threatening letter to PL Capital.

Our research indicates that Mr. Brownstein has strong ties to Galanis and is actually participating in the very activities he is responsible to independently oversee.

To start with, Mr. Brownstein has received an undisclosed loan from BANC's senior-most officers via Camden (below). The 2013 transaction, secured by Mr. Brownstein's Los Angeles mansion, appears to finance his outside business ventures (as indicated by the address of his trust, which differs from that of other deed records). This loan may very well be disqualifying for Mr. Brownstein as NYSE independence standards extend to outside dealings between management and the board.

Source: L.A. County Deed Records.

Most shockingly, however, are Mr. Brownstein's ties to Jason Galanis and his indicted associates. Mr. Brownstein Co-Founded and was Vice-Chairman of Prospect Global (PGRX). In it's Gerova Fraud complaint, the SEC plainly states that Jason Galanis transferred ill-gotten proceeds to " Prospect Global Resources, Inc.," which it defines as a company that Galanis "owned, controlled, or was associated with."

Source: SEC Complaint.

In fact, we found that Mr. Brownstein (through an entity he controlled named Quincy Prelude, LLC) was one of only four shareholders of Prospect's 2011 reverse merger entity along withJason Galanis' wife, Monet Berger, and Galanis' now-indicted best friend, Bevan Cooney. Devon Archer, also recently indicted as an alleged Galanis Tribal Bonds associate, became Prospect's Audit-Chair (pictured with Mr. Brownstein below).

Following the reverse merger, COR engaged in a variety of complex transactions with Prospect and, at one point, owned 9% of the company. In a 2011 agreement signed by Steven Sugarman, COR was awarded additional shares in exchange for becoming Prospect's paid IR Consultant and to "establish an image for the company in the financial marketplace." Even after becoming CEO of BANC, Steven Sugarman publicly promoted Prospect Global to investors unaware of Galanis' involvement, and was quoted in 2013 as touting that:

"We think Prospect Global is the best potash investment opportunity in North America"

We note that shares of Prospect Global are now essentially worthless, leaving investors who listened to Mr. Sugarman with massive losses.

The bottom line is that BANC's Lead Director, who has approved a number of large related party acquisitions under the guise of independence, has substantial conflicts of interest and strong ties to Jason Galanis, his indicted associates, and COR Capital.

We also have concerns about the independence and qualifications of each of the other Independent Directors (below). It is self-evident, at least in our view, that the board cannot be trusted to protect taxpayers, let alone investors.

Director

Role

Comments

Jonah Schnel

Chairman of Enterprise Risk

Longtime Partner of Chad Brownstein as co-founders of ITU Ventures. The LA times reported that large investors pulled out of ITU Ventures in 2006, "A big reason: The investors were troubled that the two partners, Chad Brownstein and Jonah Schnel, solicited political contributions from the fledgling firms they financed."

Eric Holoman

Chairman of Community Development

Was named as a potential Advisory Board candidate to Burnham's asset managers in documents sent by Jason Galanis and obtained by the SEC (below).

Jeffrey Karish

"Governance and Fiduciary Oversight"

Given a "special thanks" by Steven Sugarman in the acknowledgements of The Forewarned Investor. Was Board Member of Digital Turbine with Sugarman in-law, Peter Guber.

Halle Bennett

"Assessment of Capital Market Transactions"

Is a KBW Investment Banker. KBW has been paid millions by BANC as underwriter of securities offerings. A KBW analyst is also promoting shares to investors with a "Buy" rating.

Robert Sznewajs

Chairman of Audit Committee

Was previously CEO of West Coast Bank (Oregon) that received a FDIC Cease and Desist Order in 2009. The FDIC cited "management whose policies and practices are detrimental to the bank" and "a large volume of poor quality loans."

We See Similarities Between BANC and The Gerova Financial Fraud

The last time Galanis gained control of a $1 Billion financial institution was during the Gerova Financial fraud. Gerova Financial was an offshore insurance company that Jason and John Galanis originally capitalized through secretly controlled entities. Galanis then installed associates as executives and used Gerova to embark on a series of related party transactions designed to enrich insiders. Gerova's balance sheet was riddled with illiquid holdings of asset backed loans and hedge fund portfolios that, in turn, were used for regulatory capital.

The giant fraud unraveled after Galanis' involvement in Gerova was exposed in a January, 2011 short report and the stock dropped 95% before being halted by the NYSE.

We see striking similarities between BANC and Gerova:

Undisclosed Ties To Galanis.

Our research has firmly established that BANC's CEO, Vice-Chairman, Lead Independent Director, and Founding Shareholder all have extensive undisclosed ties to Jason Galanis. The fact that Gerova entities even transferred real estate assets to BANC executives (through Camden) makes the similarities particularly acute.

Shared Promotional Narratives and Associations With Politicians.

In wrapping BANC in the flag of "community reinvestment," Steven Sugarman has recycled a nearly identical narrative to what Galanis propogated at Gerova Financial.

In the below email exchange (provided below and publicly filed as part of litigation), a Gerova-affiliated executive explains to Galanis that they need to "get support at Mayoral and Councilman level" and states "we need to pitch that we are there to help build and revitalize communities and neighborhoods...this should be a great platform for some councilman to look really good in the community."

Galanis discusses political contacts and the executive goes on to tell Galanis that,

Jay, when we are with Sugarman, we need to get next to his Pal from Ohio.

While we don't know which Sugarman is being referenced, Steven Sugarman has followed a similar playbook by closely associating Banc of California with a variety of high profile politicians.

Source: Case 1:03-cr-00131

In a recently filed letter to employees (which used the word "community" in 25 seperate instances), Steven Sugarman touts BANC's Community Development Committee, which has the support of former LA mayor Antonio Villaraigosa:

"Mayor Villaraigosa also joined with our directors - led by Eric Holoman and Chad Brownstein - to form a Community Development Committee of our Board to engage with community groups"

A term sheet sent by Galanis for the purchase of asset managers as part of the Tribal Bond Scheme (below and publicly filed by the SEC), stated that he would: "introduce suitable candidates to request to serve on the Board of Advisors, including an introduction to the former Los Angeles Mayor Antonio Villaraigosa and to Mr. Eric Holoman". Galanis' document specifically highlighted Mayor Villaraigosa's status as a "senior advisor to Steve Sugarman and the Banc of California".

Source: Case 1:15-cv-09764

(Note: We do not mean to imply or allege any wrongdoing on the part of Mayor Villaraigosa or Mr. Holoman.)

Large Holdings Of Opaque Assets For Regulatory Capital

BANC's securities portfolio has grown by nearly $2 Billion since the end of 2014 and now exceeds 25% of assets. The portfolio includes $1.3 Billion worth of level 2 collateralized loan obligations (alternatively described as "structured products" in call reports) that have been subject to only sparse disclosure. This leaves BANC investors holding a portfolio of non-transparent securities that far exceeds the bank's tangible equity.

BANC has also expanded into insurance backed lending and insurance premium finance (first referenced in its 2013 10-K). BANC has indicated that it is providing credit facilities to hedge funds backed by life insurance policies as well as other unspecified assets. In light of the Galanis' history of insurance fraud and Sugarman's ties to Valor, BANC's foray into the world of insurance and hedge fund lending concerns us greatly.

BANC's expansion into other categories, such as EB-5 escrow, foreign national lending, and "no tax return" loans, underpin our worries about BANC's broader banking activities. Steven Sugarman, who has no prior banking experience, has surrounded himself with a de-facto all-star team from the subprime era. BANC's Chief Risk Officer, Chief Investment Officer, Chief Production Officer, COO Of Home Loans, Chair of the Audit Committee and a variety of Vice Presidents were previously employed at failed or sanctioned lenders.

A Bevy Of Related Party Transactions That Benefit Insiders

In becoming one of the fastest growing banks in the country, BANC has engaged in a staggering number of related party transactions including CS Financial and the soccer stadium naming rights deal. These transactions have sent millions in proceeds to Sugarman family members.

In another notable deal, BANC made an equity investment in an affiliate of St. Cloud Capital, a private fund managed by Marshall Geller. Mr. Geller is a Director of COR Clearing and an investor(through St. Cloud) in both COR Securities Holdings and BANC's recapitalization. While BANC disclosed the transaction, it did not mention that Mr. Geller appears to be a business associate of Jason Galanis.

We discovered that Geller is the manager of EGS, LLC, a closely-held entity that includes Galanis' VL Assurance (Bermuda) Ltd. as a member (VL Assurance is a subsidiary of Valor). Mr. Geller led a 2015 financing of Merriman Holdings (where he is also a Director) that sent warrants to VL in the months preceding VL's active involvement in the Tribal Bonds Scheme. We think that BANC's willingness to use taxpayer-guaranteed deposits to finance Mr. Geller is a profound warning sign.

Note: Neither Mr. Geller or St. Cloud have been named in Government complaints or accused of wrongdoing.

Red Flags In The Accounting Suite

Gerova's fraudulent activities were made evident by a series of accounting related red flags and executive departures.

BANC has had near constant turnover in its accounting and finance department. Six key financial officers have resigned since 2011, with the most recent CFO departing just last month after less than a year on the job.

Executive Position Start Date Resignation Date Comments
Marangal Domingo CFO May 2011 November 2012 8-K filed the day after Christmas. Payment of $75k for consulting services and release of claims against BANC.
Lonny D Robinson CFO/CAO November 2012 March 2014  
Ronald J. Nicolas CFO November 2012 August 2015 Signed a "separation and settlement" agreement, paid $750k lump sum plus $250k consulting fee.
Craig S. Naselow Treasurer & CIO November 2012 Unknown No disclosure of resignation and disappeared from filings after May 2014. Not listed on webpage after October 2014.
Nathan Duda CAO March 2014 July 2015 Announcement buried in an 8-K announcing the sale of a bank owned office building.
James McKinney CFO November 2015 September 2016 Annoucement buried in a press releasetitled "BANC to consolidate office of finance."
Brian Kuelbs CIO November 2015 Present Former Countrywide Capital Markets Executive

Source: Internal Analysis From Company SEC Filings and Disclosures

Perhaps most glaring is the 2015 resignation of BANC's long tenured CFO who signed a "Separation and Settlement" agreement that paid him $1 million and included a release of claims.

Finally, we note that the bank has a history of delayed financial reporting, complex executive compensation packages, recently experienced a sharp increase in audit fees, and has had previously disclosed (but since remediated) material weaknesses of internal controls.

Conclusion

In the Forewarned Investor, Steven Sugarman states:

"Investors have fallen for the same bag of tricks again and again. This occurs despite the fact that every business rogue leaves tracks in the sand. In isolation, these signs are usually minor and can be explained away. But viewed in their totality, a damning picture emerges."

The totality of our research establishes that BANC has a broad mosaic of ties to the notorious fraudster Jason Galanis. In light of Galanis' demonstrated history of secretly gaining control of publicly traded companies and large financial institutions, we believe there is a material risk that Galanis gained control of Banc of California. Our belief is strengthened by the striking paralells between BANC and Galanis' Gerova Financial which left unsuspecting investors with enormous losses as part of a giant fraud.

As a result, we believe Banc Of California is simply un-investible.

Investors are strongly encouraged to conduct their own due diligence into these factors and to take one more piece of advice from Steven Sugarman:

"The signs of fraud are often uncovered first by a small number of people who have been watching a company closely. When those people start to make their findings public, they may be the voice of the minority, but they may have important information to share... Skeptics can come from a variety of places. One place to look for them is among short sellers, who are betting that a company's stock will decline. When executives blame short sellers for the decline in their stock price, you can be pretty sure that something else is wrong with the business."

- The Forewarned Investor, a treatise on identifying corporate fraud co-authored by BANC's CEO, Steven Sugarman

Disclosure: I am/we are short BANC.