Posted on Friday, November 19, 2010
Fort Lauderdale-based BankAtlantic Bancorp intentionally misled investors about problems with loans to commercial developers, a Miami federal jury found Thursday in a rare securities fraud class action trial.
The bank holding company made a series of eight false statements in financial filings with the Securities and Exchange Commission, as well as comments by chairman and CEO Alan B. Levan and CFO Valerie Toalson, the jury found.
The verdict could be a harbinger for financial institutions around the nation, which like BankAtlantic Bancorp rode the real estate wave until it crashed.
"Financial institutions need to take a really close look at what happened here and clean up their act," said lead shareholder attorney Mark Arisohn, who represented investors led by State-Boston Retirement System.
The company’s share price fell 10.7 cents, or 13.1 percent, to an all-time low of 71 cents at the close of trading Thursday on news of the verdict.
The parent of BankAtlantic claimed during trial that it was being punished for being one of the first financial institutions to warn the public about the burgeoning real estate crisis, and the bank stopped condo construction lending while others stayed in the business.
But shareholders insisted BankAtlantic Bancorp downplayed the severity of potential loan defaults.
"BankAtlantic lost money, and Bancorp’s stock price declined because the Florida real estate market collapsed," Levan said in a statement afterward. "The risk of that occurrence was fully, completely and timely disclosed to the market. No one could fairly express either surprise or deceit when that risk materialized with the collapse of the Florida housing market in late 2007."
If the outcome is allowed to stand, Levan said it would take public companies back to the day before Congress passed protections against class actions by shareholders in money-losing companies. "We will pursue every avenue to set this verdict aside and are confident of success in that endeavor," he said.
The seven-woman, two-man jury found any investor who purchased shares from April 26 to Oct. 26, 2007, overpaid by $2.41 per share. The jury found no liability for the time period from Oct. 19, 2006, to April 25, 2007. The total damages are unknown but are projected to be in the millions of dollars.
Arisohn, a partner from Labaton Sacharow in New York, said the amount would depend on claims to be filed by class members for the time frame when the company has been found liable. Investors claimed losses as high as $3.52 a share.
Don’t Hold Your Breath
BankAtlantic attorney Eugene Stearns, a co-founder of Stearns Weaver Miller Alhadeff & Sitterson in Miami, said shareholders will never see a nickel of the verdict. He said he has never seen a case with so many issues to pursue on appeal in his 40 years of practicing law.
Foremost on his list is U.S. District Judge Ursula Ungaro’s pretrial finding that four of Levan’s statements were false during a July 24, 2007, conference call with analysts.
"It’s highly prejudicial," Stearns said. "We are obviously disappointed, but given the instructions the jury received, the outcome is hardly surprising."
He said the judge reached her conclusion without an evidentiary hearing, and he insisted those questions should have been left up to the jury, which was asked to weigh 19 statements by bank officers and in corporate filings.
Ungaro pointed out some inconsistencies and contradictions on the jury’s 64-page verdict form.
Stearns said after trial, "Where did they come up with $2.41 per share is a mystery."
Jurors arrived at the figure by deducting 52 cents a share from the $2.93 stock loss after BankAtlantic disclosed the extent of its loan losses in October 2007, juror Leticia Bacallao told Bloomberg News. Jurors concluded the 52-cent drop was caused by the economic downturn and not directly attributable to any wrongdoing by the bank.
"We really wanted to make sure that the plaintiffs had proved that each statement was false," she said.
Arisohn said the jury understood the bank was hiding its loan risks from investors.
"The jury held the bank and the bank’s management accountable for lying to the public about the riskiness of the loans it was making," he said. "The shareholders are grateful that the jury did not permit the bank to get away with the fraud."
The six-week securities fraud trial was only the 12th since Congress clamped down on shareholder lawsuits by passing the Private Securities Litigation Reform Act of 1995, Arisohn said.
Stearns said the trial showed why Congress was so concerned about shareholder class actions. "This is why they enacted that law," he said.
Arisohn said the case was about securities fraud, not the banking or real estate crisis, because investors ended up buying shares at inflated prices. BankAtlantic Bancorp saw its stock drop from nearly $78 in May 2006 to under a $1 today. It lost nearly $72 million in the first half of this year and has been in the red for the past 12 quarters. The bank had $4.6 billion in assets as of June 30.
Levan told jurors the company was the victim of an unprecedented real estate crash. He said the bank repeatedly told investors and analysts about its concerns in its developer loan portfolio, but there was no way to anticipate builders would dump their inventory at highly discounted rates. About $175 million in loans were in jeopardy in May 2007.
‘Pack Of Liars’
At the center of the trial were conference calls between Levan and bank analysts in late 2006 and 2007. Levan was quoted as saying, "There is really nothing significant to note on the credit front," and the developer loan portfolio "has always performed extremely well, continues to perform extremely well."
Plaintiffs also claimed the company omitted key information or downplayed bad financial news in its quarterly and annual SEC filings.
The trial pivoted on internal e-mail. Arisohn called Perry Alexander — a BankAtlantic manager who served on the bank’s major loan committee along with top executives, including Levan — an unintentional hero when he produced memos calling committee members "a sneaky pack of liars" who were not practicing sound underwriting.
But Stearns put on evidence showing Alexander was hotheaded and produced an e-mail from him expressing regret for his disparaging comments.
Arisohn said Levan’s comments about the bank’s conservative underwriting policies were false, pointing to loans for developments without nearby utilities. He said salary bonuses tied to loans blinded bank employees.
BankAtlantic attorneys contended the bonuses were for loan origination, not approval, and most new developments in Florida are in outlying areas.
Both sides told Ungaro they were anxious to get the appeal process started.
Miami attorney Andrew Hall of Hall Lamb and Hall, who is not involved in the case, said Ungaro’s findings about the four statements would be almost impossible for the defense to overcome. Still, he said it would be tough to get a reversal from the 11th U.S. Circuit Court of Appeal.
"Jury verdicts are very hard to upset," he said. "The bigger question is why the truth wasn’t being told relative to their financial statements."
John Pacenti Daily Business Review