Law Suits & Courts

First witness called in BankAtlantic trial

Posted on Wednesday, October 13, 2010

The attorney representing shareholders suing BankAtlantic Bancorp told jurors Tuesday he would prove executives lied to investors about a deteriorating loan portfolio.
As the shareholder class action suit opened in U.S. District Court in Miami, plaintiffs' attorney Mark Arisohn pointed to internal e-mails from bank officials and the bank's "internal watch list" of problem loans. Arisohn said they contradicted the bank's public statements to investors during the investor class period, which was Nov. 9, 2005, through Oct. 25, 2007. As a result, shareholders overpaid for the stock, he said.
Later in the day, BankAtlantic's defense attorney, Eugene Stearns, countered that the bank was open about the risks its loans faced and investors should have been well-aware that its stock would suffer if Florida real estate values declined, as they did severely.
“What you have here is a company that encourages full disclosure,” Stearns told the jury.
The trial comes at a crucial time for BankAtlantic (NYSE: BBX), which is seeking to raise up to $125 million as its shares trade at 95 cents. The bank is considered “well capitalized” by regulators, but a recent Fitch Ratings report said the company does not have enough capital to deal with problem loans and operating losses that have totaled $461 million in the past 10 quarters.
It is unclear how much in damages the bank might face if the plaintiffs are successful.
Problem loans to undeveloped properties held by developers or by borrowers that planned to sell to developers are one of the focal points of the trial, which has the State-Boston Retirement System as the lead plaintiff.
Developers, such as Miami-based Lennar Homes and the since-defunct TOUSA, backed out of tentative deals to buy home lots from BankAtlantic borrowers, according to internal bank documents presented at the trial. On Sept. 20, 2006, Lennar alone had plans to buy properties secured by $55.5 million in BankAtlantic loans.
The national builder exited a preliminary deal with Priority Entrada (near Cape Coral) and Hernando Oaks (near Brooksville), ultimately leading the borrower to defaults on loans of $12.6 million and $20 million, the documents indicated.
As an example of alleged misstatements, Arisohn pointed to comments BankAtlantic President Jarrett Levan made at an investor conference in New York: "We see no trends to make us nervous; we are very comfortable with our borrowers."
That statement was picked up by newswires.
When Levan shared it with his father, BankAtlantic Chairman and CEO Alan Levan, the elder Levan responded back by e-mail: "I also wouldn't be so bold on the credit front. I think that Marcia [Snyder] is going to have problems with her land portfolio."
Snyder, the former chief of land lending at BankAtlantic, is scheduled to testify in the trial.
Arisohn said the e-mail exchange showed the bank's statements to the public were misleading.
"Despite the fact that the head of the bank told his son that this was too bold, there was no retraction," Arisohn said.
Land loan issues
During his opening statement, Arisohn sought to characterize BankAtlantic's land loan practices as reckless and unsafe.
The attorney started his criticism by running through the bank's builder land bank (BLB) loans, where the source of repayment is the borrower selling property to a major homebuilder. He pointed to four loans totaling $86.6 million in Florida.
By October 2006, it was clear that builders, such as Lennar Corp. and D.R. Horton, weren't likely to purchase the properties, Arisohn said.
One of the largest loans was the $27 million Steeplechase loan on a sod farm about 25 miles east of Sarasota, which was the subject of a Dec. 12, 2006, South Florida Business Journal article. Arisohn said the owner flipped the property before the BankAtlantic loan, and the guarantor had a net worth of $275,000.
Of Steeplechase, Stearns said the bank “screwed up," but it quickly disclosed that to investors.
Arisohn used Steeplechase as an example of why he believes it was false for Alan Levan to say in a February 2007 conference call: "We believe we are conservative in our underwriting and our portfolio is high quality."
Stearns said Levan relied on the opinion of federal banking regulators in making that statement. He presented an Office of Thrift Supervision examination of BankAtlantic released in May 2006 – when many of the land loans were in place – as calling the bank’s asset quality strong and its underwriting practices prudent.
“The company was describing its loans in the same way the banks examiners were describing its loans,” Stearns said. “But the recession caused property values to fall. So now you have a bank that made a prudent loan at the beginning and found that the property is now worth less than the loan.”
Although BankAtlantic started disclosing problems in its BLB portfolio in the first quarter of 2007, Arisohn said it took much longer for bank officials to come clean with investors about problems with non-BLB loans, which are land loans held by borrowers who plan to do the development themselves.
For both types of land loans, BankAtlantic maintained an internal watch list that had category 10 as a “special mention” and category 11 as “substandard.”
The loans in the two categories increased to $67.3 million on April 26, 2007, from $7.4 million on March 31, 2007, Arisohn said.
Arisohn said most of those were non-BLB loans.
The plaintiffs’ attorney sought to contradict an April 26, 2007, statement by Alan Levan at a conference call when the banker said: "The portfolios that our borrowers who are buying land for their own development are proceeding in the normal course."
Arisohn said the watch list showed the portfolio was performing anything but normally.
Stearns cited examples from BankAtlantic Bancorp’s public filings that he believes made it clear that a decline in the Florida home buying market would hurt the company. He also noted that non-BLB loans caused $9.3 million of the reserve expenses in the third quarter of 2007 – when the bank’s earnings announcement was followed by a 40 percent decline in its stock. By comparison, the larger sources of that quarterly loss came from the $22.2 million expense from BLB loans and the $15 million expense to reserve for a general decline because of the troubled economy.
So even if the bank wasn’t honest about its non-BLB loans, which Stearns insists that it was, the impact on its earnings wasn’t great enough to merit damages, he said.
After the jury left the courtroom, Stearns, of Miami-based Stearns Weaver Miller Weissler Alhadeff & Sitterson, P.A., told Judge Ursula Ungaro that he wasn't happy with the plaintiffs' attorney making it sound like the bank should have made its watch list data public. Stearns noted that this isn't an SEC requirement, and most other banks don't do that.
However, before the trial, the judge barred BankAtlantic from using the disclosure records of other banks as evidence.
Ungaro held firm in her position as the trial began, and said that the plaintiffs’ argument refers to the banks public statements not reflecting the data in the watch list.
The plaintiffs’ attorney’s goal is to get the jury to rule that BankAtlantic's stock was inflated during the class period, meaning investors who bought during that time should collect damages.
Arisohn said his expert witness would testify that, based on the alleged misleading statements by the bank, its stock was inflated by 37 cents a share from Oct.19, 2006, to April 25, 2007, and then by $3.15 from April 26, 2007, to Oct. 25, 2007.
"The plaintiffs will prove to you, through the bank's own documents and the bank's own employees, that the bank broke the golden rule, 'Don't lie to your investors and the public,'" Arisohn said.
The plaintiffs plan to use testimony from Candace L. Preston, principal of Princeton, N.J.-based Financial Markets Analysis, to show the amount of damages caused to shareholders.
Stearns disputed Preston’s conclusion in advance. He said it was wrong to compare the performance of BankAtlantic Bancorp stock in an index of national U.S. banks because BankAtlantic was adversely impacted by the troubled Florida real estate market. He showed jurors a chart comparing BankAtlantic Bancorp stock to other Florida-based savings and loan institutions on the market. They plummeted in value in the third quarter of 2007.
Back then, BankUnited FSB was the largest bank in Florida and its stock was spiraling downward. The Coral Gables-based bank failed in 2009.
In addition, Stearns said that BankAtlantic was buying shares of its own stock during the class period, a practice that wouldn’t make sense if the bank was intentionally inflating the value of its shares.
“Now that’s a great way to pump up your stock, get in front of the investing public and say, ‘Let’s keep our fingers crossed,’” Stearns said, referring to a comment by Alan Levan at an April 2007 investor conference call.
Before the trial started, former SEC attorney James Sallah, who is now an attorney in Boca Raton, said the plaintiffs have a tough standard of proof in this case, especially in showing that the allegedly false statements made by bank officials directly caused losses in share value, as opposed to losses from other economic factors.
The first witness to take the stand was the point-man on the bank’s loan portfolio, BankAtlantic Chief Credit Officer Jeffrey Mindling.
Arisohn walked him through the bank’s commercial real estate lending policy, which included recommended loan amount limits based on property values and development costs. Then the plaintiffs' attorney showed him land loans that exceeded those limits.
Using an internal bank report from October 2007, Arisohn pointed out five land loans where the mortgages made up more than 91 percent of the development costs – in one case 100 percent. That left the borrowers with little of their cash in the deals and increased the risks to the bank, the attorney said.
Mindling said that having a high loan-to-development cost ratio was more risky, but exceptions to the bank’s loan policies can be made based on “mitigating factors."
Arisohn presented an internal bank memo that showed $413 million in commercial real estate loans with policy exceptions were granted in the third quarter of 2006 alone. Of those, 10 percent had loan-to-value ratios that exceeded recommended limits and 11 percent had no or limited personal guarantees from the borrowers.
Mindling said that some of the exceptions granted weren’t all that significant. Some were missing or late documentation.
All loans above $5 million were approved by the bank’s “major loan committee,” which includes both Levans and other executives who are named as defendants in the case along with the bank. Mindling is also on that committee, but he’s not a defendant.
Arisohn is trying to undermine the bank’s public statements that its underwriting was conservative. Mindling testified that the bank realized Florida real estate wasn’t such a good investment around the same time everybody else did.
“”We started to have concerns about BLB loans near the end of 2006,” Mindling said. “We started to hear talk there was potential that the market could slow. I don’t believe it was until 2007 that we realized that was happening.”
Mindling’s testimony will continue on Wednesday.
DBR Brian Bandell

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