It’s not every day that the worlds of activist investing and activist short selling collide, although there have been enough examples over the last few years that it shouldn’t be hard for most observers to name one.
The latest is at Banc of California – scene of an incredible set of twists and turns, the latest of which sent the stock up 23% yesterday. For short sellers, who had 27% of the company’s float (itself 92% of the outstanding shares) on loan as of January 13, according to the Wall Street Journal, that should be some squeeze.
Banc Of California
Banc has been volatile for a while. In the six months to last August, it rallied nearly 30%. Then, shares halved in two months as Bloomberg published an article accusing then-CEO and Chairman Steven Sugarman – who literally wrote the book on avoiding unwarranted risks with stocks – of breaking his own rules, and anonymous short seller Aurelius Value published a report suggesting shares were “simply un-investable [sic].”
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Although the recovery began almost immediately, two factors have conspired to take shares to within shooting distance of their $23 52-week high. The first was the election of Donald Trump, which spurred financial stocks higher on the promise of lower taxes and reduced regulation. The second was a bout of stable cleaning under pressure from activist investors and regulators.
Over the past two months, Banc has announced the departure of Sugarman and two other directors, the appointment of an independent chairman, an investigation by an independent law firm, which this week cleared the company of wrongdoing, and the appointment of Rich Lashley, a principal of banking sector activist PL Capital, and a constant thorn in management’s side for over two years.
Whether it was the threat of separate proxy contests from PL Capital and a group comprised of Legion Partners Asset Management and the California State Teachers’ Retirement System (CalSTRS), a Securities and Exchange Commission investigation, a warning from auditor KPMG, or a combination of all of the above that led to these changes is hard to gauge. But it is worth noting the loose ends that remain.
Legion Partners declined to comment on whether it would withdraw its nominations and has yet to do so, raising the prospect of another settlement to be negotiated. It is also hoping to pass a shareholder proposal advocating a majority voting standard on bylaw changes, although that issue may be a precursor to addressing more serious governance deficiencies, such as Banc’s Maryland incorporation and the fact that many bylaws are governed by its corporate charter, which can only be changed by a supermajority.
Then there is Aurelius’ short campaign, and another outfit, Volmanac, which has said it is short the bank’s debt. Aurelius did not immediately reply to a request made through a third party, since it does not provide contact details publicly. Yet with net income up 83% year-on-year, as reported late last month, it may be ceding this one to the longs for the near future. Volmanac, on the other hand, said in an email to me that it “still believe[s] the trade we suggested in October makes sense from a risk reward standpoint.”
Article by Activist Insight