PL Capital: Banc Of California Is Hiding Something

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PL Capital has some questions for Banc of California’s (BANC) Board of Directors relating to CEO Steven Sugarman and his “successful” tenure at GPS Partners LLC, an investment firm he co-founded.

This week, PL Capital requested full disclosure regarding Sugarman’s involvement with GPS Partners. PL Capital noted Sugarman’s corporate biography is misleading to shareholders because it portrays Sugarman’s tenure with GPS Partners as a success, despite the fact that GPS Partners received a federal cease and desist order due to alleged short selling.

What is GPS Partners?

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GPS Partners is not your run-of-the-mill hedge fund. It was founded in 2005 and served as a $2 billion private investment fund run by Sugarman and managing partner Brett Messing. The GPS Partners Advisory Board was loaded with prominent figures too, including former Los Angeles Lakers head coach Phil Jackson and ex-Goldman Sachs partner William Gruver.

In 2009, GPS Partners redeemed its investors. But some of the GPS Partners’ actions raised concerns among the U.S. Securities and Exchange Commission (SEC), which imposed a cease and desist order against the hedge fund on March 16, 2010.

The SEC claimed Messing had violated the rule of “short selling in connection with a public offering” five times in 2006 and once in 2007. In addition, the commission alleged GPS obtained profits of more than $1.1 million as a result of these illegal actions.

How was Sugarman involved?

PL Capital provided a timeline of Sugarman’s tenure with GPS Partners, and here’s a closer look at some of the key dates that outline Sugarman’s involvement with the hedge fund:

  • June 2005 to (at least) March 2009 — Sugarman served as a co-owner, partner, member and Chief Compliance Officer for GPS Partners. He also disclosed an ownership stake between 10% and 25%.
  • March 16, 2010 — Sugarman was not named as a respondent in the SEC’s cease and desist order. But let’s not forget, Sugarman was involved with the company at the time the alleged violations took place.
  • November 2010 — Sugarman joined the board of First PacTrust, which preceded Banc of California. There is no evidence that shows whether Sugarman disclosed the SEC’s cease and desist order against GPS Partners to the board of First PacTrust or Banc of California.
  • November 2010 to present — Sugarman remained on the board and became Banc of California’s CEO in 2012.

Although the SEC has not cited GPS Partners since 2010, Sugarman’s corporate biography misrepresents his tenure with the investment fund. PL Capital noted this biography “implies that GPS Partners LLC was a success, and fails to disclose material information.”

What is Sugarman’s future with Banc of California?

PL Capital has asked Banc of California’s Compensation, Nominating & Governance Committee to “properly disclose Mr. Sugarman’s background.” It also requested that each member of Banc of California’s board receives the information regarding Sugarman’s tenure with GPS Partners.

Transparency is key for any publicly traded business, and PL Capital pointed out that Sugarman’s background should be “fully disclosed in [Banc of California’s] SEC filings and on the company’s website.” PL Capital said with full disclosure, the board can comply with Banc of California’s Code of Business Conduct and Ethics, a requirement that promotes “full, fair, accurate, timely and understandable disclosures in documents filed by the company with the SEC.”

Sugarman’s term as a director expires at Banc of California’s 2016 annual meeting of shareholders. Until that time, however, Banc of California’s board has plenty to consider regarding Sugarman and the company’s future.

Bottom line

The timing of PL Capital’s request is interesting to say the least.

Banc of California’s price per share hit $20.26 on Nov. 28, which represented a new 52-week high. Also, Banc of California this week declared a quarterly cash dividend of $0.12 per share on its outstanding common stock. And based on the trading price of $15.23 as of the close of market on Nov. 27, the cash dividend resulted in an annualized dividend yield of 3.15%.

Furthermore, the news about Sugarman’s tenure with GPS Partners comes only a few weeks after Banc of California promoted three senior finance executives to lead the company’s finance office. Sugarman noted at the time that the appointments supported Banc of California’s goals to bolster its “robust financial, strategic and analytic capabilities.”

Banc of California today has $7.3 billion in assets and over 100 banking and lending locations. But turmoil at the executive level of any bank can wreak havoc on its revenues, and ultimately, its share price.

How Sugarman and the Banc of California board respond to PL Capital’s request could dictate the company’s immediate future. There’s also PL Capital 5.9% ownership stake to consider, which could give it plenty of sway over the board.

Sugarman likely will need to address PL Capital’s claims soon if he hopes to retain his position as Chairman of the board. But Banc of California shareholders should remain patient, because regardless of whether Sugarman remains, the company possesses the necessary assets to rebound quickly.

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