Bar Mandalevy v. Bofi Holding, Inc.
| Decision Date | 19 June 2018 |
| Docket Number | Case No.: 3:17-cv-00667-GPC-KSC |
| Parties | BAR MANDALEVY; DAVID GRIGSBY; and JOSEPH SHEPARD, individually and on behalf of all others similarly situated, Plaintiffs, v. BofI HOLDING, INC.; GREGORY GARRABRANTS; ANDREW J. MICHELETTI; ESHEL BAR-ADON; and PAUL J. GRINBERG, Defendants. |
| Court | U.S. District Court — Southern District of California |
ORDER GRANTING MOTION TO DISMISS
Before the Court is a motion to dismiss the operative Class Action Complaint (the "CAC") filed by Defendants. (ECF No. 32.) The motion has been fully briefed. (See ECF No. 34 (Plaintiffs' Response in Opposition); ECF No. 35 (Defendants' Reply).) For the reasons set forth below, the Court GRANTS the motion to dismiss. Because supplementation of the complaint may cure the deficiencies discussed below, the Court grants Plaintiffs leave to amend their pleadings.
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Defendant BofI Holding, Inc., is the holding company for BofI Federal Bank.1 (CAC, ECF No. 27, at ¶ 2.) BofI is a nationwide bank that provides consumer and business banking products through "multiple brands." (Id. ¶¶ 30-31.) Defendant Gregory Garrabrants is the CEO and President of BofI. (Id. ¶ 25.) Defendant Andrew J. Micheletti is BofI's Executive Vice President and CFO. (Id. ¶ 26.) Defendant Eshel Bar-Adon is BofI's Chief Legal Officer and Executive Vice President, Specialty Finance. (Id. ¶ 27.) Defendant Paul J. Grinberg sits on BofI's Board of Directors, has served as the Chairman of that board since February 16, 2017, and served as Chairman of BofI's Audit Committee until February 2017. (Id. ¶ 28.) Grinberg also serves as Chairman of the Compensation Committee and, as of February 2017, BofI's Nominating Committee. (Id.)
Seeking to represent a class of individuals who purchased BofI stock between March 14, 2016, and October 24, 2017 (id. ¶¶ 1, 23), Plaintiffs assert two claims against Defendants: (1) violation of Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), by way of violation of the SEC's Rule 10b-5, 17 C.F.R. § 240.10b-5, and (2) violation of Section 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a). (Id. ¶¶ 134-48.) Plaintiffs contend that Defendants violated Sections 10(b) and 20(a) by making, or causing BofI to make, misrepresentations about (1) whether federal regulators were investigating BofI "in connection with money laundering, related party transactions, and other improper activity," and (2) whether BofI engaged in "lending, directly or indirectly, to criminals." (ECF No. 34 at 1.)
On August 22, 2015, the New York Times published an article entitled "An Internet Mortgage Provider Reaps the Rewards of Lending Boldly," suggesting that BofI was lending to "unsavory characters who were later found to have run afoul of the law." (Id.¶¶ 5, 33.) The article listed multiple instances of BofI having issued loans to individuals who later were convicted or accused of fraud, and others who had defaulted on large loans to other banks. (Id. ¶ 33.) It also discussed BofI's practice of making loans to "foreigners," which, according to the article's author, invites anti-laundering scrutiny from regulators. (Id.)
In October 2015, a former BofI auditor named Charles Matthew Erhart filed a whistleblower protection suit against BofI. In the complaint, Erhart alleges that he observed BofI lending to "criminals and politically exposed persons" in potential violation of the Bank Secrecy Act's Anti-Money Laundering Rules ("BSA/AML rules"). (Id. ¶ 6; see Erhart v. BofI Holding, Inc., No. 3:15-cv-02287-BAS-NLS (S.D. Cal.).) Erhart alleges that, during his time at BofI, he observed conduct suggesting that (1) BofI management was altering financial statements, (2) BofI had falsely responded to an SEC subpoena asking for customer account information, (3) BofI falsely told the Office of the Comptroller of the Currency ("OCC") that it had no accounts for customers without tax identification numbers, and (4) BofI had "failed to disclose loans to criminals and politically exposed persons who put the Bank at risk for violating the" BSA/AML rules. (Id. ¶ 34.) Erhart's complaint also alleges that he "uncovered information that many of [BofI's] borrowers were criminals, even notorious criminals, and other suspicious persons who put the bank at high risk of violating the [BSA/AML rules] as well as exposing the Bank to reputational risk." (Id. ¶ 35.)
The CAC refers to a confidential witness known as "CW3" who worked as a BofI underwriter between July 2014 and August 2016. While at BofI, CW3 "heard talk of accusations made by regulators that BofI was loaning money to criminals." (Id. ¶ 38.)
On August 3, 2016, an article on the website Seeking Alpha was published with the title "Court Filings Reveal Existence of Undisclosed Second Alleged BofI Whistleblower." The article asserted that BofI "took specific legal steps to conceal details regarding a second 'whistleblower' from the public court system." (Id. ¶ 39.) The article cited a state court action, BofI Federal Bank v. Golub, No. 37-2016-4902 (SanDiego Co. Ct. 2016), in which BofI sought to enjoin Veronica Golub, a former Assistant Vice President, from using BofI information to "assist in government investigations." (Id. ¶ 40.) A filing in that lawsuit stated that Golub was responsible for performing quality control on single-family loans and reporting deficiencies that could impact credit decisions or affect the salability of a loan. (Id.) According to the article, this filing "shattered" BofI's prior statements that its whistleblower activity was confined to Erhart, and that Golub's potential status as a whistleblower "casts significant doubt on BofI's internal investigations. (Id. ¶ 41.)
On October 26, 2016, an article was published on Seeking Alpha entitled (Id. ¶¶ 8, 80, 108.) In a disclaimer at the bottom of the article, the author states that "[a]ll information for this article was derived from publicly available information."2 (ECF No. 32-8 at 18.3) This article suggested that BofI made "indirect" loans to "a convicted fraudster" named Jason Galanis by funding a special purpose entity that Galanis used "for financing." (CAC ¶ 8, 80, 108; see also id. ¶ 42.) According to the article, Galanis took out a $7 million loan from one of these entities in 2015, but the loan went into delinquency after Galanis's arrest. (Id. ¶ 42.) The author of the article stated that investors "ought to ask/wonder how this loan is being reflected on BofI's balance sheet and/or if management will speak to said Galanis ties during the next earnings call," and that the author believed "that a reasonable person could infer that Galanis has a relationship with BofI that remains undisclosed to this date." (Id.) According to the article, BofI "holds the collateral behind the loan that is now delinquent and the subject of messy foreclosure proceedings that involve the DOJ." (Id. ¶ 8.) Two days after thisarticle was published, BofI stock fell 14.53%. (Id. ¶¶ 9, 110.)
On May 28, 2015, the SEC opened an informal inquiry, or a Matter Under Inquiry ("MUI"), into BofI. (Id. ¶ 46.) On February 11, 2016, the SEC closed the MUI and began a formal investigation. (Id. ¶ 47.) The SEC issued a subpoena to BofI on February 22, 2016, which inquired into BofI's related party transactions, potential conflicts of interest, and loans made to Encore Capital Group, Inc. ("Encore") and Propel Financial Services, LLC ("Propel"). (Id. ¶ 49.) At the time, Grinberg was the CFO of Encore. (Id. ¶ 50.) In 2012, BofI issued a loan to Encore, which by then had acquired Propel. (Id.) According to Plaintiffs, the fact that this deal was permitted to go through constitutes "a deficiency of internal controls," and it also should have been disclosed by BofI as a related-party transaction. (Id.) The SEC was also interested in seeking information about a March 2012 loan made to Johnathan Ball, BofI's Chief Internal Auditor, who was responsible for auditing all related-party transactions. (Id. ¶ 51.) BofI did not disclose the existence of the SEC's February 22 subpoena. (Id. ¶ 49.)
On October 19, 2016, the SEC issued a second subpoena seeking "numerous documents related to single-family residential loans extended to a non-resident alien." (Id. ¶ 52.) BofI never disclosed the existence of this subpoena. (Id.)
Relying on statements by confidential witnesses, Plaintiffs assert that the Individual Defendants were aware of the SEC's formal investigation into BofI. (Id. ¶ 54.) in 2016, Garrabrants and Micheletti told CW1— a former Senior Mortgage Officer and Team Lead between February 2015 and June 2017—about the SEC probe into BofI. (Id. ¶ 55.) According to CW2, who worked as a Mortgage Consultant between May 2013 and August 2016, so many federal regulators were in BofI's offices during CW2's tenure that there was "no way for [] Garrabrants and Micheletti . . . to miss" them. (Id. ¶ 58.) CW4, who worked as an Assistant Vice President, Processing Manager in Residential Lending, stated that BofI's management found ways not to provide documents to the compliance department and planned strategy on how to hide misconduct from regulators.(Id. ¶ 59.) According to CW5, who worked as a Marketing Analyst from July 2015 to March 2017, federal probes from regulators other than the OCC were "ongoing" throughout CW5's tenure, and Garrabrants and Micheletti knew about them. (Id. ¶ 60.)
On March 31, 2017, the New York Post published an article entitled "Feds Probe [BofI] for Possible Money Laundering." (Id. ¶¶ 11, 93, 111.) The article indicated that the DOJ, SEC, and Treasury Department were investigating BofI and Garrabrants. (Id.) It stated that the regulators had interviewed "at least one former employee," and that part of the "probe" was focused on regulatory filings BofI made to the OCC. (Id.) By the end of March 31, BofI...
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