Key board member resigns from embattled Banc of California, following chairman
Chad Brownstein, a Los Angeles investor and longtime board member of Banc of California, has resigned from the troubled Irvine bank, which is the subject of a Securities and Exchange Commission investigation and investors’ calls for a boardroom shake-up.
Brownstein’s resignation Wednesday comes two weeks after the departure of former Chairman and Chief Executive Steven Sugarman. Sugarman resigned Jan. 23, the same day the bank acknowledged that it is under investigation by the SEC over its response to allegations of impropriety, inside dealing and connections to a convicted fraudster.
The bank’s board asked Sugarman to resign, according to sources with knowledge of the situation. In an SEC filing Wednesday, the bank described Brownstein’s departure as voluntary, saying he “has decided to retire.” It also said Brownstein has not severed all ties with the bank and will continue to represent it on the board of the LA 2024 Olympic bid committee.
With Sugarman and Brownstein — formerly the bank’s longest-tenured directors — now off the board, the bank on Wednesday appointed activist investor Richard Lashley to the board, a move that along with other governance changes is probably aimed at assuaging investor concerns about the bank.
Lashley’s firm, PL Capital, owns a 6.9% stake in the bank, making it the company’s largest active shareholder. The firm has had a testy relationship with the bank, but that seems to have softened starting last year, after Lashley, in an SEC filing, said he had productive discussions with the bank.
In a bank news release Wednesday, Lashley said he looks forward “to continuing the collaborative and solutions-focused spirit with which PL Capital and the board approached our discussions.”
PL Capital also agreed to a so-called standstill agreement, which limits the amount of additional Banc of California stock the firm can purchase and requires the firm to vote in favor of board candidates nominated by the company.
For the last few years, Lashley has pushed for changes at the bank, saying it was not properly managed, and even questioned whether Brownstein was too close to Sugarman.
In a 2014 letter to the bank, Lashley criticized the terms of Sugarman’s compensation package as overly generous and complained that the bank had done an inordinate number of deals with companies connected to bank insiders, including Sugarman’s family members.
In another letter that year, Lashley said the bank should hire an outside consultant to, among other things, “examine whether Mr. Brownstein is sufficiently independent of Mr. Sugarman to serve as an effective lead director.”
Though classified by the company as an independent director — meaning he does not work for the bank — Brownstein for years had business relationships with Sugarman and his brother, Jason.
Brownstein joined Banc of California’s board in May 2011. Two months later, Prospect Global Resources, a now-defunct mining company where Brownstein was vice chairman and a significant shareholder, hired a firm run by Steven Sugarman as an investor relations advisor. Sugarman’s firm eventually became a significant Prospect shareholder.
In 2013, Brownstein borrowed $250,000 from an investment fund run by Jason Sugarman.
The bank said in a statement last month than an internal review has found no evidence that “any loan, related party transaction, or any other circumstance has impaired the independence of any director.”
Still, corporate governance experts said Brownstein appears to have enough connections to the Sugarmans to cause legitimate concern.
“It doesn’t look good,” said Steven Bank, a business law professor at UCLA. “It sounds to me like these guys are intertwined in a way that, if there were litigation, shareholders might feel independence was not sufficient.”
Along with adding Lashley, the bank’s board announced a handful of other changes, including cutting compensation for board directors and approving a new policy that calls for board members to “refrain from engaging in outside business activities that create an actual or apparent conflict of interest.”
Many of Lashley’s concerns were echoed last month by Legion Partners, an L.A. investment firm that recently disclosed an ownership stake in the company and said it planned to push for governance changes and potentially a sale of the bank.
Brad Vizi, a managing director at Legion, told The Times last month that the bank needs new leadership and independent board members.
“The bank demonstrates some of the worst corporate governance I’ve ever invested in. The folks that have been at the helm have been asleep at the wheel,” he said.
Though Vizi did not single out Brownstein, the longtime board member had since 2013 been chairman of the bank committee that oversees corporate governance and executive compensation. In that role, Brownstein would have been responsible for signing off on some of the related-party transactions — specifically deals that benefited members of the former CEO’s family.
One such deal was the bank’s 2013 acquisition of asset management firm Palisades Group, a firm that a few months before the acquisition signed a five-year, $600,000 consulting contract with Jason Sugarman. Another, also in 2013, was the bank’s acquisition of mortgage firm CS Financial, which was partly owned by Jason Sugarman, his wife and his father.
Robert Hockett, a professor at Cornell Law School, said the bank’s board seems to be taking a prudent approach to the unfolding scandal, and that the resignations of Sugarman and now Brownstein suggest that the board is trying to distance itself from questions of impropriety.
“It looks like there have been significant shenanigans underway,” Hockett said. “The bank board is in turn acting responsibly by trying to sever its links to the sources of contamination.”
In a statement issued by the bank Wednesday, Brownstein did not address any of the issues surrounding his departure.
“Banc of California has grown substantially by almost every measure in the last five years, and I am proud to have served the company during this time,” he said in the statement.
Banc of California’s stock started to slide last year after a Bloomberg story that detailed those and other insider transactions. The stock suffered further when, in October, an anonymous short-seller accused the bank of being secretly controlled by Jason Galanis, who was convicted of fraud.
The blogger detailed several connections between Galanis and bank insiders, including Jason Sugarman and Brownstein, much of it backed up by court records and other documents viewed by The Times.
In an October news release, the bank reported that members of its board had hired a law firm to investigate the short-seller’s claims. But last month, the bank acknowledged that the news release was rife with errors and that the investigation had been initiated and overseen by the bank’s management, not it’s board.
A second investigation, one that is almost complete, has found no evidence that the bank broke any laws or that Galanis had any control over the institution, the bank said in its statement last month.
The SEC has declined to comment on what, if anything, it is investigating at the bank, but statements from the bank suggest that the inquiry is focused on misleading statements in the news release.
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UPDATES:
5:50 p.m.: This article was updated with a statement from Richard Lashley and details about additional corporate governance changes at the bank.
4:15 p.m.: This article was updated with comments from Chad Brownstein and Cornell law professor Robert Hockett, details on related-party transactions at the bank and background on the bank’s investigation into possible ties to Jason Galanis.
This article was originally published at 2:55 p.m.
