Investors in Ventura County Business Bank, a small commercial lender that was acquired by Royal Business Bank in 2011, are suing its new owners and former executives, alleging fraud and misrepresentation.
The plaintiffs — Mark Engle, Paul Turley, Mark Ioele, Ronnie Case, Dennis McCarty, Kuen Sil Park, Holger Blank and Farihan Uwaydah — allege that they collectively put $9 million into Ventura County Business Bank through a private placement offering, or PPO, in an effort to shore up capital at the struggling lender. A year later, the investors said in documents filed in Ventura County Superior Court, much of their money was lost when the bank in which they invested was sold.
The investors claim that the bank’s executives, including co-founder and CEO Gerald “Jerry” Lukiewski, led them to believe that the private placement would be sufficient to help the bank turn the corner. The defendants gave no sign that they were pursuing a sale, the plaintiffs allege.
“In or about late 2009 or early 2010, VCBB’s President, Defendant Lukiewski represented to Investors and their representatives that VCBB’s financial troubles were due to isolated failed loans and that, if these troublesome loans could be cleared and with an infusion of cash from Investors through the PPO, the bank would recover and become a viable and profitable concern,” according to the complaint.
Instead, the plaintiffs allege, VCBB’s leaders pursued a second private placement offering, and when they didn’t succeed, promptly sold the bank to Royal.
Alberto Alvarado, senior advisor and counsel to the president and CEO at Royal Business Bank, declined to comment on the lawsuit.
“As a matter of bank policy we don’t comment on existing lawsuits,” Alvarado, who was previously the Los Angeles district director for the U.S. Small Business Administration, told the Business Times.
The deal traded VCBB for “pennies on the dollar,” the investors allege in their complaint, but helped secure jobs and consulting fees for Lukiewski and VCCB’s attorney, Loren Hansen.
“It was a win-win-win for Defendants, but a catastrophe for the Investors who had invested substantial portions of their savings into the PPO. A little over a year after the Investors had invested over $9 million to save VCBB, their investments — and the very bank they put their money into — were gone,” the complaint said.
David Schwarcz, a Los Angeles attorney representing the plaintiffs, did not return a call seeking further comment. The complaint seeks unspecified damages.
VCBB’s search for investors came amid the region’s worst banking crisis since the Great Depression. Affinity Bank, Los Padres Bank and Trust Bank of San Luis Obispo failed, wiping out stockholders.
Investors in the parent of Santa Barbara Bank & Trust lost more than 90 percent of their equity when the region’s largest bank was recapitalized with a $500 million investement.
In March 2010, banking regulators at the Federal Deposit Insurance Corp. issued what’s known as a “prompt corrective action” — that is, a final warning to get capital levels back up, either through a sale to a larger institution or by selling shares to investors, or risk regulatory failure — to Ventura County Business Bank after its capital levels dropped precipitously.
Lukiewski told the Business Times in June 2011 that he had talked to investors, private equity firms and other banks and that the efforts to shop the bank around and look for partners ultimately bought enough time to avoid regulatory failure.
Royal gained two banking branches, along with $78.4 million in assets and $67.2 million in deposits, through the purchase. The deal with Royal was “not a function of capital alone,” Lukiewski told the Business Times before the acquisition closed. “It’s more of a function of a business plan that will allow you to make money in a low-margin environment.”
It’s hard for a bank to make money simply on a spread — the difference between the interest rate on funds it borrows and loans it makes — he said. And fee income, not traditionally a characteristic of community banks, has dried up under new financial reforms.
Pressure on profit margins is one of the main reasons many banks have decided to join forces with other institutions in the wave of mergers and acquisitions in the wake of Dodd-Frank financial reform. Many banks have said that only by combining can they keep administrative costs and other overhead low enough to remain profitable.
Royal Business Bank was founded in Los Angeles in 2008 with $71 million in initial capital. The lender quickly became an aggressive acquirer of other lenders and capitalized on its trade finance niche.
Executives at Royal told the Business Times at the time that they saw opportunities to lend to companies that trade goods through the Port of Hueneme, the large, deep-water port in Ventura County.
“We think trade finance has room for growth in Ventura County because of the way the Port of Hueneme is growing,” Royal Chief Financial Officer David Morris told the Business Times in June 2011.