After sleeping on it let me CLARIFY!

After sleeping on this all night let me clarify what I feel and why I broke my self-imposed promise to quit posting about BOFI.

I’ve been accused of believing all the things the shorts say and bringing half-truths and innuendos to the board. I’ve been accused of saying that BOFI has done all kinds of illegal things, and now that the ex-chief-auditor has done all sorts of illegal things. I did NO SUCH THING! I just think it makes sense to consider changing your mind about a stock in the face of new information. I’ve been accused of doing WRONG in doing so.

That last article by the shorts on Seeking Alpha brought out that Ball had worked for 20 years at a company where there was scandal, corruption, failure, officers indicted, etc. No one has disputed the truth of this. Ball apparently included it in his statement. He was not indicted. I’m not saying he did anything ILLEGAL.

I’m just saying he was chief-auditor there for many years and MISSED IT ALL. What the heck is a chief-auditor supposed to do anyway? Isn’t he, on some level, supposed to help protect the company from just this kind of thing happening?

To reward him for this splendid, sterling, performance, of auditing so well that he MISSED all that was going on for years, our company, BOFI, immediately hired him.

Out of all the auditors in the world they could have hired, they chose this one who had missed all sorts of internal corruption for years! One writer defending Bofi (maybe it was on the Bofi board) excused this because Ball was a buddy of the person who hired him because that person had also worked for that failed company.

I’m NOT saying that BOFI did anything ILLEGAL in hiring him.

I’m NOT even saying that BOFI did anything SUSPECT in hiring him.

I’d have to say though that BOFI did something that seems REALLY STUPID in hiring him. That seems like incredibly poor judgement. Do you want your chief-auditor, who presumably is there to protect the integrity of your bank, to be someone who missed all this illegality and corruption for years at another bank???

In fact, I’d have to say that BOFI did something that seems INSANE in hiring him.


Okay, now this same chief auditor suddenly RESIGNS at the same time a junior auditor brings all kinds of accusations of irregularity against the company. WHAT? What is going on. COINCIDENCE !?

And you want me to believe it when he says he’s resigning because of OVERWORK??? It just happens to be a series of coincidences? Just some mean old shorts?


Now I’m just one of those oddballs who thinks that you should change your mind about a company when there seems to be a good reason. That’s one of the basic principles I’ve tried to instill in this board - that there are always other good choices and you don’t have to stay with a bad one.

You can throw out all the other articles by the shorts. The material in this one, which I’ve described above, and which, as far as I know, no one is disputing the basic accuracy, would be enough for me to have severe doubts. Would I go out and buy shares in this company if I wasn’t in it? No way? Would I stay in it if I currently had a position in it? I don’t think so.

Do I rule out that this will all blow over and that Bofi will rise to new heights? Not at all. It’s probably more than 50-50 that they will. Do I want to take the chance? NO! There are lots of companies out there without all this hanging over them, which will also rise to new highs without this kind of danger. If you want to stay in it’s your business. I did want you to be aware of this new information which seemed to show incredibly poor judgement on BOFI’s part.

Best to you all!

Saul

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I’m just saying he was chief-auditor there for many years and MISSED IT ALL.

Saul, wasn’t the fraud involved here the receiving of bribes for approving loans backed by the Small Business Administration. Are not loan applications written up at a local level and then submitted to a loan officer higher up for perusal before they are then sent to the SBA?

Does the audit department in a bank look at individual loans, or is their job to make sure all the pluses and minuses add up correctly?

Anyone here know?
Thanks, JT

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Anyone here know?

Hi JT, I certainly don’t know, but there are just too many coincidences, funny sounding things, and almost but not quite strange and bizarre things going on for me. It may be possible to find an excuse for each of them, but putting it all together, why should I, or you, pick such a potentially troubled situation to invest in? There are other companies that will go up too, without this kind of worry.

Best,

Saul

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There are other companies that will go up too, without this kind of worry.

I quite like ‘this kind of worry’ - it enables me to buy stock in great businesses at a 50% discount.

E-Coli scares, GoPro worries, cell phone worries…

Lots of opportunities for steep discounts for the long term investor.

Ian

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the higher the risk,the greater potential for reward, or loss. not everyone is in the same boat. some of us are happy to own stocks that creep up 5% a year for years on end and some of us throw caution to the wind.

love the board and appreciate all the help, keep up the great work.

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SaulR80683: I’m just saying he was chief-auditor there for many years and MISSED IT ALL. What the heck is a chief-auditor supposed to do anyway? Isn’t he, on some level, supposed to help protect the company from just this kind of thing happening?

My understanding, in reviewing the La Jolla Bank failure, is that the audit department uncovered the wrongdoing and reported it to the Audit Committee.

Evidently, bank officers Rick Hall, Martin Rodriguez, and Richard Colbourne formed a three-person Executive Loan Committee (ELC), granting their ELC individual loan approval authority of up to $10 million. The ELC recommended or approved loans which violated numerous provisions of the bank’s loan policy. In addition, loans in excess of $10 million up to the Bank’s legal lending limit only required the approval of two ELC members.

Hall and Rodriguez also used their positions to conceal troubled Friends of the Bank (FOB) loans, prevent loss recognition on FOB loans, and maintain loan production.

Plus, while the Bank’s Internal Asset Review (IAR) department, charged with identifying, classifying, and reporting loans with potential and actual credit weaknesses was to report to the Audit Committee of the Bank’s Board of Directors and an IAR Committee, instead reported to a committee composed of Hall, Rodriguez, and other senior managers who delayed classification of troubled loans and identification of troubled borrowers.

Complicating matters, management’s strategy to increase earnings by reducing overhead costs resulted in a lack of oversight in key areas, particularly loan underwriting and credit administration.

As the situation unraveled, Chairman of the Audit Committee of the Board of Directors, Kenneth Bien had “lost confidence” in Hall and Rodriguez, telling Colbourne that the two had "made [line of credit] increases, modifications and have ‘hidden’ the status of the financial condition of key borrowers . . . . [T]his management team is unable to objectively resolve the majority of distressed loans as they made these loans, have a close relationship with the borrowers and have made modifications to [lines of credit] that are detrimental to the financial stability of the Bank. . . . [T]he financial aspects of the Bank will continue to deteriorate until these 2 are replaced.”

Clearly, there was considerable fraud taking place at La Jolla Bank. How far does an auditor’s responsibility extend when key senior executives are using their positions to circumvent lending practices, misdirect internal controls, and alter lines of credit?

From what I’ve read so far, when auditors discovered irregularities at La Jolla Bank they were brought to the Audit Committee. Isn’t that what they’re “supposed to do anyway?”

SaulR80683: I’d have to say though that BOFI did something that seems REALLY STUPID in hiring him. That seems like incredibly poor judgement. Do you want your chief-auditor, who presumably is there to protect the integrity of your bank, to be someone who missed all this illegality and corruption for years at another bank???

You’re just guessing, of course.

As long as we’re tossing out guesses, let’s guess that Ball was in fact a white knight who uncovered the wrongdoing at La Jolla Bank. And if so, is it any wonder that BofI would extend him a job offer? After all, what if he was the one who uncovered an bank fraud and revealed wrongdoing to his Audit Committee? (Isn’t that the way they write their articles over at Seeking Alpha… with a lot of “what ifs”?)

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I quite like ‘this kind of worry’ - it enables me to buy stock in great businesses at a 50% discount.

Ian,

I agree with this and occasionally try to take advantage of the wall of worry. As for BOFI, I was hoping Bill Ackman or Whitney Tilson would get in on the bashing, too, so that I could solidify my resolve in continuing to hold.

Saul may be right about BOFI. Or not. No one exactly knows all there is about the company - the same for nearly all of them. On the private Lumber Liquidators board, CMFMonkey posted a wonderful sentence that I hope TMF and he do not mind my quoting:

“If things that don’t exist continue not to exist, then LL will go up in price. But maybe LL will go down in price. So you should sell.”

We might substitute BOFI and the sentence make equal sense.

Pete

Saul may be right about BOFI.

I don’t think Saul is making a prediction about BOFI … in fact, he has said multiple times that this may all be a bunch of noise and BOFI may well do just fine. What he has said is that it all creates enough worry that he would rather have his money elsewhere. That is very different than a prediction.

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I don’t think Saul is making a prediction about BOFI … in fact, he has said multiple times that this may all be a bunch of noise and BOFI may well do just fine. What he has said is that it all creates enough worry that he would rather have his money elsewhere. That is very different than a prediction.

Thanks tamhas, that captures it exactly.

Saul

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Clearly, there was considerable fraud taking place at La Jolla Bank. How far does an auditor’s responsibility extend when key senior executives are using their positions to circumvent lending practices, misdirect internal controls, and alter lines of credit?

This is what many people don’t understand. When multiple people within an organization are colluding to commit fraud, it is literally almost impossible to detect until it blows up. It is very difficult for a single individual to commit material fraud, it is often quite easy for two or three people, however.

Fletch
Former senior auditor with KPMG in a prior life

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Hi NewEchota, that was really good investigative work tracking all that down about what happened at La Jolla Bank.

However, about Ball, unfortunately, if he had been the hero and “white knight”, it’s hard to imagine him hiding his years at La Jolla on his LinkedIn profile. I know it’s just circumstantial evidence, but it seems he was more embarrassed than proud about what he accomplished at La Jolla. As I said, that’s just a guess based on the available evidence.

Saul

Hi Saul,

I have to disagree with your logic. Lets think about the type of people who go to linkedin. It is many times working professionals trying to build or maintain their professional identity for one reason or another. The people who would view your profile will be a mix of people who know you well and people who do not know you at all. These days primarily people looking to fill a position or network. Now that Ball is potentially looking for a job or was looking in the decent past many of the people viewing his profile are looking for a potential candidate. Many people when they visit his profile know nothing about him and are getting a first impression from his profile. How would it look as a first impression to have previously worked at a bank that had failed regardless of your role? It wouldn’t look very good whether you had anything to do with the failure or not. It is human nature to look after yourself always. I think anyone here if put in his exact same situation would not list La Jolla Bank history on your linkedin profile if you were Ball. You are trying to present yourself in the best light and this might be a huge red flag for people looking to hire. Instead any smart interviewee would bring this up in the interview where they have a chance to explain their side of the story. It will most definitely pop up in any basic background check anyway after all. I don’t see how anyone can gain much of anything from him refraining from listing this on his linkedin profile. Be honest with yourself anyone who reads this would you honestly list such a position on your profile if you could get away with not listing it? I know I wouldn’t. If you listed it you most likely just disqualified yourself for nearly every banking job without even having the chance to explain your side of the story. This to me doesn’t even seem to be a yellow flag let alone a red flag. He is just looking after himself and no one is hurt by it either.

Best,
Soth

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JT,

Does the audit department in a bank look at individual loans, or is their job to make sure all the pluses and minuses add up correctly?

I asked myself the same question a month or more ago. I was thinking that the internal audit might be checking loan applications and looking for issues specifically with loan approval. But that is not that case. For information on internal audit functions you can look at bis.org/publ/bcbs223.htm This is the Basel Committee guidelines on internal audit function in banks.

“Principle 6: Every activity (including outsourced activities) and every entity of the bank should fall within the overall scope of the internal audit function.
14. The internal audit function should not be involved in designing, selecting, implementing or operating specific internal control measures. However, the independence of the internal audit function should not prevent senior management from requesting input from internal audit on matters related to risk and internal controls. Nevertheless, the development and implementation of internal controls should remain the responsibility of management.”

The internal audit function executes the internal audit plan which comes from the audit committee of the board of directors. Of course I have NO PRATICAL KNOWLEDGE of how the internal audit function operates in the real world. But in theory it is responsible to audit EVERYTHING for the purpose of protecting the financial stability and reputation of the bank. This is impossible (IMO), which is why there has to be an audit plan to prioritize the risk auditing. Depending upon the coziness or complicity of the board to the senior management, the wrong doing might never come under the scrutiny of the internal audit function.

The guidelines are more than 20 pages. Enjoy!

KC

I quite like ‘this kind of worry’ - it enables me to buy stock in great businesses at a 50% discount.

E-Coli scares, GoPro worries, cell phone worries…

Lots of opportunities for steep discounts for the long term investor.

These worries are quite different.

E. coli with CMG is temporary but it will certainly affect customer traffic, perhaps permanently.

GoPro sales decline (for AMBA) may be temporary or permanent. Either way their other business will more than make up for any GoPro loss of business.

Cell phone worries (pertaining to SWKS) may just be a worry and nothing substantial.

Now BOFI is quite different. It may be that nothing is wrong or it may be that there are serious illegal activities happening at the company. It also seems that management is shady at best and fraudulent at worst. The other “worries” might reduce business, but BOFI’s worry could kill the business. Saul says why risk that when you could make great returns with companies that have honest, competent managers.

Chris

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Chris,

It may be that nothing is wrong or it may be that there are serious illegal activities happening at the company

You could say that about any company.

But this company has been the subject of intense scrutiny and still no evidence of any kind of illegal activity has materialised.

Chipotle is probably the safest restaurant in America to eat in today - every procedure will have been examined to make sure that it is of the highest, hygienic standard. Yet 50% of customers will be afraid, avoid it and instead eat somewhere less safe.

Every process and procedure in BOFI will have been looked at and examined to make sure that with all the questions and accusations that have been raised management can reassure shareholders and regulators. And those regulators will most likely have been breathing down their necks making sure that there is no fire despite all the smoke.

Sure, any company in my portfolio could have ‘serious illegal activities happening at the company’, but given the level of scrutiny BOFI is the least likely candidate.

When enough mud has been slung, and still nothing sticks, I find that quite reassuring.

Ian

(Apologies to Saul - who wants to let this lie - but as this was in response to my earlier post I felt that I should reply)

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