Bofl Holding (BOFI) Sued by Former Auditor

Any thoughts? Is this what is driving price lower?

Bofl Holding (NASDAQ: BOFI) was sued by a former internal auditor alleging he was fired after revealing possible wrongdoing at the bank to federal regulators and management, according to a report in the New York Times.

http://www.streetinsider.com/Corporate+News/Bofl+Holding+(BO…

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This is what I wrote on the BOFI board a few minutes ago, from a litigator’s perspective:

I am trying to get a copy of the Complaint (right now the electronic filing website for the Southern District of California appears to be down). But just a quick take based on the New York Times article:

I think we must take the CEO of Bofi at his word that the plaintiff’s allegations were investigated by regulators and found to be meritless. His statement is so definitive that he would have massive exposure if it were false. The background of the plaintiff’s lawyer, Carol Gillam, is unimpressive.

This looks to me like it may be algorithm based selling and I am buying more right now.

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saw a spreadsheet that contained as many as 200 accounts without tax identification numbers

It may be true that he say this spreadsheet and that the spreadsheet contained no SSNs. However, this is not proof that the bank doesn’t have the SSNs elsewhere. There are multiple explanations.

  1. BOFI is skirting the rules.

  2. BOFI is not skirting the rules. The ex-employee is disgruntled.

  3. BOFI is not skirting the rules. The ex-employee is working with short sellers in order to manipulate the stock price.

There are other explanations. I think that it would be impossible to prove wrongdoing on BOFI’s part without another audit/investigation into the bank;s records. So I ask these questions:

  1. Can this lawsuit trigger the bank’s regulators to start a new investigation of the bank?

  2. Can the court/plaintiff’s attorneys subpoena the banks records?

If the answer to either is yes then the doubt will remain and we could see stock price stay low or drop lower until this is cleared up and no wrongdoing is shown. If wrongdoing is shown then there are 2 questions:

  1. What is the extra risk exposure to BOFI and what is the direct or indirect impact on the bank’s financial position and prospects?

  2. Can we trust management in the future (for they would have lied and broken the law)? Do we want to be invested in a bank that commits such acts?

Chris

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Cross-posted from the RB board, where I accidently posted it initially:

I realize that options aren’t Saul’s thing, but given the potential high-risk situation we’re facing today, I’ve added to my position via buying a couple of call spreads, purposefully targeted at the potential return to the previous share price if this whole thing blows over.

FWIW: April 115-145 for 8.45, and in my IRA, April 110-150 for 13.07. Total money at risk is the cost to open those positions, less than $2200 in total, with gains only if the share price is above about 123 by April. Max potential gain (probably not highly likely) is 7000-2200 = 4800.

as always, i am full of carp

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down 28% and still falling. Days like this show the disadvantage of owning only 15 or 20 stocks, one big loser can wipe out lots of small gains.
With this much damage it is more than just computer trades going on, recovery will take a long time. Even assuming there is not much actually wrong here.

Isn’t the ex auditor also responsible for faulty reporting?

Days like this show the disadvantage of owning only 15 or 20 stocks, one big loser can wipe out lots of small gains.

Sure, but it goes both ways. And there’s more downside cushion because of the earlier outperformance from that more concentrated portfolio.

There’s no doubt this is an ugly day – it’s been an ugly few months, really, between SWKS, AMBA, INFN, and now BOFI – but, as always, the question comes down to whether it’s mere volatility or actual business impairment. BOFI could certainly be a business problem, though the CEO very directly and bluntly said that this guy had already reported everything to regulators and the regulators investigated all of those claims and found nothing. That could be a lie, but it’s a pretty bold one if so. And we know that regulators have reviewed the bank very recently.

We’ll just have to see. It certainly has felt like one punch after another recently, but it is what it is: stocks don’t go up in straight lines :wink: As always, what’s important right now is what’s happening to the underlying businesses. As earnings season unfolds, we should get more insight.

Neil

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I’m not sure if someone has actually posted the exactly quote from the CEO, so here it is from the NYT article:

In an interview on Tuesday, Gregory Garrabrants, Bank of Internet’s chief executive, said the allegations were groundless. “The factual inaccuracies here are numerous and substantial,” he said. “Mr. Erhart [the ex-auditor] has made all of these allegations in great detail to federal regulators, who have reviewed them in depth and have found them to be wholly without merit.”

He doesn’t beat around the bush. Again, could be a lie, but a pretty bold one if so.

Neil

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“He doesn’t beat around the bush. Again, could be a lie, but a pretty bold one if so.”

I’d say both the CEO and the auditor are taking pretty big bets. If the auditor cannot prove his case, he can kiss his chance at any employment, EVER, as an Internal Auditor! But if he can, the CEO is signing his end of career agreement. That being said, the market for Internal Auditors are very hot, and unless this individual had credible data, he wouldn’t go after this company. Any potential money he can make in this case is not likely to be enough for sustaining his life forever, not to state the legal costs if he fails to win the case.

As for the CEO, if he is lying, he is probably well protected by his employment contract. In case of a wrong doing, they will simply fire him and pay him a couple of million dollars to avoid a protracted legal battle.

My vote is with the auditor here.
Ani.

Hi Ani

As for the CEO, if he is lying, he is probably well protected by his employment contract. In case of a wrong doing, they will simply fire him and pay him a couple of million dollars to avoid a protracted legal battle.

No he will go to jail.

Any potential money he can make in this case is not likely to be enough for sustaining his life forever, not to state the legal costs if he fails to win the case.

Since we are just guessing here and really have no idea how much money he thinks is enough, let’s just say 5 million. Do you think he might do it for that amount of money?

So my vote is on the CEO. Because I think jail time is much more scary than having to look for a job in another profession.

Andy

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“No he will go to jail.”

You mean like all the people who went to jail for the 2008 financial crisis? !!

I thought most execs got away with fines coming out of they company’s money.

Ani.

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Not Enron employees.

Htownrich

You mean like all the people who went to jail for the 2008 financial crisis? !!

Really Ani? You are going to compare BOFI to the 2008 financial crisis? Have a nice day.

Andy

Really Ani? You are going to compare BOFI to the 2008 financial crisis? Have a nice day.

Andy

I don’t think that is what he did. Given all the wrong doings that happened during the 2008 financial crisis and nobody went to jail, why should we assume that it may happen now if there ends up being any wrong doings on BOFI’s part. After all, it would pail in comparison.

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Things have changed since Enron. Here’s one of the provisions in the Sarbanes-Oxley Act:

Title III consists of eight sections and mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports. It defines the interaction of external auditors and corporate audit committees, and specifies the responsibility of corporate officers for the accuracy and validity of corporate financial reports. It enumerates specific limits on the behaviors of corporate officers and describes specific forfeitures of benefits and civil penalties for non-compliance. For example, Section 302 requires that the company’s “principal officers” (typically the Chief Executive Officer and Chief Financial Officer) certify and approve the integrity of their company financial reports quarterly.

Chris

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Jdc,
I don’t think that is what he did. Given all the wrong doings that happened during the 2008 financial crisis and nobody went to jail, why should we assume that it may happen now if there ends up being any wrong doings on BOFI’s part. After all, it would pail in comparison.

I would say that everyone already knows what happened in 2008. Also, in any of the discussions I have had on these boards whenever anyone brings up Enron, Savings and loans scandal, or the banking crisis of 2008, well the discussion is over because there is no longer anything to be found out. While I could bring up all kinds of unsavory characters and compare them to Mr. Erhart, What would that bring to the discussion? So the polite way to end it is to say “have a nice day”. Otherwise it denigrates into an argument and if I was looking for an argument there are plenty of other boards for that.

Andy

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Hi Chris,

It is true that Sarbanes Oxley Act (commnoly known as SOX) has helped a lot in improving the quality of financial reporting. But even with SOX, it is very difficult to pin down the blame of wrongdoing on a couple of executives. That is why we have seen so few executives going to jail despite a 2008 crisis, although we have seen monumental penalties.

thanks,
Ani.

OT ??

I suspect that CEO of major companies have jumped through all the legal hoops and we will see few if any convictions of top dawg corporate leaders under Sarbanes Oxley.

But all this protection costs money,lots of money, thus benefitting lawyers and accountants. But also increasing the cost of doing business in the US, thus harming the people of the US as a group. Money and business tend to go where they are treated best.

In fact few have been prosecuted under SO and even fewer convicted

http://blogs.reuters.com/alison-frankel/2012/07/27/sarbanes-…

you can get lots of opinions about the usefulness of S-O but the facts mostly point one way.

look at this defense of SO
http://www.nytimes.com/roomfordebate/2012/07/24/has-sarbanes…

lots of platitudes but no facts. And written by lawyer not a businessman

Will S-O do anything to be worth the corporate cost?
So far it does not appear to have done much to reduce executive wrong doing.Crooks will be crooks. And if you want to be a crook and are smart enough ,white collar crime is definitely the way to go. Especially if you avoid the obvious ones like embezzlement.

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Will S-O do anything to be worth the corporate cost?
So far it does not appear to have done much to reduce executive wrong doing.Crooks will be crooks. And if you want to be a crook and are smart enough ,white collar crime is definitely the way to go. Especially if you avoid the obvious ones like embezzlement.

It’s hard to prove a negative. If I put in a new law that says no one can wear denim pants, and 10 years later, I only have two convictions of people wearing denim pants, what does that say? Perhaps the law is completely ineffective because tons of people are still wearing denim pants and I’ve only put two of them in jail. Or perhaps I only have two convictions because the vast majority of people stopped wearing denim pants once the law was put in place.

If you look back in the 1990s and early 2000s there were seemingly dozens of major corporate accounting scandals. 2004 onward (2004 being the year SOX 404 was really put into place) the number of major accounting scandals has decreased considerably.

Causation? Correlation? I’m not sure. But I don’t think it’s fair to say that the law doesn’t work using lack of convictions as evidence. I do not discount the deterrent effect both from the Sarbanes-Oxley law itself and the increased auditing requirements and standards put on the accounting firms.

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