Do I need all this? Do you?

Investment Analysis Clubs Saul’s Investing Discussions
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Your decision to sell clearly makes sense for you; but being perhaps the most respected and one of the most highly thought of posters on The Fool, I just wish you hadn’t re-posted this long list of unproven allegations from Seeking Alpha as your rational.

Hi New Echota,
I guess I should have mentioned that I also downloaded and briefly looked through the lawsuit by the City of Houston Employee’s Pension Fund. Look, my loyalty is to my family and portfolios first, then to the people on this board. I have no obligation to be loyal to BOFI, or any other company. If I see a clear and present danger I feel I have an obligation to point it out to the board.

Here’s a link to the Reuters article about the lawsuit (not some anonymous short).
http://finance.yahoo.com/news/houston-pension-fund-sues-inte…

Here’s a link to the actual lawsuit
https://www.dropbox.com/s/bppvumgboptm27c/BOFI%20Houston%20L…

Here’s part of the Table of Contents of the Lawsuit:

SUBSTANTIVE ALLEGATIONS… 14
I. BofI Engaged in Unlawful Lending Practices … 14

A. BofI Violated the “Ability to Repay” Rule … 15

B. BofI Engaged in, and Concealed, Illicit Lending Partnerships … 22
1. OnDeck … 22
2. Quick Bridge … 26
3. RCN … 30
4. Center Street … 31
5. Propel Tax … 33
6. BofI Properties … 34

C. BofI Failed to Disclose Its Use of Affiliated Off-Balance Sheet SPEs To Purchase Third-Party Originated Lottery Receivables … 37

D. BofI Maintained a Deficient Customer-Identification Program and Violated Federal Laws and Regulations … 38
1. BofI’s Deficient Customer Identification Program … 38
2. BofI’s Deficient BSA/AML Compliance Program … 41
3. Missing or Unverifiable Customer TINs … 42
4. Loans to Foreign Nationals … 44

E. BofI’s Violations of the Flood Disaster Protection Act … 47
F. BofI Misrepresented Its Allowance for Loan Losses … 49

II. BofI’s Ineffective Internal Controls … 52

III. BofI’s Audit Committee and Internal Audit Program Were Materially Inadequate … 55

IV. BofI Failed to Adequately Disclose Related-Party Transactions … 59

A. Related-Party Loans … 59
B. BofI Violated Applicable SEC Rules by Failing to Adequately Disclose A Related-Party Loan to Propel Tax. … 64
C. BofI Violated U.S. Generally Accepted Accounting Principles (“GAAP”) by Failing to Disclose A Material Related-Party Transaction with Encore CapitalGroup / Propel Tax. … 66

V. BofI Failed To Disclose The Criminal Background Of A Senior Officer and Violations of the FDIA … 69

VI. Other Unlawful Misconduct By Defendants … 71

VII. BofI Failed To Disclose Material Information About Pending Government and Regulatory Investigations … 72

VIII. Garrabrants Intimidated And Threatened BofI Personnel, And Abused His Position For Personal Gain … 74

MATERIALLY FALSE AND MISLEADING STATEMENTS ISSUED DURING THE CLASS PERIOD… 79

THE TRUTH BEGINS TO EMERGE BUT DEFENDANTS CONTINUE TO MISREPRESENT AND OMIT MATERIAL FACTS … 111

ADDITIONAL SCIENTER ALLEGATIONS … 127

Note that this isn’t ANYTHING like the usual ambulance chaser type class action lawsuit. Those come after a disastrous quarter, and the accusation is that the insiders had inside information and knew it was coming and didn’t disclose it (and maybe sold some of their own shares). This on the other hand is totally different! It’s a long list of accusations of illegal and illicit behavior.

This is more than 100 pages of allegations of misdeeds that I am not competent to judge, but… Do I Need This??? Do You??? … Are there plenty of other stocks that will grow equally fast out there without this kind of trouble, headache, and possibility of corruption and malfeasance???

If you want to stay “loyal” to Bofi you may make a bunch of money eventually, but if you re-invested your money in one of 20 or 30 Motley Fool stocks without all this hassle, you will probably make a lot of money too.

Do you need all this!!!

Saul

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2

Saul is absolutely right. This is a trait to me a successful investors. You cannot get emotionally tied to your company or stock. One thing I have learned over the years is when bad news comes to light, sell first then let the dust clear. You can always buy back into the company when things are more transparent. I sold BOFI, CMG and others right when the bad news came to light. I use to wait to see how things would “play out” but have learned over the years that does not usually work out well. There are plenty of other of opportunities out there for us all in the stock markets.

There are some news events that are over reactions. One type of event was when the violence was erupting in Iceland and was causing travel issues to Europe. PCLN stock drop because of it and presented a great buying opportunity. You have to be able to discern the difference in these type events. Temporary disturbances versus events that will linger, such as lawsuits.

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You can always buy back into the company when things are more transparent.

It is worth remembering that short attacks often work, at least in the short term. So, if one owns the stock and isn’t sure about the merits long term, it can often be safe to exit and re-enter when the dust settles. If one doesn’t own the stock, then the question is what one thinks long term. If one isn’t sure, then don’t buy. If one is sure, then it is a buying opportunity.

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It is worth remembering that short attacks often work, at least in the short term. So, 
if one owns the stock and isn't sure about the merits long term, it can often be safe 
to exit and re-enter when the dust settles. If one doesn't own the stock, then the 
question is what one thinks long term. If one isn't sure, then don't buy. If one is 
sure, then it is a buying opportunity.

I agree with your sentiment except for one item. This is not a short attack. This is a class action lawsuit with new allegations no Seeking Alpha writer has addressed. Yes, it also has many of the allegations of the writers on Seeking Alpha who are professional shorts. So what?

There is not one person on this board who can tell you what the lawyers will definitively present in court should this go to trial.

There is no one here who knows the specifics of stories told by ex-employees in depositions during the discovery phase.

There’s not a Motley Fool poster who can tell you how this will develop, whether there are newly re-opened or even pending investigations about to happen.

Don’t be mis-directed by people angry with smears/allegations/baseless claims. They don’t know what the lawyers of the plaintiffs are sitting on.

Suppose just one of these newly interviewed employees presents the lawyers a zip drive in the discovery phase with new evidence backing up some of the claims in Erhart’s initial lawsuit?

A court filing never tells the whole story.

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I agree with your sentiment except for one item. This is not a short attack.

If not a short attack, what do you see as the purpose of Friendly Bear’s Seeking Alpha article?

Don’t be mis-directed by people angry with smears/allegations/baseless claims. They don’t know what the lawyers of the plaintiffs are sitting on.

Don’t be misdirected by somebody who has a vested interest in tanking the stock because he is short the stock!

Suppose just one of these newly interviewed employees presents the lawyers a zip drive in the discovery phase with new evidence backing up some of the claims in Erhart’s initial lawsuit?

Suppose that they don’t…

A court filing never tells the whole story.

Agreed

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There is not one person on this board who can tell you what the lawyers will definitively present in court should this go to trial

Or how the judge will rule, or what verdict the jury will return, or, if guilty, what penalties will be assigned.

This is not risk. This is unknown, this is uncertainty, this is not quantifiable. It is a toss of the dice.

Denny Schlesinger

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Don’t be misdirected by somebody who has a vested interest in tanking the stock because he is short the stock!

While the short attack is just allegations on a website, knowledgeable investors should trust their own instincts, research, and conclusions. Getting scared out of a position is for novices. But once the short attack snowballs into a court case where someone is putting money on the line, prudence should have the upper hand. You don’t need to be right, you need to preserve your capital.

Denny Schlesinger

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On the other hand, there are a great many silly lawsuits filed which should not cause one to sell the stock out of reflex. Judgement is required as to how serious the suit is … and that seems the whole point of these exchanges.

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I agree with your sentiment except for one item. This is not a short attack.

If not a short attack, what do you see as the purpose of Friendly Bear’s Seeking Alpha article?

I don’t see how you could have possibly misunderstood I was talking about the lawsuit, not Friendly Bear’s Seeking Alpha article. Let me go back to my paragraph which you took out of context. I will highlight your cut and pasted sentences while showing the whole paragraph it began.

My whole paragraph read like this (and anyone reading can go upthread this is the exact replica of my paragraph’s words.

I agree with your sentiment except for one item. This is not a short attack. This is a class action lawsuit with new allegations no Seeking Alpha writer has addressed. Yes, it also has many of the allegations of the writers on Seeking Alpha who are professional shorts. So what?

Yes, Friendly Bear’s piece was a short attack. But it was built on the law suit. The law suit is what I thought was my clear intent of discussing.

Alexa again: Don’t be misdirected by somebody who has a vested interest in tanking the stock because he is short the stock!

Why would investors/former investors/former employees named in this lawsuit be interested in tanking the stock? But you seem to be holding the paw of Friendly Bear and won’t let go in this thread.

Sure, if Friendly Bear is a pro short talking his book, I understand why he’s writing what he’s writing.

But if you can just let him go just for a moment, focus on the lawsuit.

Me: Suppose just one of these newly interviewed employees presents the lawyers a zip drive in the discovery phase with new evidence backing up some of the claims in Erhart’s initial lawsuit?

Alexa: Suppose that they don’t…

And as Durty Harry asked, and any BOFI investor should answer, “Are you feeling lucky?”

A court filing never tells the whole story.

Agreed

Investigations take time. You start with some kernel of an allegation or evidence, you go down false alleys and it looks like a whole lotta nuthin’. Then, something falls into your lap from new sources which might stoke investigator(s) to give this another go.

Who knows? BOFI may settle out of court to make it all go away. Meanwhile, my bet is someone in some alphabet state or federal agency has just had this latest lawsuit - with new claimants, witnesses & allegations - tossed into their “IN” box for reading this coming week. Heck, they may have already printed it out and are reading it tonight at home from their Lay-Z Boy.

We just don’t know.

What we do know is BOFI’s share price has tanked about 20% or so (the last two trading days) since the just released class action lawsuit document which is about 4 times longer in content than the original lawsuit filed by one lone whistleblower back in October.

We know what the first lawsuit document with add on comments by shorts did to the stock price in October.

The last high for BOFI came on Oct. 12, 2015 at $35.64 per share (split adjusted 4:1) on October 12 according to this Google chart. Look what happened to BOFI shares on October 14th and 15th when the first lawsuit document was released.

(This is a Google chart which may or may not show you the last year’s stock advances/declines, but you can set the chart to your own needs.)

https://www.google.com/finance?q=bofi&ei=GiUUV4mPCNaYmAH…

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“Are you feeling lucky?”

Always a good quip, but I’m not sure it fits the circumstance. Remember that much of the allegation now is not new, but has been made previously … previously enough that there have been a couple of significant audit actions which seem like they would have been likely to throw up red flags, had the allegations been well founded, but no such red flags happened.

I shy away from any investing in banks, but it seems to me that there is a lot of emotion on both sides here and that sound investing decisions are unlikely to be made from emotion. While there is certainly enough here to warrant concern … and the concern alone may be enough for one to decide to look elsewhere for investment potential … it also seems to me that there has also been a lot of well-founded counter argument and it does none of us any service to merely dismiss it.

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This is not risk. This is unknown, this is uncertainty, this is not quantifiable. It is a toss of the dice.

Denny Schlesinger

Well its a risk if you step up to the table to roll the dice. But well said, Denny. You are wise to see what Saul is trying to explain as well.

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Well its a risk if you step up to the table to roll the dice.

You got me there! Indeed, a roll of the dice is risk!

Well done!

Denny Schlesinger

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We can keep tossing this backwards and forwards, but the reality is that we don’t know whether there is any substance to this lawsuit.

People need to make their own judgements based on the available facts and that includes the weight to attach to these allegations.

Alex

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