The Bank of Internet had a good year

People wanting stocks to go up are called “longs.” People wanting stocks — or a particular stock — to go down are called “shorts.” Shorts borrow a stock, sell it, and hope to make a bundle when replacing the borrowed shares at a lower price.

One of the most vicious clashes between longs and shorts involves a San Diego company, BofI Holding, better known as Bank of Internet, headquartered in University City. It does consumer and commercial banking over the internet and has impressive revenue growth and profits, partly because it has no branch buildings and partly because it loans money to wealthy individuals.

In 2015, the New York Times said the bank had loaned money to one fellow who went to prison for Medicare and Medicaid fraud and two men who the United States government said ran Ponzi schemes.

That same year, a former BofI auditor, Charles Matthew Erhart, said in a lawsuit filed in federal court that the bank loaned money to “suspicious persons” and “even notorious criminals” that could get the bank in trouble for violating anti–money-laundering rules. Erhart had supplied information to bank regulators, gotten fired, and filed the suit for whistleblower retaliation, wrongful termination, defamation, and other sins. Among many other charges, Erhart said the bank falsely blamed him for a negative article by a short seller that appeared in Seeking Alpha, a reputable publisher of stock-market information. BofI stock plunged 30 percent immediately. The bank denounced Erhart and sued him. The next hearing in Erhart’s suit is January 30.

In the fall of 2015, two putative class actions were filed against the bank and some of its officials. The suits, now combined, charge that the bank’s internal controls were disregarded; borrowers included foreign nationals who should have been off-limits, and some financial statements were false and misleading. Next hearing: March 3.

In late 2015 and early 2016 came several derivative actions — mostly filed in federal court. These are lawsuits brought by a shareholder on behalf of the company, against officers and directors. These charge BofI top managers with gross mismanagement, breach of fiduciary duties, abuse of control, and unjust enrichment.

Four of these derivative actions have been combined, and a state court action has been stayed. The court has dismissed class-action claims against a number of executives, but charges against the company and its chief executive officer, Gregory Garrabrants, remain, according to BofI’s reports to the Securities and Exchange Commission.

According to the Seeking Alpha shorts, almost a dozen former employees of BofI have now revealed alleged details about dubious company activities including “Salvadoran gambling gangs, felonious executives, opaque Venezuelan trusts, corrupt appraisals…check forgery, and falsified audits.” This condemnation by Seeking Alpha also picks up lawsuit claims that the company employed a convicted felon without obtaining a government waiver and issued loans to borrowers “whose ability to repay was demonstrably doubtful.”

Despite these charges, the stock had a good 2016 and is still doing well, as the longs belittle the shorts’ revelations and emphasize the bank’s strong results.

On October 26 of last year, Seeking Alpha came out with what it considered a blockbuster. First, it tied BofI to the notorious Oceanside Galanis family, whom I call Galanis & Sons. The father, John Galanis, 73, was released from prison May 16 of last year. Sons Jason, 46, and Derek, 44, are in the New York MCC, a metropolitan correctional center. A third son, Jared, is not in prison, although all four were charged with fraud and conspiracy by the Securities and Exchange Commission in September.

Last May, Jason and John Galanis were charged with defrauding investors with Native American tribal bonds, according to Securities and Exchange Commission records. They and others were also charged criminally by the United States Attorney’s Office for the Southern District of New York. In 2007, Jason was slapped with a $60,000 fine and banned from the securities business for five years for his role in an accounting fraud as a major shareholder of the company that publishes Penthouse magazine.

In 2015, when charging the Galanis crew with fraud in Gerova Financial Group, the commission noted that the senior Galanis “has been the subject of numerous prior criminal proceedings, as well as enforcement actions by the commission arising out of his violations of the federal securities laws.” The commission noted that in 1988, the elder Galanis was convicted of various felonies, including securities fraud and racketeering schemes, and was sentenced to 27 years in prison.

So how do the shorts tie the Galanis family to BofI? The bank may have loaned money to Jason Galanis. Knightbrook Insurance is controlled by one of BofI’s largest shareholders and has invested in BofI. Knightbrook allegedly has a reinsurance relationship with a company controlled by Jason Galanis. BofI financed entities of Victory Park, whose funds Jason Galanis used in a takeover. These are interesting alleged interties, but I don’t believe they make a decisive case yet.

The October 26 Seeking Alpha report notes that one of BofI’s auditors, Gary McCormick, in 2002 became chief executive of Fraud Discovery Institute, the crook-chasing outfit run by the former Reverend Barry Minkow, now simply Barry Minkow, who will be in prison until June of 2019. Minkow pulled a huge Ponzi scheme, was sentenced to 25 years behind bars, found God, got out, was named pastor of a San Diego church, and founded Fraud Discovery Institute while helping parishioners find God. But then he made some unfounded charges against a large company, fleeced his flock of $3 million, and landed back in the hoosegow.

Since Minkow’s institute years ago was hired by government agencies to teach fraud lessons, I cannot see that the McCormick connection is shocking.

I called Johnny Lai, vice president of corporate development and investor relations at BofI. He didn’t want to answer my questions, even though the company’s chief executive, Gregory Garrabrants, has sounded off in discussions with analysts. In October, Garrabrants referred to an “amateurish short-seller hit piece.” He emphasized, “BofI has no interest credit exposure ownership of any loan, any kind of loan to Jason Galanis or any loan to Jason Galanis who is a guarantor including the $7 million loan mentioned in the hit piece.” He referred to Erhart as a “former junior employee” and said a large law firm has cleared BofI of wrongdoing.