4 FEB Z 1 2012 RAL DISTRICJ fl1 ( j u l 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 1 of 96 Page I #:1123 D BERNSTEiN LITOWITZ BERGER & GROSSMANN LLP BLAIR A. NICHOLAS (Bar No. 178428) MOMY rnlbglaw.com ) A. DeLANGE (Bar No.190768) (timothy& NDOZ-A blbglaw.com ) NTKI L. (Bar No. 214646) (nikirnblbglaw. corn) JON WORM (Bar. No. 248260) (jonwb1bglaw.corn) JOSEPH GOODMAN (Bar No. 230161) VA OIT [email protected]) M. JONNA (Bar No. 265389) M811fligh uljblbglaw.com) Bluff Drive, Suite 300 San Diego, CA 92130 Tel: (858) 793-0070 Fax: (858) 793-0323 -and- GERALD H. SILK W72 blbglaw. corn) SEFSON (aviblbglaw. corn) 1285Avenue of the Americas New York, NY 10019 Tel:(212) 554-1400 Fax: (212) 554-1444 Counsellor Lead Plaintiff Jacksonville Police & Fire Pension Fund and Lead Counselfor the Class UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA WESTEIN DIVISION BARRY R. LLOYD, Individually and CASE NO. CV 10-06256 MMM (PJWx) on Behalf of All Others Similarly CLASS ACTION Situated, Plaintiff, FIRST AMENDED CONSOLIDATED CLASS V. ACTION COMPLAINT CVB FINANCIAL CORP., et al., Defendants. DEMAND FOR JURY TRIAL FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MMIVI (PJWx) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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FEB Z 1 2012
RAL DISTRICJ fl1 (
j u l
2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 1 of 96 Page I
#:1123 D
BERNSTEiN LITOWITZ BERGER & GROSSMANN LLP
BLAIR A. NICHOLAS (Bar No. 178428)
MOMYrnlbglaw.com) A. DeLANGE (Bar No.190768)
(timothy&NDOZ-Ablbglaw.com)
NTKI L. (Bar No. 214646) (nikirnblbglaw. corn) JON WORM (Bar. No. 248260) (jonwb1bglaw.corn) JOSEPH GOODMAN (Bar No. 230161)
Bluff Drive, Suite 300 San Diego, CA 92130 Tel: (858) 793-0070 Fax: (858) 793-0323
-and- GERALD H. SILK
W72blbglaw. corn) SEFSON
(aviblbglaw. corn) 1285Avenue of the Americas New York, NY 10019 Tel:(212) 554-1400 Fax: (212) 554-1444
Counsellor Lead Plaintiff Jacksonville Police & Fire Pension Fund and Lead Counselfor the Class
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA
WESTEIN DIVISION
BARRY R. LLOYD, Individually and CASE NO. CV 10-06256 MMM (PJWx) on Behalf of All Others Similarly CLASS ACTION Situated,
Plaintiff, FIRST AMENDED CONSOLIDATED CLASS
V. ACTION COMPLAINT
CVB FINANCIAL CORP., et al.,
Defendants. DEMAND FOR JURY TRIAL
FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
Case No. 1O-cv-06256-MMIVI (PJWx)
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TABLE OF CONTENTS
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I. NATURE AND SUMMARY OF THE FRAUD ............................................ 1
II. JURISDICTION AND VENUE ...................................................................... 6
III. PARTIES .........................................................................................................7
A. Lead Plaintiff ......................................................................................... 7
B. Defendants .............................................................................................. 7
IV. CONFIDENTIAL WITNESSES...................................................................13
V. DEFENDANTS' FRAUDULENT SCHEME...............................................16
A. Defendants Fraudulently Made Impaired Loans Appear "Current" ...........................................................................................18
B. Defendants Inflated Values For Properties Serving As Collateral For CVB's Loans ................................................................ 24
C. Defendants Used Fraudulent Accounting Practices To Materially Misstate CVB's Financial Statements Throughout The Class Period..............................................................26
1. CVB Intentionally Failed To Disclose Its Loan Losses, Loan Loss Reserves, And Its Restructured, Past Due, Non-Performing And Nonaccrual Loans ByLoan Type ............................................................................ 28
2. CYB Failed To Accurately Report Its Past Due, Restructured And Non-Performing Assets And Its Realized Losses .......................................................... ............... 31
3. Defendants Failed Tio Record Timely Loan Loss Provisions As Losses Were Incurred........................................33
Defendants' Failure To Write Off Loan Losses As They Occurred Inflated CVB's Understated Reserves....................................................................................35
CVB's Omitted Financial Statement Disclosures In Violation Of GAAP ..................................................................36
Following Commencement Of The SEC Investigation, CVB Has Now Changed Its Disclosure Practices .................................................................. 39
VI. DEFENDANTS' MATERIALLY FALSE AND MISLEADING STATEMENTS AND OMISSIONS DURING THE CLASS PERIOD .................................................................................... 41
FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
Case No. 1O-cv-06256-MIMN'I (PJWx)
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A. Third Quarter 2009 Statements ...........................................................41
B. November And December 2009 Presentations ...................................46
C. Fourth Quarter 2009 Statements .........................................................50
D. March 2010 Presentations ...................................................................54
B. First Quarter 2010 Statements............................................................. 55
F. May 2010 Presentation ........................................................................ .58
G. Second Quarter 2010 Statements ........................................................ 59
VII. DEFENDANTS ACTED WITH SCIENTER...............................................61
A. Myers And CVB Executives Personally Negotiated Modifications With Garrett During The Class Period ........................62
B. Defendants' False Statements And Omissions Concerned, CVB's Core Business ............................................................................ 63
C. Defendants Myers And Biebrich Regularly Monitored The Status Of The Bank's Loans And Its Lending Practices............................................................................................... 65
D. Defendants' Close Relationship And Regular Communications With Garrett Support A Strong Inference Of Scienter ........................................................................... 68
B. Defendants Were Motivated To Commit Fraud..................................70
VIII. LOSS CAUSATION .....................................................................................72
IX. THE PRESUMPTION OF RELIANCE........................................................80
X. INAPPLICABILITY OF THE STATUTORY SAFE HARBOR .................. 81
XI. CLASS ACTION ALLEGATIONS..............................................................82
XII. CLAIMS FOR RELIEF.................................................................................84
COUNT I For Violation Of § 10(b) Of The Exchange Act And Rule lOb-S Against CVB, Myers And Biebrich .................................84
COUNT II For Violation Of § 20(a) Of The Exchange Act Against Myers And Biebrich...............................................................87
XIII. PRAYER FOR RELIEF ................................................................................89
XIV. JURY DEMAND...........................................................................................89
FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT
Case No. 1O-cv-06256-MMIIVI (PJWx)
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These allegations are based upon information and belief with information
I obtained through the investigation made by and through Lead Counsel. Lead
Counsel's investigation has included, among other things: (i) interviews of former
employees of CVB Financial Corp. ("CVB," the "Company," or the "Bank") and
former employees of Paul Garrett's real estate development firm, The Garrett
Group LLC ("Garrett"'), with first-hand knowledge of the events alleged herein;
(ii) reviews and analyses of CVB's filings with the Securities and Exchange
Commission ("SEC"), Company press releases, slide presentations, and other
public statements; and (iii) reviews of news, media, web resources, property title
searches, tax lien documents, foreclosure records, and analyst research reports.
I. NATURE AND SUMMARY OF THE FRAUD
1. This is a securities class action on behalf of purchasers of CVB
common stock between October 21, 2009, and August 9, 2010, inclusive (the
"Class Period"). Lead Plaintiff asserts claims pursuant to Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 1 Oh-S
promulgated thereunder (17 C.F.R. § 240.10b-5), against CVB and its top
executive officers, the Bank's Director, President, and Chief Executive Officer
("CEO"), Christopher D. Myers ("Myers"), and its former Chief Financial Officer
("CFO") and Executive Vice President, Edward J. Biebrich, Jr. ("Biebrich"). 2
2. Defendants' fraud largely centers on their efforts to conceal from
investors that CVB's $85 million in loans to Garrett - by far CVB's largest
borrowing relationship - were "impaired" 3 by September 2008, when Defendants
1 Unless otherwise indicated, "Garrett" refers to Paul Garrett, The Garrett Group LLC, and all of its related or owned entities. 2 Defendants Myers and Biebrich are referred to collectively as the "Individual Defendants."
CVB repeatedly stated in its SEC filings that "[a] loan is impaired when principal and interest are deemed uncollectible in accordance with the original contractual
FIRST AMENDED CONSOLIDATED -1- CLASS ACTION COMPLAINT
Case No. 1O-cv-06256-MMIM (PJWx)
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I knew that Garrett could not pay its existing loans and said it would have to file for
bankruptcy if CVB did not extend additional credit and modify loan terms. Instead
of disclosing the problems with the Garrett loans, Defendants secretly extended
I additional credit to Garrett and repeatedly restructured its loans to allow Garrett to
escape bankruptcy and delay defaulting on its loans to CVB, all while falsely
assuring investors that it had strict lending standards and that its borrowers had
I strong credit.
3. Former Garrett executives and employees, including its Chief
Operating Officer ("COO") at the time, confirm that Defendant Myers and other
CVB executives met with Garrett in or around September 2008 and requested and
received additional loans - funds that were needed to help Garrett meet its ongoing
obligations and avoid filing for bankruptcy. According to Garrett's former COO,
the additional funding was used to get Garrett current on prior loans from CVB:
"CVB was trying to keep the house of cards standing."
4. CVB's assistance only delayed Garrett defaulting on its obligations to
the .Bank. CVB repeatedly modified the Garrett loans throughout 2009, while
publicly informing CVB's shareholders that its loans to Garrett were current and
performing as agreed. According to Garrett's former COO, Myers and CVB
executives met with Paul Garrett and top Garrett executives in January 2010 to
discuss Garrett's troubled loans. At the meeting, Garrett told Myers that CVB
needed to modify the loan terms or Garrett would file for bankruptcy. CVB again
modified Garrett's loan terms.
terms of the loan," and that "[a] loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts (contractual interest and principal) according to the contractual terms of the loan agreement." See, e.g., CVB's Form 10-K filed with the SEC on March 4, 2010. Here, where multiple confidential witnesses confirm that Garrett was unable to keep its loans current under their original contractual terms, CVB's loans to Garrett were impaired beginning no later than September 2008.
FIRST AMENDED CONSOLIDATED -2- CLASS ACTION COMPLAINT
Case No. 1O-cv-06256-MIIVIIVI (PJWx)
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5. Even setting aside Myers' first-hand negotiations with Garrett, there is
2 no question that Myers and Biebrich were aware of the status of the loans to
3 Garrett. Defendants claimed that they monitored the Bank's loans on a regular
4 basis. Both participated in Loan Committee meetings at which problem loans were
5 discussed, and commitments over $7 million had to be approved by the Loan
6 I Committee and reviewed on a regular basis. Moreover, Myers specifically
7 discussed the Garrett loans in public statements. Finally, given the importance of
8 the Garrett loans to CVB's bottom line, it is inconceivable that Myers and
9 Biebrich, the two most senior officers at the Company, would not have been aware
10 of the status of the loans. Indeed, when CVB was forced to recognize certain
11 losses on the Garrett loans after the close of the Class Period, those losses were
12 more than 80% of the $52 million in common stock net income that CVB reported
13 for the entire year in 2009. Further, the Garrett write-downs were more than
14 CVB's total reported write-downs for the previous five quarters combined.
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6. Defendants also engaged in other deceptive practices to hide from
16 investors the true condition of CVB's loan portfolio in the rapidly declining real
17 estate market. For example, witnesses describe how CVB overvalued the
18 properties serving as collateral for CVB's loans, including its loans to Garrett. By
19 overvaluing the collateral, Defendants understated CVB's reserves and overstated
20 its profits.
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7. In stark contrast to these practices, Defendants assured investors
22 throughout the Class Period that CVB's strict underwriting standards had helped it
23 avoid the fate of many of its peer lenders in California that had been decimated by
24 skyrocketing defaults. Defendants distinguished CVB's practices from the reckless
25 and improper lending practices of other lenders (which were coming to light as
26 lenders struggled and went out of business). Defendants publicly stressed that,
27 unlike its peers, CVB had a "strong credit culture," its "underwriting integrity
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1 remain[edJ paramount," and "/t/he overall credit quality of [CVB'sJ loan
2 portfolio is sound."
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8. Defendants made a host of other materially false and misleading
4 statements and omissions to conceal the true state of CVB 's loan portfolio, lending
5 practices, and financial condition. Among other things, despite Garrett's threats of
6 bankruptcy and CVB's repeated modifications of the Garrett loans in response,
7 Defendants reported in SEC filings that they were not aware of any loans for which
8 credit problems of the borrower would cause serious doubts as to the ability of the
9 borrower to comply with the terms of the loan. Defendants also used fraudulent
10 accounting to misstate various entries in CVB's publicly filed financial statements,
11 which gave the appearance that CVB was more profitable and had better
12 performing loans than was the case.
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9. Investors and analysts were particularly focused on CVB's loan
14 portfolio and lending practices given the economic climate and the lending
15 practices and financial troubles of other lenders and real estate-related businesses.
16 Thus, Defendants' misrepresentations and omissions inflated CVB's purported
17 profits (and artificially inflated its stock price). In addition, by falsely claiming to
18 have strong capital, conservative lending practices, and low loan losses, CVB was
19 able to continue its stated "growth strategy" of transitioning from a community
20 bank to a regional bank through acquisitions of failing banks with favorable loss-
21 sharing agreements with the Federal Deposit Insurance Corporation ("FDIC")
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10. By August 2010, however, Defendants could no longer hide the truth
23 about its loan portfolio, lending practices, and finances. On August 9, 2010, CVB
24 announced that two weeks earlier, on July 26, 2010, the SEC had issued a
25 subpoena to the Bank demanding information about how the Bank handles and
26 discloses troubled loans - the very allegations detailed herein. The SEC
27 investigation is ongoing and has included depositions of certain confidential
28 witnesses whose accounts are included herein. Specifically, the subpoena FIRST AMENDED CONSOLIDATED
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1 questioned the Bank's loan underwriting guidelines, its allowance for credit losses
2 and how CVB calculates its allowance for loan losses. Analysts immediately
3 reacted to the announcement, stating that the SEC probe was notable because it
4 I revealed that CVB was not fully disclosing potentially problematic loans and that
5 I CVB's largest exposure - Garrett - was backed by collateral whose market value
6 was well below that of the loan amount (mirroring the allegations herein).
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11. The market reacted swiftly to this previously undisclosed truth about
8 the quality of CVB's loan portfolio and financial reporting, and CVB investors
9 suffered severely. Following this disclosure, CVB's stock price plunged 22% in a
10 single day, from $10.30 to $8.00, representing a market capitalization loss of
11 approximately $245 million on extremely high trading volume.
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12. One month later, on September 9, 2010, CVB finally admitted that
13 1 analysts' and the market's interpretations of the SEC subpoena were correct - that
14 CVB's loans to its largest borrower, Garrett, were in trouble. Specifically, on
15 September 9, 2010, CVB disclosed that Garrett defaulted on $82 million worth of
16 loans, that CVB had negotiated a Forbearance Agreement with Garrett, and that
17 CVB was forced to remove all $82 million in Garrett loans from its purported
18 "performing" loans, where they had been improperly accruing interest income
19 throughout the Class Period. Moreover, CVB also effectively admitted its prior
20 violations of Generally Accepted Accounting Principles ("GAAP"). The entire $82
21 million Garrett loan portfolio was overvalued: $34 million was a total loss and had
22 to be written off completely, while the remaining $48 million was deemed
23 "impaired," which required CVB to immediately stop accruing interest income,
24 and to reverse previously reported interest. In its press release, CVB admitted that
25 its loan loss allowance was inadequate to cover the $34 million in credit losses on
26 the Garrett loans, forcing CVB to immediately record an additional loss provision
27 of $9.3 million in third quarter 2010.
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13. Finally, on January 20, 2011, CVB admitted that Garrett had violated
2 forbearance agreements, and that CVB was considering the sale of certain notes,
3 initiation of foreclosure proceedings, and alternative repayment plans.
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14. In contrast to members of the investing public, Myers and Biebrich
5 took advantage of their knowledge of the true state of CVB's loans and financial
6 condition. While publicly claiming that CVB had managed its risks and that its
7 largest borrower was performing as agreed, Defendants Myers and Biebrich sold
8 nearly 100,000 of their own shares at artificially inflated prices, cashing in over
9 $700,000 during the less than ten-month Class Period. This trading was highly
10 unusual and suspicious. In the full year prior to the beginning of the Class Period,
11 Defendant Myers sold no shares and acquired 258,000 shares, and Defendant
12 Biebrich sold only 1,608 shares. Moreover, Myers sold 5,500 shares after CVB
13 received the SEC subpoena but before CVB announced receipt of the subpoena to
14 the public.
15 II. JURISDICTION AND VENUE
16
15. This action arises under Sections 10(b) and 20(a) of the Exchange Act,
17 15 U.S.C. §§ 78j (b) and 78t(a), and Rule 1 Ob-5 promulgated thereunder by the
18 SEC, 17 C.F.R. § 240.1Ob-5.
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16. This Court has jurisdiction over the subject matter of this action
20 pursuant to 28 U.S.C. § 1331, and § 27 of the Exchange Act, 15 U.S.C. § 78aa.
21 Venue is proper in this District pursuant to Section 27 of the Exchange Act,
22 15 U.S.C. § 78aa, and 28 U.S.C. § 1391(b). Defendant CVB maintains its
23 principal place of business within this District, Defendants conduct and/or
24 conducted business in this District, and many of the acts giving rise to the
25 violations alleged herein, including the preparation and dissemination of materially
26 false and misleading information and omissions, occurred in substantial part in this
27 District.
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17. In connection with the acts alleged in this Complaint, Defendants,
2 directly or indirectly, used the means and instrumentalities of interstate commerce
3 including, but not limited to, mail, interstate telephone communications, and the
4 I facilities of the national securities markets.
5 III. PARTIES
6
A. Lead Plaintiff
7
18. Lead Plaintiff Jacksonville Police & Fire Pension Fund ("Jacksonville
8 P&F" or "Lead Plaintiff") was created in 1937, and is a single-employer
9 contributing defined benefit pension plan covering all full-time police officers and
10 firefighters of the Consolidated City of Jacksonville. Jacksonville P&F purchased
11 CVB common stock during the Class Period, as set forth in the certification
12 previously filed with the Court, and suffered damages as a result of the federal
13 securities law violations alleged herein. By Order dated January 21, 2011, the
14 Court appointed Jacksonville P&F as the Lead Plaintiff in this action.
15
B. Defendants
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19. Defendant CVB is a California corporation with its principal place of
17 business at 701 North Haven Avenue, Suite 350, Ontario, California 91764.
18 According to the Company's profile, CVB operates as a bank holding company for
19 Citizens Business Bank, which provides various retail banking and financial
20 services to small and mid-sized businesses, high net-worth individuals, and
21 professionals in the United States. The Bank offers various deposit products,
22 including checking, savings, money market, and time certificates of deposit for
23 business and personal accounts. As of September 30, 2011, CVB operated 43
24 business financial centers located in the Inland Empire, Los Angeles County,
25 Orange County, and the Central Valley of California. CVB reports to be the largest
26 financial institution headquartered in the Inland Empire region of Southern
27 California. CYB reports that its primary asset, Citizens Business Bank, has more
28 than $6 billion in assets. CVB's income is derived primarily from interest earned FIRST AMENDED CONSOLIDATED
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1 on the Bank's loans and deposits and is highly dependent upon the underlying
2 credit quality of its loan portfolio. In 2001, when CVB first listed its stock on the
3 NASDAQ National Market Exchange ("NASDAQ"), it had more than $1 billion in
4 loans; by the end of the third quarter of 2009, loans had grown to more than $3.5
5 billion, with more than half of them in commercial real estate.
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20. (a) Defendant Myers is, and was throughout the Class Period, the
7 Company's CEO, President, and Director of the Company, as well as CEO and
8 President of Citizens Business Bank. During the Class Period, Defendant Myers
9 signed and/or certified the Company's SEC filings and made additional false
10 statements and omissions as set forth herein.
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(b) Defendant Myers had access to the adverse undisclosed
12 information about CVB's business, operations, products, trends, financial
13 statements, markets, and present and future business prospects via direct
14 communications with Garrett, access to internal control documents (including but
15 not limited to the Bank's Problem Loan Reports); conversations and connections
16 with other corporate officers, employees, and borrowers; participation at
17 management and Board of Directors ("Board") meetings and meetings of related
18 committees (including the Bank's monthly Loan Committee meetings, which had
19 to review and approve lending relationships greater than $7 million), and reports
20 and other information provided to him in connection with those meetings,
21 including special credit administration "quarterly reports" on "borrowers who were
22 under stress."
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(c) For each of the Bank's periodic SEC filings during the Class
24 Period, Defendant Myers signed certifications representing that: (i) the periodic
25 filings fairly represented CVB's financial condition; (ii) the periodic filings did not
26 contain "any untrue statement of a material fact or omit to state a material fact
27 necessary to make the statements made, in light of the circumstances under which
28 such statements were made, not misleading"; (iii) the financial statements and FIRST AMENDED CONSOLIDATED
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1 I other financial information included with the periodic filings fairly presented in all
2 material respects CVB's financial condition, results of operations and cash flows;
3 I and (iv) that the periodic filings were prepared in accordance with GAAP.
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(d) As an officer, director, and controlling person of a publicly held
5 company whose common stock was, and is, registered with the SEC pursuant to
6 the Exchange Act, traded on the NASDAQ, and governed by the provisions of the
7 federal securities laws, Defendant Myers had a duty to promptly disseminate
8 accurate and truthful information with respect to the Bank's financial condition and
(i) Confidential Witness 9 ("CW9") was the Chief Operating
191 Officer of The Garrett Group LLC from April 2005 until March 2011. In this
20 capacity, CW9 interacted directly and regularly with the executive staff at Garrett,
21 including Paul and Diane Garrett, CEO Kirk Wright, and CFO Bill Whinna. CW9
22 was deposed by the SEC in connection with its investigation of CVB.
23
(j) Confidential Witness 10 ("CW10") worked for The Garrett
24 Group LLC from September 2004 to February 2009, first as a Senior Analyst and
25 later as an Assistant Asset Manager. CW10 worked with and was familiar with
26 properties serving as collateral for loans from CVB to Garrett. CW1O was deposed
27 by the SEC in connection with its investigation of CVB.
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(k) Confidential Witness 11 ("CW1 1") worked for The Garrett
2 Group LLC from May 2004 until November 2008 as a Property Manager Income
3 Division and Assistant to Vice President Asset Management. CW11 managed
4 thirteen properties for Garrett and reported to Kimberly Stevenson, Asset Manager.
5
(1) Confidential Witness 12 ("CW12") was a Vice President of
6 CVB and Commercial Loan Officer in Ontario, California from August 2005
7 through March 2010. CW12 managed a loan portfolio of $100,000,000 and
8 interacted regularly with the credit administration department. CW12 was familiar
9 with credit administration reports and communication of information within the
10 department and to senior executives.
11 V. DEFENDANTS' FRAUDULENT SCHEME
12
23. Throughout the Class Period, CVB stated in its SEC filings that its
13 primary source of income was interest earned on its loans and investments. CVB
14 focused on commercial real estate, construction, commercial and industrial,
15 agribusiness, mortgage, consumer, lease and other real estate loans in the Inland
16 Empire and Central Valley regions, and Los Angeles and Orange Counties.
17
24. By the start of the Class Period, however, land and developed real
18 estate prices were plummeting in the geographic region in which CVB did
19 business. Delinquencies, defaults, and foreclosures were increasing rapidly. As
20 The Wall Street Journal reported in an article dated January 14, 2009, entitled
21 "Commercial Sector Expects Things to Get Worse," the commercial sector in the
22 Inland Empire region went "from a booming smorgasbord to a basket case in a few
23 short years." The article reported that, from 2007 to 2008 in the Inland Empire,
24 office vacancies, retail vacancies, and warehouse vacancies increased substantially,
25 effective rents and annual asking rents decreased across the board, and single
26 family home prices plummeted.
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25. CVB's peer lenders, as well as larger banks and real estate-related
28 businesses, were experiencing rapidly increasing losses on their loan portfolios, FIRST AMENDED CONSOLIDATED
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with many going out of business. Moreover, investigations, lawsuits, and press
reports detailed rampant improper lending practices and poor loan underwriting
that contributed to the failure of many banks and lenders. In this environment,
investors and analysts were keenly focused on CVB's statements regarding its
lending and underwriting practices and the status of the loans in its portfolio.
26. Just like its peer lenders, CVB's commercial borrowers, many of
whom also owed money to other commercial lenders, were facing severe financial
difficulties and were not able to pay CVB according to the original terms of their
loans. Moreover, the collateral underlying CVB's loans to these borrowers was
plummeting in value.
27. If Defendants revealed the truth regarding CVB's loan portfolio,
lending practices, and financial condition, the Bank would have had to increase its
loan loss reserves and increase its write-offs, which would have reduced profits
and resulted in a lower price for CVB stock (as occurred when the truth was
ultimately revealed).
28. Further, if Defendants disclosed the truth regarding CVB's lending
practices and provided an accurate picture of its loan portfolio, the Bank would not
have been able to continue its publicly stated growth strategy of acquiring other
banks.4 In order to make such acquisitions and continue growth, CVB had to
maintain the appearance that it had strong capital, conservative lending practices,
Both prior to and throughout the Class Period, Defendants expressed the goal to grow CVB and "transition[] from a Community Bank to a Regional Bank." For example, in a December 2, 2010 private analyst slide presentation, the Bank shared its "10 Year Vision": "Citizens Business Bank will strive to become the dominant financial services company operating throughout the state of California, servicing the comprehensive financial needs of successful small to medium sized businesses and their owners." Defendants sought to accomplish this growth and dominance primarily through acquisitions of other banks. CVB had already acquired First Coastal Bank in June 2007. Then, on October 16, 2009, C\TB announced that it acquired San Joaquin Bank, which had approximately $732 million in total assets.
FIRST AMENDED CONSOLIDATED -17- CLASS ACTION COMPLAINT
Case No. 1O-cv-06256-MIVIM (PJWx)
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and experienced very low loan losses. Tellingly, since the truth about CVB was
revealed as alleged below, CVB has not acquired any other banks, and its total
I assets have declined.
29. Rather than disclose the truth, Defendants resorted to various
fraudulent practices so that they could distinguish CVB from other struggling
lenders in their public statements, keep claiming that borrowers were "current,"
report comparatively low loan losses and reserves, and keep reporting record
profits.
A.
30.
Defendants Fraudulently Made Impaired Loans Appear "Current"
Aware that certain borrowers were unable to pay their loans according
to the original terms, Defendants made these borrowers appear "current" for
reporting purposes by extending loan due dates, using loan proceeds to keep other
loans current, refinancing or restructuring payment terms, extending additional
credit, or increasing the borrowers' credit limits. Because these practices were
made to accommodate borrowers' existing loans, each constituted a "modification"
and was required to be accounted for as a "troubled debt restructuring." GAAP
required CVB to record additional loan loss reserves, reverse and discontinue
accrual of unpaid interest, and make specific disclosures.
31. None of these practices, however, some of which are commonly
referred to in the industry as "extend and pretend," "amend and pretend," and
"delay and pray," were disclosed to investors. Instead, contrary to the actual
condition of the loans, CVB continued to report high profits and comparatively low
levels of reserves and charge-offs and publicly touted that its loan portfolio
remained "sound" and the loans were performing "as agreed."
32. CVB's fraudulent practices in connection with its loans to its largest
borrower, Garrett, are illustrative, and the practices were especially deceptive
considering the size of the commitment and investor focus on CVB's loans to FIRST AMENDED CONSOLIDATED
-18- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MMIVI (PJWx)
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1 Garrett. CVB committed $85 million in loans to Garrett, more than double the size
2 of CVB's next largest lending relationship, and the commitment represented
3 approximately 14% of the Bank's tangible common equity, a closely watched
4 measure of an institution's net worth. Further, the loans to Garrett dwarfed CVB's
5 reported net income for each of the years 2006 through 2010 and thus could have
6 swung CVB to a loss.
7
33. According to CW9, Garrett's COO at the time, CVB already knew
8 Garrett was in a "perilous financial condition" in or around September 2008 when
9 Garrett told CVB that it needed additional funds or it would have to file for
10 bankruptcy. At this time, Garrett executives met with Defendant Myers and James
11 Dowd, CYB's Chief Credit Officer, and asked for additional funding. According to
12 CW9, Garrett informed CVB that it needed the additional funds just to meet its
13 ongoing obligations, which CW9 said were mostly to CVB. According to CW9,
14 CVB advanced Garrett additional funds at this time, and Garrett used the funds to
15 get current on existing loans from CVB. CW9 also stated that Garrett had many
16 loans outstanding and that when a loan closed, some of the proceeds were used to
17 make other loans current. According to CW9, "CVB was trying to keep the house
18 of cards standing."
19
34. CW10 confirmed that Garrett was on the verge of bankruptcy at this
20 time and recalled meetings between CVB and Garrett in or around September 2008
21 about Garrett needing additional funds. CW10 explained that Garrett's financial
22 condition was "rotten" throughout 2008 and until CW10 left in February 2009, and
23 that the company went through four rounds of layoffs. CW10 stated that
24 employees received no raises and no bonuses during this time period and that
25, "everybody knew" that Garrett's financial condition was dire as of September
26 VIIIJ:J
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35. Several Garrett employees confirmed the dire situation Garrett faced
28 at this time and how desperately Garrett needed CVB's help. These accounts also FIRST AMENDED CONSOLIDATED
-19- CLASS ACTION COMPLAINT Case No. 10-cv-06256-MIvllvI (PJWx)
2:10-cv-06256-MMM -PJW
Document 61 Filed 02/27/12 Page 23 of 96 Page I I #:1145
1 I make it clear that Defendants were aware (or recklessly disregarded) Garrett's
2 condition. According to CW10, in or about September 2008, Garrett's CEO, Kirk
3 Wright, presided over a meeting of 30-35 Garrett employees. Prior to this meeting,
4 Garrett had recently laid off a number of employees. At the meeting, all
5 employees' salaries were cut by 10%. CW10 stated that employees were told by
6 I Wright at the meeting that Garrett was trying to save the company, that Garrett was
7 in a dire situation, and that Garrett needed to secure additional funding from CVB
8 or Garrett would not survive. Former employees of Garrett were consistent in their
9 view that CVB would have known that Garrett was in serious trouble at this time.
10
36. In this summer/fall 2008 time period, according to CW10, Garrett
11 executives discussed bankruptcy and met with bankruptcy attorneys. CW8
12 confirmed that Garrett executives discussed a potential bankruptcy filing during
13 2008 and 2009. CW8 continued to hear talk of Garrett filing for bankruptcy even
14 after CW8 left Garrett in February 2009. CW11 said that "Garrett was hanging on
15 by a thread" during this time period, with many buildings in receivership, and
16 remembered that CVB was trying to partner with Garrett in 2008 to "help keep
17 Garrett afloat."
18
37. Defendants knew or recklessly disregarded (but failed to disclose and
19 affirmatively concealed in their public statements as set forth in Section VI below)
20 Garrett's perilous financial condition during this time period. Indeed, CW8
21 described properties financed by CVB that sat vacant for years and provided no
22 income. According to CW8, two properties in Murrieta, California, Silverhawk 8
23 and Silverhawk 10, totaling approximately 100,000 square feet, sat vacant through
24 CW8's departure from CVB in February 2009. CW8 believes that they were still
25 vacant as of 2011. CW8 was responsible for finding tenants for the buildings, but
26 due to the economy souring, tenants were hard to secure. Through conversations
27 with Garrett's CEO, Kirk Wright, CW8 explained that CVB executives met
28 FIRST AMENDED CONSOLIDATED
-20- CLASS ACTION COMPLAINT Case No. I0-cv-06256-MIVIM (PJWx)
2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 24 of 96 Page I #:1146
regularly with Garrett executives throughout 2009 to discuss the status of the loans
I to Garrett.
38. Not surprisingly, CVB's extension of additional credit in 2008 merely
delayed Garrett's eventual default on the loans. Just a couple of months later, in
I March 2009, CVB restructured more than $53 million of the Garrett loans. CVB
I secretly modified the Garrett loans several more times throughout 2009. Deed and
title records provide additional details regarding CVB's repeated modifications to
the terms of loans to Garrett throughout 2008 and 2009, often at quarter-end:
• End of First Quarter 2008: On March 25, 2008, just days before the
close of the first quarter, the Bank provided Garrett a $50 million
revolving line of credit;
• End of Third Quarter 2008: On August 23, 2008, the Bank provided
$16 million in "refinancing" to Garrett; and
• End of First Quarter 2009: In late March 2009, including the very last
day of the quarter, March 31, 2009, the Bank provided Garrett with
$53,325,284 in "refinancing," which consisted of $44 million in a
"stand-alone second," and $9,325,284 in "non-purchase money." The
Bank used at least eleven parcels as collateral for the over $53 million
refinancing. 5 Liens for unpaid county property taxes had previously
been issued on April 25, 2008, on at least two of the properties serving
as collateral. The deeds of trust reveal that the loans were directly
handled by the Company's Deputy Chief Credit Officer.
The Assessor's Parcel Numbers for the parcels serving as collateral for the $53,325,284 refinance include the following: 445-150-001, 426-420-008, 308- 140-007, 439-180-015, 438-040-008, 302-030-002, 919-350-020, 919-350-019, 919-350-018, 919-350-017, and 438-040-009.
FIRST AMENDED CONSOLIDATED -21- CLASS ACTION COMPLAINT
Case No. 1O-cv-06256-MMM (PJWx)
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Document 61 Filed 02/27/12 Page 25 of 96 Page ID #:1147
1 • End of Third Quarter 2009: On September 23, 2009, just one week
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4 • End of Fourth Quarter 2009: On December 29, 2009, just two days
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before the end of the quarter and fiscal year, the Bank provided
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Garrett nearly $38 million in "refinancing."
7
39. During the late 2009 time frame, other lenders to Garrett refused to
engage in these deceptive practices and effectively left CVB as Garrett's lender of
last resort. Garrett's dire situation and inability to pay its obligations is
10 corroborated by the other lenders who foreclosed on loans to Garrett. According to
11 foreclosure records and later press accounts, in November 2009, Jefferson-Pilot,
12 part of Lincoln Financial Group, foreclosed on two office buildings in Ontario,
13 California, that served as collateral for a $15.3 million loan to Garrett. Likewise,
14 in December 2009, Bank Midwest foreclosed on a plot of land serving as collateral
15 for a $25.7 million loan to Garrett. CW8 also reported that Garrett lost several
16 properties in 2009-2010 to foreclosure proceedings by other lenders, and CW8
17 specifically recalled three such properties. According to CW8, Lincoln Financial
18 foreclosed on two of Garrett's office space properties, one located in Denver,
19 Colorado, and another located in Ontario, California, referred to as "Gateway."
20 CW8 also recalled a bank foreclosing on a 100,000 square foot office building in
21 Tempe, Arizona, in this same time frame.
22
40. In contrast to these other lenders, CVB continued to engage in secret
23 I loan modifications with Garrett and, as detailed in Section VI below, issue
24 additional false statements and omission hiding from investors the true condition of
25 the impaired Garrett loans. In or around January 2010, CVB again modified its
26 loan commitments to Garrett, as Garrett told CVB it would have to file bankruptcy
27 unless CVB modified the loans. According to CW9, Garrett's COO at the time,
28 company founder Paul Garrett met with Defendant Myers, George Borba, and FIRST AMENDED CONSOLIDATED
-22- CLASS ACTION COMPLAINT Case No. 10-cv-06256-MMItVI (PJWx)
Case 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 26 of 96 Page ID #:1148
1 James Dowd of CVB in or around January 2010 and told CVB that unless CVB
2 extended additional credit or modified loan terms, Garrett would file for
3 bankruptcy. CW9 sat in meetings with Paul and Diane Garrett, Kirk Wright, Bill
4 Whinna, and Marty Weiss before and after these meetings with Myers and other
5 CVB executives. Despite these discussions and modification, Defendants
6 continued to conceal this information from investors.
7
41. Under SEC Regulations and GAAP, a change in any term of any
8 Garrett loan made to accommodate Garrett was both a loan "modification," and a
9 "troubled debt restructuring," as defined. In a "troubled debt restructuring," for
10 accounting purposes, CVB's Garrett loans had suffered a collective loss in value
11 and thus, were "impaired." SEC Regulations and GAAP required that CVB record
12 adequate loan loss reserves specific to its Garrett loan portfolio and make
13 substantial additional public disclosures, beginning in the period of modification.
14 When CVB provided additional credit to Garrett, these amounts were required to
15 be added to the existing troubled debt restructuring balance for Garrett loans and
16 disclosed to investors.
17
42. In addition to the Garrett relationship, CVB engaged in similar
18 improper "extend and pretend" practices with other borrowers to make loans to
19 these borrowers appear current for reporting purposes. CW4 - who worked for
20 CVB for a total of eleven years in various Bank departments including Credit,
21 Finance, and Loan Documentation - explained that CVB extended additional lines
22 of credit or increased existing lines of credit to customers who already had troubled
23 loans in order to pay down the late or delinquent accounts. One such troubled
24 account was the account of Vintage Dairy ("Vintage"), which consisted of credit
25 lines for feed and hay. When Vintage did not make payments, the Bank took an
26 advance off Vintage's line of credit to make the payments so that it appeared as
27 though Vintage made a payment and was not behind. According to CW4, CW4's
28 boss - the Head of the Bank's Agri-Business Department, Larry Zivelonghi, who FIRST AMENDED CONSOLIDATED
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Case 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 27 of 96 Page ID II #:1149
reported directly to Defendant Myers - told CW4 directly that on occasion, when
Vintage was maxed out on its line of credit and nothing was available, the Bank
borrowed from the credit line of a related entity to pay down the line of credit in
order to make the payment. In addition, Zivelonghi held internal staff meetings in
which he openly discussed the practice of granting additional funds in order to
conceal delinquencies.
B. Defendants Inflated Values For Properties Serving As Collateral For CVB's Loans
43. Defendants also overvalued properties serving as collateral for CVB's
loans, concealing that the market value of the collateral was rapidly deteriorating
and that the actual value was less than the value CVB assigned to the collateral
when making the corresponding loan. CVB 's inflated values of the collateral were
particularly misleading in light of CVB's repeated claim in its periodic filings that
it "strive[s] to have a maximum loan-to-value ratio of 65-75%." By manipulating
the value of collateral in connection with its loans, C\TB understated its reserves
and overstated its profits. Further, CVB's inflated collateral values concealed the
true risk of loss associated with the Bank's loan portfolio.
44. For example, CW1 explained that CVB often obtained two different
appraisal values for properties serving as collateral for loans: (i) a higher value if
the property was "stabilized with market rent," meaning no deferred maintenance
was required and the property was fully occupied and leased up at market rent; and
(ii) a lower value for the property in the "as-is" condition, meaning the property
did not meet those requirements. Due in part to the implied continuity of income
from a fully occupied property, there is a large difference between the two values.
45. A Senior Vice President and Special Assets Manager ordered CW1 to
use the higher of the two appraisals for properties, even if the properties had
deferred maintenance and zero occupancy. This practice had a direct impact on the
Bank's bottom line, in particular the Allowance for Loan and Lease Loss FIRST AMENDED CONSOLIDATED
-24- CLASS ACTION COMPLAINT Case No. lO-cv-06256-MIvIIvI (PJWx)
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Document 61 Filed 02/27/12 Page 28 of 96 Page ID #:1150
ii I ("ALLL") Reserves, because any difference between the principal loan balance
2 and estimated proceeds from sale of the collateral (current appraised value less cost
3 of sale) had to be written off or reserved for. Using the higher (inflated) appraisal
II I values overstated CVB's expected proceeds from foreclosing on distressed loan
5 collateral. This practice artificially reduced CVB's recorded reserves, thereby
6 overstating its profits.
7
46. CW1 described one specific example of this practice from March
8 2010 related to the collateral for a commercial loan to borrower American World
9 Investment. The property, located at 9500 Haven, Rancho Cucamonga, California,
101 was a vacant, one tenant, two-story office building in need of maintenance. At the
11 time, the loan's outstanding principal balance was over $2.77 million. In early
12 March 2010, CW1 informed a Senior Vice President and Special Assets Manager
13 that the "as-is" appraised value was $1.9 million, and thus, the Bank would need to
14 take a $1 million charge-off. The Senior Vice President and Special Assets
15 Manager then ordered CW1 to use an appraisal value of $2.5 million, instead of the
16 $1.9 "as-is" appraisal value, despite the fact that the property was in need of
17 maintenance and vacant. The American World Investment account was taken away
18 from CW1 a month later, and reassigned to another employee.
19
47. Similarly, CVB overvalued a property that served as collateral for
20 some of CVB's loans to Garrett, the Empire Corporate Center in Ontario, by
21 millions of dollars during the Class Period. According to an Assistant Asset
22 Manager at the Garrett Group, the Empire Corporate Center was used as collateral
23 for one of the loans from CVB to Garrett and was valued at $16 million for
24 purposes of the loan. CW8, who was responsible for managing all of Garrett's
25 commercial properties, described the history of the Empire Corporate Center.
26 According to CW8, the property was originally carried on Garrett's books at
27 $21-22 million and was lowered to $16 million. CW8 recalled that the property
28 was put on the market in the 2007-2008 timeframe, and offers came in around FIRST AMENDED CONSOLIDATED
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I $12-13 million, $9- 10 million less than the appraised value on CVB's books. The
property did not sell during CW8's tenure, which lasted until February 2009.
According to a June 8, 2011 press release by Lee & Associates, the realtor
representing both sides in the transaction, the Empire Corporate Center finally sold
in June 2011 for just $9.25 million. As became evident when CVB disclosed the
I Garrett-related write-offs, CVB never appropriately valued the collateral backing
I the Garrett loans.
48. The value of numerous properties serving as collateral for CVB's
loans to Garrett were also subject to significant property tax deficiencies, directly
reducing their value in any foreclosure proceeding. According to the Riverside
County Office of the Treasurer-Tax Collector, Garrett was delinquent on its
property taxes for at least tax years 2008, 2009, and 2010 (first installment), on at
least 32 properties that CVB financed. As a result, the County of Riverside
assessed substantial penalties against Garrett, which directly reduced the value of
the collateral if C\TB foreclosed on Garrett. Indeed, after the Class Period, in its
September 9, 2010 press release (discussed below), CVB admitted that one of the
Garrett properties was sold for $2.5 million, and that $0.5 million of the proceeds -
or 20% - was used to pay "past due property taxes, sales commissions and
borrower cost reimbursements."
C. Defendants Used Fraudulent Accounting Practices To Materially Misstate CVB's Financial Statements Throughout The Class Period
49. Throughout the Class Period, Defendants Myers and Biebrich caused
CVB to issue financial statements that were materially misstated and not presented
in accordance with GAAP at the time they were issued. Further, Defendants Myers
and Biebrich signed sworn certifications regarding CVB's financial statements and
the adequacy of the Company's internal controls that were materially false and
misleading when made, as these sworn certifications failed to reveal the
Company's then-existing violations of GAAP and poor internal controls. FIRST AMENDED CONSOLIDATED
-26- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MMIVI (PJWx)
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50. GAAP are the authoritative standards, interpretations, rules, and
underlying concepts established and relied on in the United States as the best and
most reliable financial reporting and accounting practices. Regulation S-X, to
which CVB is subject as a registrant under the Exchange Act, provides that annual
I and interim financial statements filed with the SEC that are not prepared in
compliance with GAAP are presumed to be misleading and inaccurate, regardless
of accompanying disclosures. See 17 C.F.R. § 210.4-01(a)(1) and § 210.10-01(a),
as to annual and interim financial statements, respectively. The SEC recognizes
the financial reporting and accounting standards of the Financial Accounting
Standards Board ("FASB") as GAAP. See SEC Release Nos. 33-8221, 34-47743,
and FR-70. 6 SEC Rule 12b-20 requires that periodic reports contain such further
information as is necessary to make the required statements, in light of the
circumstances under which they are made, not misleading. 7
51. Management is solely responsible for preparing financial statements
that comply with GAAP. Public Company Accounting Oversight Board
("PCAOB") Auditing Standard No. 1, AU § 110.03, Distinction between
Responsibilities of Auditor and Management; see also Sarbanes-Oxley Act of
2002, §§ 302, 401, and 404.
52. As detailed herein, CVB's public financial statements and related
earnings releases during the Class Period were materially misstated and in
6 Effective July 1, 2009, FASB replaced existing GAAP with its Accounting Standards Codification ("ASC"). Accordingly, the SEC recognizes ASC as GAAP. 17 C.F.R. §§ 211, 231, and 241; Releases Nos. 33-9062A, 34-60519A, and FR-80A. CVB's GAAP violations in periods ended before July 1, 2009, violated the same or similar GAAP provisions under the prior taxonomy.
' CVB and its operating bank subsidiaries are also required by federal and state regulators including the Federal Reserve Bank ("FRB"), FDIC and Federal Home Loan Bank ("FHLB") to comply with banking regulations and accounting rules set forth herein.
FIRST AMENDED CONSOLIDATED -27- CLASS ACTION COMPLAINT
Case No. 1O-cv-06256-MlVllvI (PJWx)
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violation of GAAP. Defendants materially overstated, among other things, CVB's
net interest income, net earnings, earnings per share, stockholders' equity, and loan
values by improperly accounting for its loans and committing other GAAP
violations. More specifically, on a quarterly basis, CVB failed to record an
adequate loan loss provision (expenses), failed to properly account for restructured
loans and failed to properly account for losses in the market value of its collateral,
all of which overstated income. CVB's allowance for credit losses (reserves) was
much too small to absorb expected losses, which overstated CVB's loan values and
stockholders' equity. Further, CVB omitted several GAAP and SEC required
disclosures concerning its loans, operating results, and management's discussion
and analysis ("MD&A"), including disclosures that would have revealed problems
with specific loans and specific loan portfolios by first quarter 2009 instead of third
quarter 2010.
53. CVB's accounting errors totaled tens of millions of dollars and
affected the most important accounts to investors and analysts of bank holding
companies. For example, on the income statement: interest income, interest
expenses, net income, loan loss provisions; on the balance sheet: loan loss reserves,
net asset values and shareholders' equity, along with associated rates of return and
loss. If Defendants had complied with GAAP, the Bank's reported Class Period
financial results would have been materially different.
1. CVB Intentionally Failed To Disclose Its Loan Losses, Loan Loss Reserves, And Its Restructured, Past Due, Non-Performing And Nonaccrual Loans By Loan Tve
54. In order to conceal the impairment in its loan portfolio, CVB did not
disclose loan loss reserves, non-accrual loans, and troubled debt restructurings by
loan type. Defendants thus violated GAAP and express SEC guidance on the
issue, for example (effective from 1996 to the present):
Disclosures about risk elements and impaired loans should reflect the
particular methodology established for certain loans pursuant to SFAS FIRST AMENDED CONSOLIDATED
-28- CLASS ACTION COMPLAINT Case No. IO-cv-06256-MIVIM (PJWx)
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114 and 118. The table of impaired loans should disclose the
carrying value by type of loan, broken out into groups based on how
such loans were measured (e.g., present value of expected cash
flows; fair value of collateral; observable market price). The
components of the end of period allowance for loan losses should
distinguish the portion attributable to loans accounted for pursuant to
SFAS 114.
See SEC Publication, SEC Practice 09, Specialized Industries, Bank Holding
Companies, Interpretations and Guidance (emphasis added); see also Guide 3,
Statistical Disclosure by Bank Holding Companies, Summary of Loan Loss
Experience (from the same publication).
55. The SEC has long articulated requirements for lender loan loss reserve
disclosures that exceed some interpretations of FASB's minimum requirements. 8
GAAP expressly provides that SEC conclusions that differ from FASB's control
for GAAP purposes.
56. CVB's disclosure requirements for past due, restructured, and non-
performing (nonaccrual) loans were substantially the same for its loan losses
incurred and loan loss reserves. Similarly, the SEC explicitly required disclosures
8 For example, in December 1996, the SEC said that conclusions reached by FASB in EITF 96-22 (concerning impaired loan disclosure) were insufficient for SEC registrants, and instructed public companies to provide details not yet required by FASB. The SEC's 1996 statement was a part of GAAP throughout the Class Period. See ASC § 310-40-S99-1. Also applicable is FRR-28, codified as SEC Regulation § 401.09, Accounting for Loan Losses by Registrants Engaged in Lending Activities (1986). The SEC regularly reminds financial institutions and others about the need for enhanced disclosures, including, for example, in letters dated January 12, 1999, July 12, 1999, and March 21, 2001. As recently as December 2009, the SEC disseminated an extensive slideshow reminding banks of their disclosure requirements. This slideshow directly addressed the issues CVB faced with Garrett and other borrowers.
FIRST AMENDED CONSOLIDATED -29- CLASS ACTION COMPLAINT
Case No. 1O-cv-06256-MMM (PJWx)
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1 for banks before the requirement for such disclosures was made explicit by FASB
2 for all entities. For example, in its basis for conclusions, ASU 2010-20 (July 2010)
31 I states:
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[C]ertain SEC loan loss disclosures . . . are required to be
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disaggregated by domestic and foreign loans. The charge-off and
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recoveries information also is required to be presented with further
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disaggregation by loan-type categories, such as commercial,
8
financial, and agricultural; real estate construction; real estate 11
9 mortgage; installment loans to individuals; and lease financing.
10 (emphasis added).
11
57. The SEC requires banks, in particular, to disclose loan loss and
12 reserve data by loan category because the characteristics of risks and rewards for
13 different loan types (such as commercial, construction, mortgage, consumer, etc.)
14 vary as to amount and timing. Further, lending is inherently cyclical, but the cycles
15 vary by loan type. The SEC has concluded that investors who cannot assess
16 concentrations of loans made, loan losses incurred, and loan loss reserves within a
17 bank's total loan portfolio are not adequately informed.
18
58. In order to conceal the impairment in the Garrett loans, which were
19 too large to be concealed within individual loan categories, CVB did not disclose
20 loan loss reserves, non-accrual loans, and troubled debt restructurings by loan type.
21
59. CVB concealed its inadequate loan loss provisions and allowances for
22 credit losses by, among other things, providing only one number for its loan loss
23 provisions, rather than disclosing the loss amount in each of its eight loan
24 portfolios. During the interim quarters, even the allowance for credit losses was
25 only provided as a single number. Without a breakdown of provisions and
26 allowances at the loan portfolio level, portfolio analysis of loan quality was not
27 possible.
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60. CVB compounded this problem by assigning a different set of labels
to its categories of non-performing and delinquent loans, preventing investors from
matching the problem loans to their corresponding loan portfolio, and blinding
investors to the fact that CVB's largest loan portfolios were comprised of its worst
performing loans.
61. CVB also concealed its fraud in other ways. For example, it padded
the allowance account by failing to write off loans that had already gone bad. As a
result, much of CVB's reported allowance for credit losses was illusory, because it
had actually been absorbed by past losses but improperly left on the books.
Further, CVB failed to accurately report its impaired loans and troubled debt
restructurings, making the allowance for credit losses appear sufficient. This made
CVB and its loan portfolios appear much healthier than its peers.
2. CVB Failed To Accurately Report Its Past Due, Restructured And Non-Performing Assets And Its Realized Losses
62. During the Class Period, C\TB failed to comply with GAAP and SEC
accounting and disclosure requirements and provided its investors inaccurate
(understated) figures for its delinquent and non-performing loans.
63. For example, SEC Industry Guide 3, Statistical Disclosure by Bank
Holding Companies, explains that the vast majority of loans "perform" from
inception until maturity and their accounting treatment does not change. Loans
that do not perform become delinquent, signaling in advance that some or all of the
principal and interest will not be collected when due, or ever. Such loans -
especially real estate loans - take a long time to work through various accounting
"buckets" that indicate relative risk to investors. When a loan begins to show signs
of distress by becoming delinquent, GAAP requires changes in accounting for
and reporting the loan. See, e.g., id.; ASC 942-210-S99, ¶7, Financial Services-
Depository and Lending, Balance Sheet, SEC Materials, Loans (citing SEC
Regulation S-X, Rule 9-03). FIRST AMENDED CONSOLIDATED
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64. If loan distress worsens as time passes, the loan moves through a
series of reporting categories for the loan and its related allowance for credit
losses. A distressed loan progresses from: (i) past due under 30-59 days; to
(ii) past due 60-89 days; to (iii) past due 90 or more; to (iv) non-performing and
non-accrual status (i.e., in default). At this point, interest income is no longer
recognized and the last 90 days of interest is reversed. With most problem loans,
distress intensifies, and, typically around six months past due, the loan is either
(i) restructured; (ii) foreclosed on and repossessed (becoming "OREO," or other
real estate owned); and/or (iii) written off, each one of which require an earnings
charge to reflect a loss in loan principal value. Troubled loans should be strictly
reported in different "buckets," depending on where in the
default/foreclosure/write-off timeline the loan falls. See, e.g., SEC Industry Guide
3, Statistical Disclosure by Bank Holding Companies, Item 111• 9
65. Contrary to these requirements, during the Class Period, CVB
provided its investors with inaccurate (understated) figures for the Bank's
delinquent and non-performing loans. A chronological review of the Bank's largest
borrowing relationship in particular reveals CVB's failure to comply with a host of
GAAP and SEC accounting and disclosure requirements.
66. CVB failed to account for the Garrett loans as a troubled debt
restructuring, beginning in third quarter 2008 and continuing throughout all
The SEC amended Guide 3 with Financial Reporting Release No. 13, adding a new disclosure section, Risk Elements, which states: "A significant change in the amended guidelines for disclosure of nonaccrual, past due and restructured loans is the exclusion of certain instructions present in the current Guide which allowed for the use of different criteria, and permitted exclusion of certain loans. This change has the effect of enhancing comparability of disclosures among registrants. Users of this information, particularly financial statement analysts, have stressed the importance of comparability in this area." See FRR.T.40 1 .08a, Risk Elements Involved in Lending Activities.
FIRST AMENDED CONSOLIDATED -32- CLASS ACTION COMPLAINT
Case No. 10-cv-06256-MIVIIVI (PJWx)
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I subsequent reporting periods until third quarter 2010, when CVB finally admitted
problems with Garrett. The resulting accounting errors and disclosure violations
caused CVB's financial statements to be materially misstated throughout the Class
I Period.
3. Defendants Failed To Record Timely Loan Loss Provisions As Losses Were Incurred
67. Under GAAP, accounting for losses on lending activities are governed
by ASC 450, Contingencies, and ASC 310, Receivables, and related literature.
68. A loss contingency is an existing condition, situation, or set of
circumstances involving uncertainty as to possible loss. FASB ASC, Master
Glossary. "The assets of an enterprise may include receivables that arose from
credit sales, loans, or other transactions. The conditions under which receivables
exist usually involve some degree of uncertainty about their collectibility, in which
case a contingency exists." See ASC 310-10-35-7, Losses From Uncollectible
Receivables. GAAP requires that estimated losses from loss contingencies be
accrued by a charge against income when a loss is both probable and reasonably
estimable. ASC 450-20-25-2. Loans are explicitly subject to ASC 450. Id.
69. For public companies like CVB, among the most important related
literature is FRR.T.40 1.09, Accounting for Loan Losses by Registrants Engaged in
Lending Activities, as set forth in SEC Financial Reporting Release No. 28 ("FRR
28"), Accounting for Loan Losses by Registrants Engaged in Lending Activities.
FRR 28 goes well beyond the GA-AP literature, prescribing a detailed and
systematic reserve-setting methodology, along with policies and procedures with
which SEC registrants must comply when assessing and recording expected loan
losses.
70. CVB failed to comply with the GAAP requirements set out above.
For example, CVB failed to record timely loan loss provisions when losses were
probable and reasonably estimable. Indeed, Defendants were aware that CVB's FIRST AMENDED CONSOLIDATED
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1 largest borrower, Garrett, was on the verge of bankruptcy no later than September
2 2008. In fact, multiple confidential witnesses confirm that Defendants were aware
3 that Garrett was "in a perilous financial condition," had met with Myers and other
4 top CVB executives in or around September 2008, and needed additional funds to
5 get current on prior loans and to carry on its operations. Given that Garrett was
6 already behind on loans to CVB and needed additional loans just to survive, losses
7 on Garret's loans were "both probable and reasonably estimable."
8
71. Likewise, CVB failed to accrue a charge against income in March
jI 2009, when CVB was forced to restructure the largest Garrett loan, and in January
10 2010, when Garrett again explicitly threatened Defendants that it would file for
10 "The term 'financial statements' as used in this part shall be deemed to include all notes to the statements and all related schedules." See SEC Regulation S-X, Article 1, Rule 1-01(b), Application of Regulation S-X
FIRST AMENDED CONSOLIDATED -36- CLASS ACTION COMPLAINT
Case No. 10-cv-06256-MMM (PJWx)
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1
80. Even if CVB had not materially overstated its income, earnings per
2 share, stockholders' equity, and loan values, its financial statements still would
3 have been false and misleading as a result of the omissions set forth below. These
4 omissions included the following specific disclosures required by the SEC:
5 Concentration Of Credit Risk
6
81. CVB failed to comply with the requirements that it present detailed
7 information about CVB's material loss exposure specific to Garrett, including
8 disclosures of loan provisions, allowances, restructuring, and write-offs,
9 throughout 2008, 2009, and 2010. See SEC Regulation S-X, Rule 9-03, ¶7(a)(7),
10 Assets.
11 Risk Elements Involved In Lending Activities
12
82. CVB failed to comply with SEC Financial Reporting Release No. 13,
13 which required it to disclose details about lending risks. See FRR.T.40 1, Banks
14 and Bank Holding Companies, § 401.08, Risk Elements Involved in Lending
15 Activities. Furthermore, according to GAAP, an "entity shall disclose all
16 significant concentrations of credit risk arising from all financial instruments,
17 whether from an individual counterparty or groups of counterparties." See ASC
18 825-10-50-20, Concentrations of Credit Risk ofAll Financial Instruments. CVB's
19 omitted disclosures include the $85 million maximum loss on the Garrett
20 relationship and a description of Garrett's collateral. Id. 825-10-50-21. CVB
21 failed to make the required disclosures about its concentration of risk associated
22 with Garrett.
23 Management's Discussion And Analysis
24
83. CVB failed to comply with SEC Regulation S-K, Item 303(a)(3),
25 Management Discussion and Analysis of Financial Condition and Results of
26 Operations, which required disclosure of any unusual or infrequent transactions
27 that materially affected CVB's income from continuing operations. Regulation
28 S-K, Item 303(b), Interim Periods, also required registrants to include a FIRST AMENDED CONSOLIDATED
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ii I management's discussion and analysis in all interim period financial statements
2 filed with the SEC, "so as to enable the reader to assess material changes in
3 financial condition and results of operations" for the most recent quarter and
4 year-to-date periods for both the current and prior year. (Emphasis added). This
5 required CVB to discuss Garrett's financial status in each reporting period.
I Accordingly, CVB failed to comply with GAAP and SEC Regulation S-K
7 1 I throughout the Class Period because CVB failed to disclose changes in Garrett loss
8 estimates and their impact on CVB's financial statements.
11 about Critical Accounting Policies (codified as FRR.T.501.14), instructs registrants
12 to comply with Regulation S-K, Item 303(a), Management's Discussion and
13 Analysis of Financial Condition and Results of Operations. When estimates are
14 susceptible to material change, the company must discuss not just the possibility
15 that its estimates may turn out differently, but also (i) the factors that may cause
16 different outcomes, and (ii) the potential amount of variability in its significant
17 estimates: "Companies should provide quantitative as well as qualitative
18 disclosure when quantitative information is reasonably available and will provide
19 material information for investors." See SEC Release 33-8350. With respect to the
20 Garrett loans, throughout the Class Period, CVB was in violation of SEC
21 Regulation S-K, Item 303(a).
22
85. CVB also failed to disclose to its investors the fact that its loan loss
23 provisions were estimated using a method that was either heavily dependent on
24 favorable historical periods with respect to the actual losses, not readily adaptive to
25 changing circumstances, or both. During the Class Period, CVB failed to update
26 its reserves or reserve setting methodologies based on changes in market
27 conditions that had taken place throughout 2007 and 2008. CVB should have told
28 investors that its loan loss estimates were based on assumptions that the market FIRST AMENDED CONSOLIDATED
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I downturn was temporary and would reverse, and that the effect on its financial
I statements would be severe if the market downturn failed to reverse.
6. Following Commencement Of The SEC Investigation, CVB Has Now Changed Its Disclosure Practices
86. After the Class Period, and faced with the continuing SEC
investigation, on March 1, 2011, the Bank effectively admitted in its 2010 Form
10-K that its prior disclosures about its loan portfolios and delinquent and non-
performing loans were improper and deficient. In its 2010 Form 10-K, CVB
provided, for the first time, certain loan details alleged herein to be required
disclosures throughout the Class Period. Information that CVB provided for the
first time in its 2010 Form 10-K included:
Combined information about the Bank's real estate loans as a whole,
including nine categories of real estate underlying the loans and other
information not previously provided.
A new disclosure that included a "rollforward" of the allowance for
credit losses for each individual portfolio. A rollforward is an activity
statement that shows beginning and ending balances and all components of
change that took place during the period. The table was called "Allowance
for Credit Losses and Recorded Investment in Financing Receivables" and
reflected all eight loan portfolios, with individual provisions, charge-offs,
recoveries, and the beginning and ending allowance for credit losses for each
portfolio. Previously, the Bank had reported the roliforward information in a
single table, with just one beginning and ending balance.
A table called "Non-Covered Impaired Loans" showing, for each of
the eight loan portfolios, the original loan amount, the unpaid loan balance,
the allowance, and the average recorded investment. This information was
split between two groups - loans with no related allowance recorded and
loans with a related allowance recorded. During the Class Period, this FIRST AMENDED CONSOLIDATED
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1
information was not only omitted at the portfolio level, it was not provided
2
at all.
3
A new TABLE 6, "Non-Performing Assets, Non-Covered," which
4 properly combined all non-accrual loans, restructured loans and other real
5 estate owned ("OREO") assets in a single table.
6
A new TABLE 8, "Summary of Credit Loss Experience," which
7 provided the provisions, charge-offs and recoveries for each loan portfolio.
8
CVB had not previously presented this critical information in the proper
9
format, or with the required information.
10
A new TABLE 9, "Allocation of Allowance for Credit Losses,"
11 showing all eight loan portfolios, their beginning and ending individual
12 allowances for credit losses, and the percentage of the total which each
13
portfolio comprised.
14
• A table entitled "Non-Covered Past Due and Non-Accrual Loans,"
15 showing five "buckets" of payment status for all loans. Previously, the Bank
16 provided only three categories for payment status. The loans were grouped
17
into ten categories, and the table included important information not
18 provided previously, such as "Construction - Speculative," and
19
"Construction - Non-Speculative."
20
• "Credit Quality Indicators," which included "Credit Risk Profile by
21
Internally Assigned Grade." CVB showed the same ten categories as "Non-
22
Covered Past Due and Non-Accrual Loans," and the amount of loans labeled
23
"Pass," "Watch List," "Special Mention," "Substandard," or "Doubtful" for
24 each of the ten. During the Class Period, this information was not only
25 omitted at the portfolio level, it was not provided at all.
26
27
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1 VI. DEFENDANTS' MATERIALLY FALSE AND MISLEADING STATEMENTS AND
2
OMISSIONS DURING THE CLASS PERIOD
3
87. Defendants' false and misleading material statements and omissions
4 during the Class Period, which are alleged below chronologically, fit into four
5 categories: 1) misrepresentations regarding the status of CVB's loan portfolio,
6 particularly the Garrett loans, characterizing them as "current" and "performing,"
7 when they were not; 2) misrepresentations regarding CVB's "credit" and "loan
8 underwriting culture" as "strong," that "C'VB's credit metrics are superior" to its
9 peers and that its "underwriting integrity remains paramount" when CVB was
10 engaging in deceptive conduct to present troubled loans and lending practices as
11 healthy; 3) misrepresentations that the real estate market was a "risk factor" that
12 "could" affect the ability of loan customers to remain current on their obligations,
13 when, in fact, the risk had already materialized; and 4) a myriad of GAAP
14 violations that rendered CVB's financial statements materially misstated
15 throughout the Class Period.
16
Third Quarter 2009 Statements
17
On the first day of the Class Period, October 21, 2009, the Bank
proclaimed "Record Results for Third Quarter 2009." (Emphasis in original.) In a
press release, the Bank stated it reported net income of $19.3 million for the third
20 quarter of 2009, the highest quarterly net income in the history of the Bank. The
21 Bank (and in particular, its CEO, Defendant Myers) assured investors that "/t/he
22 overall credit quality of the loan portfolio is sound."
23
89. Reasons Why False and Misleading: The above statement was false
24 and misleading because Defendants knew at that time, or recklessly disregarded,
25 that the "overall credit quality" of CVB's loan portfolio was not "sound." In fact,
26 Defendants extended loan due dates, used loan proceeds to keep other loans
27 current, refinanced or restructured payment terms, extended additional credit or
28 increased credit limits to make certain borrowers appear "current" even though the FIRST AMENDED CONSOLIDATED
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ii I borrowers were unable to pay their loans according to the original terms. For
2-1 I example:
3
• At least four confidential witnesses, as well as multiple property title
4 searches, corroborate Defendants' secret "extend and pretend"
5 practices described in detail above, including providing additional
6 capital to borrowers to bring prior loans current and extending loan
7
due dates. Among other things, these practices made the loans appear
8 current, gave the appearance of low delinquencies, and avoided
9
increased reserve requirements and reduced profits.
10 • CW9, Garrett's COO at the time, confirms that Defendants were
11 aware that Garrett was already "in a perilous financial condition" in
12
or around September 2008 and that Garrett had met with Defendant
13
Myers and other top CVB executives at that time and demanded
14 additional funds to get current on prior loans and to carry on its
15 operations. According to CW9, Garrett informed CVB that it needed
16
the additional funds to meet its ongoing obligations, which CW9 said
17 were mostly to CVB.
18
• According to CW9, CVB advanced Garrett additional funds in or
19
around September 2008, and Garrett used the funds to get current on
20 existing loans from CVB. CW9 also stated that Garrett had many
21
loans outstanding and that when a loan closed, some of the proceeds
22 were used to make other loans current. According to CW9, "CVB
23 was trying to keep the house of cards standing."
24
• Deed records corroborate that, at least as early as 2008, Defendants
25
kept Garrett's loans "current" only by virtue of CVB extending
26 additional lines of credit or new loans.
27
• According to CW4, when Vintage Dairy did not make payments on its
28
loan, CVB extended Vintage Dairy's credit line so that payments FIRST AMENDED CONSOLIDATED
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1 could be made until its credit line maxed out, and then moved money
2
from a related entity's credit line to make payments and keep the
3
account looking current.
4 . Defendants overvalued properties serving as collateral for CVB's
5
loans, allowing Defendants to conceal the true market value of the
6 collateral held by CVB. For example, confidential witnesses and
7 public sources confirm that CVB overvalued a property that served as
8 collateral for some of CVB's loans to Garrett, the Empire Corporate
9
Center in Ontario, by millions of dollars during the Class Period.
10
These practices are inconsistent with a purportedly "sound" loan
11 portfolio and are contrary to statements in its regular periodic filings
12 with the SEC that CVB "strive[s] to have a maximum loan-to-value
13
ratio of 65-75%."
14
90. The Bank's November 5, 2009 Form 10-Q repeated the Bank's
15 purported record results. It stated, "[W]e are not aware of any other loans as of
16 September 30, 2009 for which known credit problems of the borrower would
17 cause serious doubts as to the ability of such borrowers to comply with their loan
18 repayment terms, or any known events that would result in the loan being
19 designated as non-performing at some future date."
20
91. Reasons Why False and Misleading: The above statement was false
21 and misleading because Defendants knew at that time, or recklessly disregarded,
22 and failed to disclose "known credit problems" with many of CVB's loans,
23 including those of its largest borrower, Garrett, that "cause[d] serious doubts about
24 the ability of those borrowers to comply with their loan repayment terms." The
25 above statement is also false and misleading because Defendants were aware of at
26 that time, but failed to disclose, "known events that would result in the loan being
27 designated as non-performing at some future date," such as the very real possibility
28 that Garrett would file for bankruptcy or otherwise default. For example: FIRST AMENDED CONSOLIDATED
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• At least two confidential witnesses confirm that Defendants were
2 aware that CVB's largest borrower, Garrett, was "in a perilous
3
financial condition" and that Garrett had met with Myers and other
4
top CVB executives in or. around September 2008 and needed
5 additional funds to get current on prior loans and to carry on its
6 operations. Given that Garrett was already behind on loans to CVB
7 and needed additional loans just to survive, at a minimum there were
8
"serious doubts" as to Garrett's ability to comply with the terms of its
9
debts to CVB.
10 • According to CW4, Vintage Dairy did not make payments on its loan
11 and CVB extended Vintage Dairy's line of credit to make payments
12 on the loan until its line of credit was maxed out. CVB then
13
borrowed money from a related entity's credit line to make payments
14 and keep the account looking current.
15
92. The Bank's third quarter 2009 Form 10-Q also included a purported
16 "risk factor" that continuing deterioration in the real estate market "could" affect
17 the ability of loan customers, including the Bank's largest borrowing relationships,
18 to service their debt, which "could" result in loan charge-offs and provisions for
19 credit losses "in the future."
20
93. Reasons Why False and Misleading: The above statement was false
21 and misleading because Defendants knew, or recklessly disregarded, that
22 continuing deterioration in the real estate market had already affected the ability of
23 loan customers, including its largest borrowing relationship, Garrett, to service
24 their debt. In other words, Defendants failed to disclose that the purported "risk"
25 had already come to fruition. For example:
26
• At least eight confidential witnesses corroborate that Defendants knew
27
by this time, but failed to disclose, that an increasing number of the
28
Bank's loans were facing delinquency. FIRST AMENDED CONSOLIDATED
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1 . At least eight confidential witnesses confirm that it was evident
2
internally at the Bank by this time that the loans to its largest
3
borrowing relationship, Garrett, were troubled.
4
94. The Form 10-Q also represented that it was "prepared in accordance
5 I with the rules and regulations of the Securities and Exchange Commission for
6 I Form 10-Q and conform to practices within the banking industry and include all
7 the information and disclosures required by accounting principles generally
8 accepted in the United States ofAmerica for interim financial reporting."
9
95. Reasons Why False and Misleading: For the reasons discussed
10 above in Section V.C, this statement was false and misleading because the Form
11 10-Q was not prepared in accordance with SEC rules and regulations, did not
12 conform to practices within the banking industry and did not include all the
13 information and disclosures required by GAAP. Rather, among other things, CVB
14 misrepresented its loan loss experience, loan loss reserves, and its restructured,
15 past due, non-performing and nonaccrual loans by loan type in order to conceal its
16 fraud; failed to accurately report its past due, restructured and non-performing
17 assets and its realized losses; failed to record timely loan loss provisions as losses
18 were incurred; and failed to make required disclosures in the Bank's financial
19 statements, footnotes, and MD&A.
20
96. Defendants Myers and Biebrich signed certifications that were
21 included in the Bank's third quarter 2009 Form 10-Q. These certifications
22 represented, among other things, that: (a) the Form 10-Q fairly represented CVB's
23 financial condition; (b) the Form 10-Q did not contain "any untrue statement of a
24 material fact or omit to state a material fact necessary to make the statements
25 made, in light of the circumstances under which such statements were made, not
26 misleading"; (c) the financial statements and other financial information included
27 with the Form 10-Q, fairly presented in all material respects CVB's financial
28 condition, results of operations and cash flows; and (d) the Form 10-Q was FIRST AMENDED CONSOLIDATED
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ii prepared in accordance with GAAP. Defendants Myers and Biebrich also signed
2 certifications pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of
3 the Sarbanes-Oxley Act of 2002, stating that the information in the Form 10-Q
4 fairly presents, in all material respects, the financial condition and results of
5 operations of the Bank.
6
97. Reasons Why False and Misleading: The representations in these
7 certifications were false and misleading because the Form 10-Q did not fairly
8 represent CVB's financial condition and because it omitted material facts
9 necessary to make the statements made not misleading. In addition to the reasons
10 put forward in Paragraph 89, and as detailed above in Section V.C, the Bank's
11 failure to report adequate loan loss provisions (expenses), failure to properly
12 account for non-performing and restructured loans, and failure to properly account
13 for losses in the market value of its collateral materially overstated CVB's income,
14 manipulated its insufficient allowance for credit losses (reserves), and inflated
15 CVB's loan values and stockholders' equity.
16
98. Analysts and investors reacted to the positive news. The day after the
17 third quarter 2009 earnings release, October 22, 2009, CVB 's stock closed up, on
18 heavy trading volume, from $7.86 per share to $8.81 per share. And analysts, such
19 as B. Riley & Co., reported that "[a]sset quality at CVBF remains very strong
20 relative to other banks operating in southern California."
21
B. November And December 2009 Presentations
22
99. During a November 9, 2009 investor presentation, Defendants
23 I repeated the Bank's "record" financial results. They further stressed that the
24 Bank's purported "strong credit culture and underwriting integrity remain
25 paramount at CVB," that "geographic diversification, a focus on relationship
26 banking, and a strong credit culture have allowed CVB to mitigate loan losses
27 through this economic downturn," that on a peer comparison basis "CVB's credit
28 FIRST AMENDED CONSOLIDATED
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1 I metrics are superior," and that "CVB 's strong loan underwriting culture has
2 I limited its exposure to problem credits."
3
100. Reasons Why False and Misleading: The above statements were
4 false and misleading because CVB did not have a "strong" credit culture and its
5 "credit culture and underwriting integrity" were not "paramount." The above
6 statement was also false and misleading because CVB's "credit culture" did not
7 allow CVB to "mitigate loan losses through this economic downturn." The above
8 statements were also false and misleading because CVB's credit metrics where not
9 "superior" to its peers and CVB did not have a "strong underwriting culture" that
10 "limited its exposure to problem credits." In addition to all the reasons set forth
11 above in Paragraph 89, including CVB's repeated, secret modifications to troubled
12 loans, such as when CVB modified Garrett's loans in or around September 2008
13 after Garrett threatened bankruptcy, and CVB's failure to disclose impairment in
14 those loans:
15 • Defendants did not "mitigate loan losses" nor did they "limit[]
16
[CVB's] exposure to problem credits," but rather hid problem loans
17
from investors by extending loan due dates, using loan proceeds to
18
keep other loans current, refinancing or restructuring payment terms,
19 extending additional credit or increasing credit limits to make certain
20
borrowers appear "current" even though they were unable to pay their
21
loans according to the original terms.
22 • The credit and underwriting cultures at CVB were weak because
23
Defendants used overvalued properties as collateral for CVB's loans,
24 allowing them to conceal that the market value of the collateral held
25
by CVB was well below that of the corresponding loan.
26
101. Shortly thereafter, during a December 2, 2009 private analyst
27 presentation, in response to questions specifically concerning the Garrett loans,
28 Defendant Myers stressed that "its a fully performing asset in all respects," "we FIRST AMENDED CONSOLIDATED
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1 don't have specific reserves against that," and that "[ljhey are paying everything.
2 It's performing as agreed." (Emphasis added.)
3
102. Reasons Why False and Misleading: The above statement was false
4 and misleading because Garrett's loans were not "fully performing in all respects"
5 and Garrett was not "paying everything" and the loans were not "performing as
ii I agreed." In fact:
7
• According to CW9, Garrett's COO at the time, Defendant Myers
8
knew Garrett was in a "perilous financial condition" as of the summer
9 of 2008, when Garrett executives met with Defendants Myers and
10
James Dowd of CVB and asked for additional funding. According to
11
CW9, Garrett informed CVB that it needed the additional funds just to
12 meet its ongoing obligations, which CW9 said were mostly to CVB.
13
According to CW9, CYB advanced Garrett additional funds in or
14 around September 2008, and Garrett used the funds to get current on
15 existing loans from C\TB. CW9 also stated that Garrett had many
16
loans outstanding and that when a loan closed, some of the proceeds
17 were used to make other loans current. According to CW9, "CVB
18
was trying to keep the house of cards standing."
19 • Deed records corroborate that, at least as early as 2008, Defendants
20
kept Garrett's loans appearing "current" only by virtue of CVB
21
extending additional lines of credit or new loans.
22 • At least two confidential witnesses confirm that Defendants were
23 aware that CVB's largest borrower, Garrett, was "in a perilous
24
financial condition" and that Garrett had met with Myers and other
25
top CVB executives in or around September 2008 and needed
26 additional funds to get current on prior loans and to carry on its
27
operations.
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1 . At least eight confidential witnesses confirm that it was evident
2
internally at the Bank by this time that the loans to its largest
3
borrowing relationship, Garrett, were troubled.
4 . CW9 confirmed that Garrett's financial condition continued to
5
deteriorate throughout 2009.
6
103. Defendant Myers further explained that, of the five largest banks
7 headquartered in the region, four had disappeared and "we are the last man
8 standing," adding that CVB avoided trouble with loans faced by its peers. Myers
9 claimed that, with respect to credit quality, "we clearly are superior to most of our
10 competition."
11
104. Reasons Why False and Misleading: For the reasons set forth in
12 Paragraphs 100 and 102, including CVB's repeated, secret modifications to non-
13 performing loans, such as when CVB restructured Garrett's loans in or around
14 September 2008 after Garrett threatened bankruptcy, and CVB's failure to disclose
15 impairment in those loans, the above statement was false and misleading because
16 CVB's credit quality was not "clearly . . . superior." Indeed, because of CVB's
17 fraudulent accounting practices, it was not possible to compare CVB's credit
18 quality with its competitors, and Myers' claim to having done so here was false and
19 misleading. Defendant Myers also concealed from investors that the quality of
201 CVB's credit had deteriorated.
21
105. As further support for his statement that the Bank was not facing the
22 same loan loss problems as its peers, CEO Defendant Myers explained during the
23 presentation that, while ten buildings on the avenue where CVB is headquartered
24 each had a 75% vacancy rate, the Bank had "zero loans against those ten
25 buildings."
26
106. Reasons Why False and Misleading: The above statement was false
27 and misleading because the Bank did have a loan against a building on the avenue
28 where CVB is headquartered. In fact, directly contrary to Defendant Myers' FIRST AMENDED CONSOLIDATED
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1 I statement, the Bank had an interest in an office building on its street which partly
2 secured a $16 million promissory note issued by CVB and which served as
3 collateral for a $16.575 million revolving credit line that CVB had extended to
4 I Garrett in March 2008.
5
C. Fourth Quarter 2009 Statements
6
107. On January 21, 2010, CVB announced its fiscal year 2009 results,
7 I including "record net interest income." CEO Defendant Myers commented, "This
8 represents the highest net interest income in the history of the Company,
9 demonstrating our ability to continue to grow top-line income."
10
108. CVB reported the purported record results in its Form 10-K filed with
11 the SEC on March 4, 2010. The Bank's Form 10-K disclosed as a purported "risk
12 factor" that the Bank "may be required to make additional provisions for credit
13 losses and charge off additional loans in the future," and that the continuing
14 deterioration of the commercial real estate market "could" affect the ability of the
15 Bank's borrowers, including its largest borrowing relationships, to service their
16 debt, which "could" result in loan charge-offs and provisions for credit losses "in
17 the future," and declining real estate values "could be significantly reduced."
18
109. Reasons Why False and Misleading: For the reasons set forth in
19 Paragraph 93, the above statement was false and misleading because Defendants
20 knew, or recklessly disregarded, that continuing deterioration in the real estate
21 market was no longer a "risk factor" that "could" result in loan "charge-offs" and
22 provision for credit losses "in the future"; rather, the real estate market had already
23 affected the ability of loan customers, including its largest borrowing
24 relationship, Garrett, to service their debt, and CVB violated GAAP when it failed
25 "to make additional provisions for credit losses and charge off additional loans."
26 Among other things, Paul Garrett and the executive staff at Garrett met with Myers
27 and other executives of CVB in January 2010 and told them that CVB needed to
28 work something out with Garrett or Garrett would file for bankruptcy. In addition, FIRST AMENDED CONSOLIDATED
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1 Defendants failed to disclose that the Bank kept Garrett "current" at year end 2009
2 by extending Garrett a $38 million "refinance" on December 29, 2009, just two
3 days before year end. In other words, Defendants failed to disclose that the
4 purported "risk" had already come to fruition.
5
110. The Form lO-K represented that it was prepared "in accordance with
6 accounting principles generally accepted in the United States of America" and
7 that it "conform[sJ to practices within the banking industry."
8
111. Reasons Why False and Misleading: For the reasons discussed
9 above in Section VC, this statement was false and misleading because the Form
10 10-K was not prepared in accordance with GAAP and did not conform to practices
11 within the banking industry. Rather, CVB misrepresented its loan loss experience,
12 loan loss reserves, and its restructured, past due, non-performing and nonaccrual
13 loans by loan type in order to conceal its fraud; failed to accurately report its past
14 due, restructured and non-performing assets and its realized losses; failed to record
15 timely loan loss provisions as losses were incurred; and failed to make required
16 disclosures in the Bank's financial statements, footnotes, and MD&A.
17
112. The Form 10-K also stated: "[W]e are not aware of any other loans
UI as of December 31, 2009 for which known credit problems of the borrower would
19 cause serious doubts as to the ability of such borrowers to comply with their loan
20 repayment terms, or any known events that would result in the loan being
21 designated as non-performing at some future date." Defendant Biebrich and
22 Defendant Myers repeated their Sarbanes-Oxley certifications, and further signed
23 certifications pursuant to Section 111(b) of the Emergency Economic Stabilization
24 Act of 2008 as Amended, in light of CVB's receipt of TARP funds.
25
113. Reasons Why False and Misleading: For the reasons stated above in
Paragraph 91, the above statements were false and misleading because Defendants
27 knew at that time, or recklessly disregarded, and failed to disclose "known credit
problems" with many of CVB's loans, including those to its largest borrower, FIRST AMENDED CONSOLIDATED
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1 Garrett, that "cause[d] serious doubts about the ability of those borrowers to
2 comply with their loan repayment terms." The above statement is also false and
3 misleading because Defendants were aware of at that time, but failed to disclose,
4 "known events that would result in the loan being designated as non-performing at
5 some future date," such as the very real possibility that Garrett would file for
6 bankruptcy or otherwise default. Moreover, Defendants kept Garrett "current" at
7 year end 2009 by extending Garrett a $38 million "refinance" on December 29,
8 2009, just two days before year end.
9
114. The representations in the certifications were false and misleading
10 because the Form 10-K did not fairly represent CVB's financial condition and
11 because it omitted material facts necessary to make the statements made not
12 misleading. In addition to the reasons put forward in Paragraphs 89 and 102, as
13 detailed in Section V:
14 . Defendants failed to disclose that the Bank kept Garrett "current" at
15 year end 2009 by extending Garrett a $38 million "refinance" on
16
December 29, 2009, just two days before year end. Additionally,
17
Paul Garrett and the executive staff at Garrett met with Myers and
18 other executives of C\TB in January 2010 and told them that CVB
19 needed to work something out with Garrett or Garrett would file for
20
bankruptcy.
21 . Defendants also failed to disclose in the Form 10-K that $28.3 million
22 of the 2009 provision for credit losses was for Dairy, Livestock and
23
Agribusiness loans, constituting 35% of CVB's total provision for
24 credit losses of $80.5 million during the year ended 2009.
25
. Defendants also failed to disclose that $31 million of the Bank's
26
December 31, 2009 allowance for credit losses was for Dairy,
27
Livestock and Agribusiness loans, constituting almost 30% of the
28
total allowance for credit losses of $109 million as of December 31, FIRST AMENDED CONSOLIDATED
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2009 . 11 This information about the troubled loans in the Dairy sector
was ultimately disclosed in the Bank's 2010 Form 10-K filed with the
SEC March 1, 2011, without explanation for why it had not
previously been timely disclosed.
• The numbers that Defendants reported in CVB's 2009 Form 10-K for
restructured loans were nearly $20 million lower than the numbers
Defendants reported to the FDIC for the same time period as stated in
the FDIC Uniform Bank Performance Report, as set forth below:
CVB Financial - Restructured Loans Reported as of December 31, 2009
Reported Reported
$ in thousands, rounded in Form to FDIC Discrepancy 10-K
Restructured loans - past due $ 2,500 $16,337 $13,837 Restructured loans - current 1,017 6,977 5,960 Restructured loans - Total $ 3,517 $23,314 $19,797
115. Macquarie (USA) Equities Research ("Macquarie") reported on
January 25, 2010 that "management noted that the $84 million Garrett Group credit
is performing as expected."
116. Reasons Why False and Misleading: The above statement was false
and misleading because the $84 million Garrett Group credit was not "performing
as expected." In addition to the reasons set forth in Paragraph 102, Paul Garrett
and the executive staff at Garrett met with Myers and other executives of CVB in
The provision is an income statement item - an expense - so it accumulates over a period of time. The provision for all of 2009 was $80.5 million. The allowance is a balance sheet item - a reserve - so it is reported as of a date. The allowance for both the year and quarter ended December 31, 2009, are the same: $109 million.
FIRST AMENDED CONSOLIDATED -53- CLASS ACTION COMPLAINT
Case No. lO-cv-06256-MMIVI (PJWx)
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1 January 2010 and told them that CVB needed to work something out with Garrett
2 or Garrett would file for bankruptcy. In addition, Defendants failed to disclose that
3 the Bank kept Garrett "current" at year end 2009 by extending Garrett a $38
4 million "refinance" on December 29, 2009, just two days before year end.
5
117. Analysts, news commentators and investors were impressed with
According to an April 3, 2010 New York Times article, when asked about particular
troubled loans, Myers admitted that, "[w]e certainly are aggressively looking at
this stuff all the time." FIRST AMENDED CONSOLIDATED
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1
154. Moreover, confidential witnesses - all of whom were CVB employees
2 during the Class Period - explained that the Bank's senior management remained
3 well informed of the status of troubled loans, including the Garrett loans. These
4 witnesses described regular meetings attended - including the Loan Committee
5 meetings - and materials received by Myers and Biebrich. For example, CW1
6 confirmed that Defendant Myers held a Loan Committee meeting monthly,
7 typically the third Wednesday of each month (except for the month when the
8 shareholder meeting took place, in which case the Loan Committee meeting took
9 place the Monday before the shareholder meeting). Other participants regularly
10 included Defendant Biebrich, Chairman of the Board and founder George Borba,
11 Vice Chairman of the Board D. Linn Wiley, Board members who were on the Loan
12 Committee, including San Vaccaro (who is also a full-time attorney), Credit
13 Administration members, the CCO, and the Special Assets Managers. Defendant
14 Myers called the meetings to order, then the participants held discussions of the
15 loans approved the prior month and loans "of interest" (e.g., large amounts or large
16 customers), including the Garrett loans. Then the participants went through the
17 Bank's branches' information including the credits that were booked during the
18 month and the delinquencies.
19
155. CW1 described how the regular monthly Loan Committee meetings
20 took place in the Bank's headquarters, in the third-floor Directors' conference
21 room, and lasted between 1 and 1 1/2 hours, from approximately 11:30 a.m.-
22 1:00 p.m., with the meetings running longer when the group was going over
23 quarter-end information. These meetings were held in conjunction with other Bank
24 meetings that CEO Myers and CFO Biebrich held the same day.
25
156. CW1 also explained that in connection with each Loan Committee
meeting, each participant was given a 1-inch thick packet of materials, including
27 CEO Myers' 1-page agenda. The packet included, in approximately five to ten
us pages, a detailed list of all loans approved during the prior month, the loan amount, FIRST AMENDED CONSOLIDATED
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1 what the collateral was, the date of the loan, who approved the loan, who sustained
2 the loan, and information regarding any existing loans the borrower previously
3 had. The packet also covered new loans, renewals, second and third liens, loan
4 modifications, and restructured loans. The Bank's Board members were given this
5 packet as part of a larger "Board packet" - a 3-inch thick binder, with the Loan
6 Committee section as one of the first sections.
7
157. According to CW1, the Problem Loan Report ("PLR") was also
8 included in the Loan Committee materials. The PLR detailed the Bank's loans that
9 were classified as substandard, watch, or doubtful, and included information about
10 the borrower, the borrower's financials, the quantity of the loan, the reason for the
11 downgrade, and the collateral (including the appraised value, and any delinquent
12 taxes and insurance payments). CW6 confirmed the preparation of regular
13 PLRs, some of which CW6 reviewed, and that the information was provided to the
14 Board of Directors on a quarterly basis.
15
158. CW1 further explained that, in light of the size of the borrowing
UI relationship, as well as Garrett's large deposit relationship with the Bank, the
17 Bank's top executives paid particular attention to Garrett, including regularly
18 discussing Garrett during the Loan Committee meetings. Indeed, at least as early
19 as 2008, during a monthly Loan Committee meeting, CVB's founder and Chairman
20 of the Board, George Borba, asked questions regarding one or more loans to
21 Garrett that were approved the prior month.
22
159. CW2 elaborated that each office tracked its own loans and once a loan
23 was late by thirty days, someone from the office called and sent the loan to the
24 Bank's Credit Department. The Credit Department also furnished reports that were
25 sent to the executives. Every region and office tracked its loans monthly on a
26 standard banking report that looks at all delinquencies and all reserves. In addition
27 to regions and individual offices creating monthly reports, CVB made one master
28 report each quarter. FIRST AMENDED CONSOLIDATED
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160. CW12, a Vice President at the Bank who managed a loan portfolio of
I $100,000,000, explained that Defendant Myers had regular access to special credit
I administration "quarterly reports" and participated in regular meetings to assess
I "trends in the portfolio."
161. Other facts demonstrate that CVB 's senior management was keenly
I aware of the status of the real estate markets and CVB's deteriorating lending
relationships. As explained by CW1, because the Bank's senior management knew
there was going to be an increasing number of problems with loans, beginning in
March 2009, the Bank nearly tripled the number of employees in its Special Assets
Department, from four to eleven. CW7 likewise confirmed that CVB added
additional Special Assets divisions in 2009, including in the Bank's Rosedale
office.
162. Finally, Defendant Myers' knowledge of the status of CVB's troubled
loans - particularly those of its largest borrower - is further confirmed by Myers'
extreme "hands-on" management style. CW12 explained that "Myers knew
everything all the time. He did not get surprised." CW12 also stated that
Defendant Myers attended all of the Board of Directors meetings and he sat "at the
head of the table." CW5 stated that "Chris [Myers] got involved in credit issues
and was really a micromanager. He was pretty much involved in everything."
D. Defendants' Close Relationship And Regular Communications With Garrett Support A Strong Inference Of Scienter
163. Garrett and CVB - and in particular Defendant Myers - had a close,
familiar relationship. According to an e-mail from Wright to Myers filed in the
real estate transaction litigation among Garrett, Stratford, and homebuilder Artisan
Communities ("Artisan"), Stratford Ranch Partners, LLC v. Paul Garrett, Case No.
RIC 513524 (Riverside Super. Ct.), when a third-party, Stratford Ranch Partners
("Stratford"), requested Garrett's personal financial statements before it entered
into a transaction with him, Garrett's CEO, Wright, proposed that Stratford instead FIRST AMENDED CONSOLIDATED
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speak directly with Defendant Myers "regarding Paul, his performance over the
years, and his financial status .„ 12
164. Witnesses confirm that Defendants were in regular contact with
executives at the Garrett Group. For example, CW10 stated that CVB executives
(including CVB's Executive Vice President and Chief Credit Officer, James Dowd,
who reported to Defendant Myers) came to Garrett's offices in late 2008. CW8
stated that there were numerous meetings and discussions between Garrett
(specifically, founder Paul Garrett, CEO Kirk Wright, and Marty Weiss) and CVB
during 2008 and 2009, and continuing after CW8 left the company in February
2009. CW8 reported that these meetings "occurred regularly.” CW8 regularly
heard about these meetings from Garrett's CEO, Kirk Wright, who CW8 remained
in contact with even after CW8 left Garrett in February 2009. CW8 also stated that
it was common for CVB executives to come to Garrett's offices periodically during
this time period.
165. Further demonstrating the close relationship Myers and CVB had with
Garrett, CW8 recalled that Myers first came to visit Garrett's offices soon after
Myers was appointed CEO of CVB, in August 2006.
166. Finally, CW9 stated that Paul Garrett met regularly with "all the key
players at CVB," and recalled specifically that these included Defendant Myers,
George Borba (Chairman of the Board) and Jim Dowd.
12 Stratford filed the case against Paul Garrett on November 21, 2008, related to a loan Garrett received from Temecula Valley Bank (which has since failed) for $10.6 million in April 2008. In May 2007, Paul Garrett personally guaranteed a payment of $5 million to Stratford in return for part of a piece of land it was selling. Another portion of the land from the deal was transferred from a unit of Artisan to Garrett through a quitclaim deed in late May 2007. The property was then pledged as part of collateral for the $10.6 million loan from Temecula Valley Bank. Stratford obtained an Order for a Writ of Attachment against Garrett on May 29, 2009, and an Order for an additional Writ of Attachment against Garrett on November 10, 2009, in the amount of $5.95 million.
FIRST AMENDED CONSOLIDATED -69- CLASS ACTION COMPLAINT
Case No. lO-cv-06256-MMI\'I (PJWx)
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Case 2:10-cv-06256-MMM -PJW
Document 61 Filed 02/27/12 Page 73 of 96 Page ID #:1195
1
E. Defendants Were Motivated To Commit Fraud
2
167. CVB's stated "growth strategy" was to transition from a community
3 bank to a regional bank through acquisitions of failing banks with favorable loss-
4 sharing agreements with the FDIC. Most recently, CVB acquired San Joaquin
5 Bank just days prior to the Class Period. Garrett's dire financial condition
6 interfered with this strategy, however, and two confidential witnesses confirmed
7 that Defendants strategically (and fraudulently) wanted to wait for a profitable
8 quarter to write down the Garrett loans. CW5 stated that, although the Garrett
9 loans were "going sideways" in 2008, the Defendants waited to publicly disclose
10 the troubled status of the Garrett loans in hopes that they could "piggy-back" on
11 top of a profitable quarter so that it did not have as large of an impact on Bank's
12 profitability. CW9, Garrett's COO, also independently reported that CYB wanted
13 to wait for a "big quarter" to write down the Garrett loans. Tellingly, since the time
14 the truth was revealed as set forth in Section VIII below, CVB has not acquired any
15 additional banks, and its total assets have decreased.
16
168. Defendants Myers and Biebrich also reaped substantial proceeds from
171 insider sales at artificially inflated prices during the Class Period. At the same
18 time, Defendants were emphasizing that the "interests of senior management and
19 board of directors [are] aligned with those of shareholders" (November 4, 2009
20 slide presentation), the "strong board ownership" in the Bank by the directors, and
21 how "we have really taken a longer-term intermediate term perspective on what we
22 do."
23
We are not as interested in our results in the next quarter, as we are
24 what [sic] we're building for the future . . . . We have strong board
25 ownership position 16%, so we make decisions for the long run.
1 I Specifically, during the Class Period, CFO Defendant Biebrich sold 57,680 shares
2 for a total of $565,618. During the entire year prior to the beginning of the Class
3 Period, Biebrich had only one transaction, selling 1,608 shares for a total of
4 I $16,080. During the Class Period, Defendant Biebrich sold approximately half of I 5 the 110,929 shares he held at the start of the Class Period. Specifically, Defendant
6 Biebrich sold 10,000 shares on November 16, 2009, at $8.39 per share; sold
7 another 20,000 shares on January 25, 2010, at $9.37 per share; sold another 10,000
8 shares 4 days later on January 29, 2010, at $9.95 per share; sold another 3,000
9 shares on March 24, 2010, at $10.53 per share; sold another 10,000 shares on
10 April 26, 2010, at $11.51 per share; and sold another 4,680 shares on May 27,
11 2010, at $10.29 per share.
12
170. During the entire year prior to the beginning of the Class Period,
13 Defendant Myers did not sell any shares, but purchased. 8,000 shares on the open
14 market and acquired another 250,000. Then, after the beginning of the Class
15 Period, on February 24, 2010, Defendant Myers sold 13,000 shares. Shortly
16 thereafter, on June 15, 2010 (just five weeks before receipt of the SEC subpoena),
17 Myers instituted a lObS-i trading plan, with the reported purpose of allowing
18 Myers "to pay the income taxes related to the vesting of his restricted stock
19 grants." Then, on August 2, 2010 - after Defendants received the SEC subpoena
20 but before they disclosed it to investors - Myers sold an additional 5,500 shares
21 pursuant to the lObS-i trading plan. In total, during the Class Period, Defendant
22 Myers purchased no shares, but sold 18,500 shares, for proceeds of $180,889.
23
171. Defendants Myers and Biebrich received these proceeds while they
24 were in possession of material, non-public information concerning CVB,
25 including, as explained above, that:
26
(a) Defendants failed to properly account for CVB's commercial
27 real estate loans and failed to reflect impairment in the loans;
28 FIRST AMENDED CONSOLIDATED
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1
(b) CVB had not adequately reserved for loan losses such that its
2 I financial statements were presented in violation of GAAP;
3
(c) Defendants knew or recklessly disregarded that CVB's largest
4 borrower, Garrett, had defaulted and was about to be foreclosed on; that the loans
5 were backed by collateral whose market value was well below that of the loan
6 amounts, and were kept "current" only by virtue of its "extend and pretend"
7 practice of extending new monies to help borrowers pay existing loans; that Garrett
8 threatened to file for bankruptcy if CVB refused to extend/modify its loans; and
9
(d) Defendants knew or recklessly disregarded that there was not a
10 mere "risk" that continuing deterioration in the real estate market "could" affect the
11 ability of CVB 's loan customers, including its largest borrowing relationships, to
12 service their debt; rather, Defendants knew or recklessly disregarded that this
13 "risk" had already come to fruition.
14 VIII. LOSS CAUSATION
15
172. After the close of the market on August 9, 2010, CVB shocked the
16 market when it announced that, two weeks earlier, on July 26, 2010, the Bank had
17 received a subpoena from the SEC demanding information about how the Bank
18 handles and discloses troubled loans. Specifically, the subpoena questioned the
19 Bank's loan underwriting guidelines, its allowance for credit losses and how CVB
20 calculates its allowance for loan losses. Analysts immediately reacted to the
21 announcement, stating that the SEC probe was notable because it revealed that
22 CVB was not fully disclosing potentially problematic loans and that CVB's largest
23 exposure - Garrett - is backed by collateral whose market value is well below that
24 of the loan amount - concerns the Bank had previously denied. Specifically, CYB
25 announced:
26
The subpoena requests information regarding our loan underwriting
27 guidelines, our allowance for credit losses and our allowance for loan
28
loss calculation methodology, our methodology for grading loans and FIRST AMENDED CONSOLIDATED
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the process for making provisions for loan losses, and our provision
2
for credit losses. In addition, the subpoena requests information
3
regarding presentations we have given or conferences we have
4
attended with analysts, brokers, investors or prospective investors.
5
173. The Bank provided no explanation for why it had waited two weeks to
6 disclose the subpoena it had received on July 26, 2010 - the same day the Bank
had, instead, announced that CFO Defendant Biebrich was "retiring."
174. The market reacted quickly and negatively. Immediately following
9 the news of the SEC probe and analysts reports confirming that the subpoena
10 revealed that CVB was not fully disclosing potentially problematic loans, CVB's
11 stock fell $2.30 per share to close at $8.00 per share on August 10, 2010 - a one-
12 day decline of over 22% on extremely high volume of 13.25 million shares,
13 representing a market capitalization loss of approximately $245 million.
14
175. The announcement of the SEC investigation validated what until then
15 Defendants had publicly denied - namely, whether the Bank was (i) fully
16 disclosing potentially problematic loans, in particular, loans to its largest customer,
17 Garrett; (ii) whether the market value of the collateral was below the loan amounts;
18 and (iii) whether CVB extended new loans to borrowers to keep their existing
19 loans current. For example, after the announcement, on August 10, 2010, Dow
20 Jones published an article with the headline "HEARD ON THE STREET: CVB
21 Financial's Can of Worms," which stated in part:
22
A Securities and Exchange Commission probe of a midsized
23
California bank may open more than one can of worms.
24
CVB Financial, of Ontario, Calif., announced Monday that on July 26
25
it received a subpoena from the SEC, seeking information about,
26 among other things, bad loan reserves. Its stock plunged 22%
27
Tuesday.
28 FIRST AMENDED CONSOLIDATED
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The investigation is notable for two reasons. First, it could determine
2 whether CVB Financial's critics are right in thinking that the bank
3
isn It fully disclosing potentially problematic loans, an accusation
4
the bank rejects. Second, the subpoena was received after the Federal
5
Deposit Insurance Corp. in May had concluded an annual examination
6
of the bank.
7 * * *
8
Discussion of CVB Financial centers on its largest exposure, loans
9
to a property company called the Garrett Group. Skeptics believe
10
this exposure is backed by collateral whose market value is well
11
below that of the loan amount. Some also question whether CVB
12 extended a new loan to Garrett to help it pay existing loans,
13 something Myers denies. He said the Garrett Group was current on
14
its loans at the end of the second quarter, but the bank had reserves
15
against the exposure.
16
176. Similarly, Macquarie reported on August 10, 2010, that the SEC
17 investigation indicated that the adequacy or consistency of CVB's disclosures
18 could be at issue, and that it expected the investigation to remain a material
19 overhang on the stock, "particularly given lingering concerns in the investment
20 community around the company's asset quality and financial reporting."
21
177. CVB admitted the "extraordinary market activity in the Company's
22 stock volume and price today." The next day, on August 10, 2010, in an apparent
23 attempt to stop the stock price from continuing its downhill slide, CVB announced
24 a repurchase plan:
25
"We believe the decline in stock price presents an opportunity for us
26
to repurchase CVBF stock to enhance shareholder value. We are
27
taking advantage of this opportunity," said Chris Myers, President and
28
CEO. FIRST AMENDED CONSOLIDATED
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The Bank's regulators recently completed their annual safety and
2
soundness examination of Citizens Business Bank. "While the results
3
of this examination are confidential, the fact that there was no
4
negative disclosure on the FDIC website should speak for itself," said
5
Myers. Annual regulatory examinations involve a comprehensive
6
review of the Company's loan portfolio, underwriting practices, and
7
the adequacy of its loan loss reserves and methodology.
8
In addition to the annual safety and soundness examinations, we
9
regularly have our loan portfolio reviewed by outside consultants.
10
CVB Financial Corp. has reported over 130 consecutive quarterly
11
profits. On July 21, 2010, the Company reported record earnings for
12
the second quarter of 2010.
13
178. Also on August 10, 2010, Credit Suisse reported that the SEC
141 investigation revealed two issues, regarding: (i) the adequacy of CVB's reserves,
151 including specifically with respect to the Bank's largest loans (Garrett); and (ii) the
161 adequacy of CVB's disclosures.
17
179. On August 11, 2010, FIG Partners explained as follows:
18
It appears the SEC is looking into whether CVBF misled the Street
19
by hiding the true performance of loans the company said were
20 performing. In doing so, the SEC is also implying that company
21 management hid the true nature of the loan portfolio from the FDIC
22 and California Department of Financial Institutions (the bank's
23 primary regulators) . . . . The information sought [in the SEC
24 subpoena] is very similar to stories in the press recently that the
25 company was overstating credit quality. (Emphasis added.)
26
180. The report further explained that "[un response to the 22% decline in
27 the stock price yesterday, management issued a rare public statement after market
28 close." The Bank defended its internal credit monitoring process, reminded FIRST AMENDED CONSOLIDATED
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1 investors it is on good terms with banking regulators and executed, for the first
2 time, on an existing 10 million share repurchase program.
3
181. On September 9, 2010, just one month after the Bank announced its
4 receipt of the SEC subpoena questioning the Bank's loan underwriting guidelines
5 and loan loss reserves, CYB finally disclosed that Garrett was not in fact "fully
6 performing" or "current" on its debt. Rather, CVB had suddenly charged-off $34
7 million in debt owed by Garrett, and placed the remaining $48 million in the
8 Bank's non-performing and impaired loan category. The Bank also admitted
9 that the reserves it had previously allocated for the Garrett loans were
10 insufficient, at only $24.7 million (or 30% of the loan amount), and because of its
11 inadequate Garrett reserves, it had to record an additional provision of $9.3 million
12 in third quarter 2010.
13
182. Specifically, the Bank's announcements in its September 2010 press
14 release and conference call slides filed with the SEC stated that in August, the
15 Bank's largest borrower (Garrett) informed the Bank that they were not able to
16 make principal and interest payments on their loans as scheduled and wanted to
17 negotiate an alternative repayment schedule:
18
The borrowing relationship is comprised of seven loans and totals
19 approximately $82 million in outstanding debt. This is the largest
20
borrowing relationship in the Bank.
21
In response to the information from our largest borrower, we have
22
taken the following actions:
23 • On September 2, 2010 all of the loans were put on non-
24 accrual ($48 million in loans after charging off $34 million).
25 • We charged-off $34 million in loans versus our June 30,
26
2010 reserve of $24.7 million. Based on our charge-off of
27
$34 million, we are recording an additional $9.3 million
28 provision for credit losses in the third quarter.
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1 • The $34 million charge-off figure was determined as
2
follows: we currently hold first trust deed liens on 25
3
different properties with an aggregate appraised value of
4
$52.1 million. Each of the 25 properties has been appraised
5
by MAT certified third party appraisers with the exception of
6
two properties which were appraised by a third-party State
7
Certified Real Estate appraiser. The combined value of the
8
two non-MAI appraised properties is $5.7 million. All of
9
the 25 property appraisals were updated in 2010 with the
10 exception of one property which was appraised in November
11
2009 and was valued at $3.0 million at that time. The
12 remaining $48 million in non-accrual loan balance
13 represents 92% of the $52.1 million in aggregate appraised
14 values.
15 • The Borrower sold a 26th property recently for $2.5 million.
16
The majority of the proceeds of this sale ($2 million) are
17
held as payment collateral for our loans, which collateral is
18 to be used to make all principal and interest payments
19 scheduled through December 15, 2010. The remaining $0.5
20 million in proceeds were used to pay past due property
21
taxes, sales commissions and borrower cost reimbursements.
22
This is part of a Forbearance Agreement with the subject
23
borrower. The Agreement expires December 15, 2010.
24
183. With respect to the largest of the seven Garrett loans, with a $42.5
25 million loan balance, the Bank disclosed that it had no direct liens on the properties
26 that were purportedly serving as collateral for the loan, and that the Bank was now
27 suddenly reducing the value of the Bank's UCC- 1 filings on the properties to zero.
28 The Bank disclosed as follows: FIRST AMENDED CONSOLIDATED
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This loan is further supported by UCC-1 filings on the borrower's
2
equity interests in 15 income producing properties, aggregating nearly
3
two million square feet of office and industrial space. All of the 15
4 properties have existing first trust deeds recorded by other lenders, so
5 we have no direct lien on the properties. The excess cash flow
6 realized on these properties (after paying the mortgage payments) has
7
been utilized to assist our Borrower in paying CBB loan obligations.
8
Of the 15 properties, all properties are income producing (nine are
9
industrial properties and six are office buildings). However, in recent
10 months, cash flow has declined significantly due to vacancies and
11 reduced rents. Due to our weakened equity-based collateral position
12 on these properties, we have discounted the value of our UCC-1
13
filings on the subject properties to zero.
14
184. Overall, the Bank reported that it expected its non-performing loans
15 ("NPLs") will increase $59 million for the third quarter going from $83 million to
16 $142 million; of this increase, $48 million represents the balance of the loans to
171 Garrett, after the $34 million charge-off, and the remaining $11 million in increase
18 is primarily attributed to two dairy borrowers, who recently were reclassified to
19 non-performing status. The Bank reported that charge-offs for the third quarter are
20 projected to total approximately $38 million; of this amount, $34 million
21 represents the charge-off on Garrett, and the remaining $4 million is for smaller,
22 unrelated loans to other borrowers. The Bank further reported that in order to
23 partially absorb the sharp increase in Net Charge-Offs, CVB recognized $28
24 million in sales of securities.
25
185. Following the Bank's disclosure after the close of the market on
26 September 9, 2010, the price of CVB stock dropped from $7.05 to a low of $6.88,
27 a drop of 2.41%, before closing at $6.99, on volume of 4,379,983, more than five
28 times the volume traded on the previous day Moreover, the decline was FIRST AMENDED CONSOLIDATED
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#:1204
1 particularly significant in light of the fact that, the same day, the Standard and
2 Poors 500 ("S&P 500") increased, from 1104.18 to 1109.55, and the index of all
31 I state banks also increased.
4
186. On September 10, 2010, Credit Suisse, reported in part:
5
More importantly, in our view, CVBF announced that it was placing
6
its largest (and most controversial) loan on non-performing status, and
7 writing it down to its recent appraisal value (less assumed OREO
8
costs).
9
While the SEC subpoena remains outstanding, we believe the
10 announcement removes a major component of uncertainty in regards
11
to problem loans; for which the subpoena also seeks to address (to a
12
certain extent).
13
187. On September 13, 2010, Howe Barnes Hoefer & Arnett explained as
141
15
16
17
18
19
20
21
22
23
24
25
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27
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follows:
The company's share price plummeted by 22% to $8.00 on
August 10, which was the day after it disclosed the SEC investigation.
Since then, the share price has drifted down by an additional 13% to
$6.99 on September 10. There was only a modest decline of -.'l%
following the earnings preannouncement as further deterioration in
credit quality and uncertainty surrounding the SEC investigation are
already reflected in the share price.
188. Shortly thereafter, on January 20, 2011, CVB further disclosed that
Garrett had failed to comply with forbearance agreements (which CVB had
previously disclosed on September 9, 2010, was "a Forbearance Agreement,"
(singular), but which CVB now reported was multiple "forbearance agreements").
The Bank explained:
As a result, we are continuing to explore all of our rights and remedies
on a loan-by-loan basis, including without limitation the sale of FIRST AMENDED CONSOLIDATED
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1 certain notes, initiation of foreclosure proceedings against certain
2 collateral and alternative repayment plans. There can be no assurance
3 as to the outcome of such efforts, which the borrower may oppose.
4
The current aggregate balance after prior payments and charge-offs is
5
$45.2 million. Further charge-offs may need to be taken based on
6
loan developments, borrower actions and/or reappraisals of collateral.
7
189. Eventually, CVB recorded numerous Notices of Default on Garrett,
8 including at least the following: (1) on January 24, 2011, for $8,711,151.55; (2) on
9 January 26, 2011, for $4,920,283.08; (3) on January 27, 2011, for $2,725,162.94;
10 and (4) on February 15, 2011, for $42,361,705.24.
11 IX. THE PRESUMPTION OF RELIANCE
12
190. At all relevant times, the market for CVB's publicly traded common
13 stock was an efficient market for the following reasons, among others:
14
(a) The Bank's common stock met the requirements for public
15 listing and was listed and actively traded on the NASDAQ, a highly efficient
16 market. The average daily volume of CVB's common stock during the Class
17 Period was 1,058,754 shares based on information from the Yahoo Finance
18 website. Further, approximately 60% of the stock was owned by institutional
19 investors;
20
(b) As a regulated issuer, CVB made public filings, including its
21 Forms 10-K, Forms 10-Q and related press releases, with the SEC;
22
(c) CVB was followed by analysts from major brokerages
23 including, among others, Cantor Fitzgerald, Sandler O'Neill & Partners, LP,. Stifel
San Diego, CA 92130 Tel: (858) 793-0070 Fax: (858) 793-0323
-and- GERALD H. SILK
Wry(blbglaw.com) 1TJOSEFSON
(aviblbglaw.com) 128 Avenue of the Americas, 38th Floor New York, NY 10019 Tel: (212) 554-1400 Fax: (212) 554-1444
Counselfor Lead PlainffJacksonville Police & Fire Pension And and Lead Counsel for the Class
FIRST AMENDED CONSOLIDATED -90- CLASS ACTION COMPLAINT
Case No. 10-cv-06256-MMIVI (PJWx)
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2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 94 of 96 Page I
#:1216
DECLARATION OF SERVICE
I, the undersigned, declare:
That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Diego, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 12481 High Bluff Drive, Suite 300, San Diego, California 92130.
That on February 27, 2012, declarant caused to be served the following documents:
. FIRST AMENDED CONSOLIDATED CLASS ACTION
COMPLAINT
SEE ATTACHED SERVICE LIST
0 (BY U.S. MAIL) I am personally and readily familiar with the business practice of Bernstein Litôwitz Berger & Grossmann LLP for collecting and processing of corresj,ondence for mailing with the United States Postal Service, and S? caused such envelope(s) with postage thereon fully prepaid to be placed in the United States Postal Service at San Diego, Cahforma.
0 (BY EMAIL) I am personally and readily familiar with the business practice of Bernstein Litowitz Berger & Grossmann LLP for collection and processing of document(s) to be transmitted by electronic mail and I caused such document(s) on this date to be transmitted by electronic mail to the offices of electronic mail addressee(s) listed below.
?l (BY OVERNIGHT MAIL) I am personally and readily familiar with the business practice of Bernstein Litowitz Berger & Grossmann LLP for collection and processing of correspondence for overnight delivery, and I caused such document(s) described herein to be deposited for delivery to a facility regularly maintained by Federal Express for overnight delivery.
Executed on February 27, 2012, at San
Cuccurullo, C.P. d Paralegal
DECLARATION OF SERVICE Case No. 1O-cv-06256.MIvIM (PJWx)
28
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SERVICE LIST
Lewis S. Kahn Kahn Swick & Foti LLC 206 Covington Street Madisonville, LA 70447 Tel: 504-455-1400 Fax: 504-455-1498 [email protected]
Attorneys for Plaintff Barry R. Lloyd
Michael D. Braun Braun Law Group PC 10680 West Pico Blvd., Suite 280 Los Angeles, CA 90064 Tel: 310-836-6000 Fax: 310-836-6010 servicebrauniawgroup.com
I Attorneys for Plaint iff Barry R. Lloyd
Darren J. Robbins Catherine J. Kowalewski David C. Walton Jonah H. Goldstein Robbins Geller Rudman& Dowd LLP 655 W. Broadway, Suite 1900 San Diego, CA 92101-3301 Tel: 619-231-1058 Fax: 619-231-7423 E_ file _sdrgrd1aw.corn [email protected] davewrgrdlaw.corn [email protected]
Attorneys for Plaintiff Barry R. Lloyd
DECLARATION OF SERVICE Case No. 10-cv-06256-MMM (PJWx)
Case 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 96 of 96 Page ID II #:1218
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Scott Vick Vick Law Group 800 W. Sixth Street, Suite 1220 Los Angeles, CA 90017 Tel: 310-598-7044 Fax: 310-784-6226 scottvicklawgroup.com
Attorneys for Defendant CVB Financial Corp., Christopher D. Myers and Edward J. Biebrich, Jr.
Wayne M. Carlin Jeffrey D. Hoschander Warren R. Stern David M. Murphy Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019 Tel: 212-403-1272 Fax: 212-403-2324 [email protected][email protected][email protected] DMMurphywlrk.com
Attorneys for Defendant CVB Financial Corp., Christopher D. Myers and Edward J. Biebrich, Jr.
DECLARATION OF SERVICE Case No. I0-cv-06256-MMM (PJWx)