BankAtlantic Bancorp (BBX) and its chief executive officer lost a bid to dismiss a Securities and Exchange Commission lawsuit alleging they misled investors about the extent of the losses the bank was facing because of a troubled loan portfolio.
U.S. District Judge Robert Scola in Miami ruled Tuesday that the SEC can proceed with allegations of disclosure fraud and misrepresentations or omissions in earning statements and investor conference calls. He dismissed parts of two of seven counts in the lawsuit against the bank and Chief Executive Alan Levan, while giving the agency permission to amend its complaint.
"Viewed as a whole, these allegations go beyond severe recklessness and touch upon intent to deceive," the judge wrote in reference to one count that survived his review. "The court finds that the SEC's allegations sufficiently raise a plausible inference that Bancorp and Levan made misrepresentations and omissions of material fact by the alleged failure to reclassify and write down certain loans'' in the portfolio.
The SEC said in its January complaint that BankAtlantic and Levan made misleading statements in public filings and earnings calls to hide losses on the Fort Lauderdale, Fla.-based bank's commercial and residential land holdings and improperly recorded loans they were trying to sell from the portfolio in late 2007.
According to the agency, Levan knew that a large portion of the portfolio, which consisted mainly of loans on land intended for development into single-family housing and condominiums, was worsening in early 2007 as borrowers struggled to make payments. In the first two quarters of 2007, BankAtlantic made only general warnings about risks related to Florida's real estate market and failed to disclose the downward trend already occurring in its portfolio, the SEC said.
The bank acknowledged the problem in the third quarter of 2007 by announcing a large loss, which caused the bank's stock to plunge 37 percent, the SEC said.
''BankAtlantic and Levan used accounting gimmicks to conceal from investors the losses in a critical loan portfolio," SEC Enforcement Director Robert Khuzami said in a statement when the case was filed.
Eugene Stearns, an attorney for BankAtlantic and Levan, didn't immediately respond to e-mail and phone messages seeking comment on today's ruling after regular business hours.
During a hearing last month, Stearns argued that the suit should be dismissed because the bank disclosed in filings and on analyst conference calls that it was holding loans that would be affected by a real estate downturn.
"We have a securities claim brought against a meteorologist for saying it's going to rain on Saturday, when it rained on Saturday," Stearns said.
He pointed to disclosures in the bank's first and second quarter earnings statement in 2007 and to transcripts of the earnings conference calls during that period.
"What investors were told was, 'The market is terrible and we don't know where it's going to go,'" Stearns said.
An SEC spokesman didn't immediately respond to an e-mail seeking comment after regular business hours on today's ruling.
A victory in a 2010 jury trial by shareholders who made a similar complaint was later reversed by a federal judge in Miami.
BankAtlantic is in the process of being acquired by BB&T (BBT) of Winston-Salem, N.C., for about $301 million. The sale is expected to close later this quarter.