Coast Financial Holdings Inc. has lost more than half its market value in the last three months, and now it faces the prospect of a costly legal fight with angry shareholders.
Two law firms have already filed class actions, and at least seven others have initiated legal proceedings against the $733 million-asset company in Bradenton, Fla., alleging that it defrauded investors by failing to disclose potential problems in its loan portfolio.
So far just two shareholders, who own about 3,000 shares, have been named as plaintiffs, and it remains to be seen whether others will join them. At the very least, the suits are a distraction for Coast executives, who are busy trying to fix its loan troubles and, perhaps, finding a buyer to rescue it.
Coast's disclosed in January that hundreds of its borrowers might have difficulties repaying loans because of a single builder's financial troubles, and within days its stock had dropped by more than 50%.
The lawsuits were filed late last month on behalf of shareholders who bought its stock from Oct. 28, 2005, through Jan. 19, 2007. The suits allege that its stock price was artificially inflated by material misstatements and Coast's failure to increase loan-loss reserves adequately.
Coast executives should have told shareholders that roughly 20% of its loans involved a single builder Construction Compliance Inc. of St. Petersburg because such a large concentration of loans increased the risk to the total loan portfolio, the suits say.
Construction Compliance's financial troubles forced it to stop construction on the projects.
Kenneth J. Vianale, a principal at Vianale & Vianale LLP of Boca Raton, has filed a lawsuit on behalf of the Sons of Italy in America's Grand Lodge of Pennsylvania, a fraternal organization that owns about 1,000 Coast shares.
Coast touted "over and over again how their residential mortgage loan portfolio was expanding quarter to quarter," Mr. Vianale said in an interview. "That's great for business no question about that but you also have to disclose the risk of loan losses" from having so many loans involving a single contractor.
Tramm Hudson, who was brought in as an adviser to Coast's board and management after the loan problems surfaced, would not discuss the suits.
Though nine firms are pursuing legal action, securities class actions are generally consolidated into a single suit on behalf of a lead plaintiff. But a source familiar with the issue questioned why any shareholder would participate in litigation against Coast, saying that it would "just screw up any process of getting any kind of value out of the bank."
Coast announced in late January that it had hired Sandler O'Neill & Partners LP to help it explore strategic options.
"They're trying to sell the bank, and the more legal burdens you put on this, the harder it is to sell it, and the harder it is going to be for shareholders to get their money," the source said. "It's cutting off your nose to spite your face."
Mr. Vianale's suit names several Coast executives as defendants, including its chief executive officer, Brian F. Grimes, and his predecessor, Brian P. Peters. Mr. Vianale cites an earnings report for the period that ended Sept. 30, 2005, in which Coast said, "Residential construction and land loans grew 74% and now account for 39% of loans compared to 29% at September 30, 2004."
The suit alleges that the statement was false and misleading because it "failed to disclose that a high concentration of its construction loans were made to customers who had hired the same contractor to construct their home."
Chris Marinac, an analyst with FIG Partners LLC in Atlanta, said he understands how investors could be upset. "It's fair to say that there were some internal deficiencies at Coast, and because of that, the shareholders certainly have a right to be unhappy."
But he also said such lawsuits are part of doing business. "Unfortunately, these shareholder lawsuits are & a byproduct of a company having struggled. I don't know how you avoid them other than not having bad news."
