invenice.net - Suit offers inside look at Coast's meltdown

The downfall of Coast Bank of Florida began with a lending plan hatched in 2004 in the executive suite by "The Brians," a new federal lawsuit contends.

Brian P. Peters and Brian F. Grimes, at the time the chief executive and chief financial officers, concocted the "easy money scheme" based on the sale of lots and homes to investors.

That failed scheme, according to the lawsuit, cost shareholders in parent Coast Financial Holdings Inc. tens of millions of dollars -- money they hope a federal jury will order the company to repay.

Attorneys representing shareholders filed an amended complaint last week against Coast Financial, its board of directors and current and former executives.

The 143-page lawsuit paints a scathing portrait of a publicly held company eager to take huge risks, ignore federal laws and lie to stockholders in order to build the bank and rake in quick profits.

Coast spokesman Tramm Hudson declined Wednesday to comment on the allegations, saying the company will file its response by Oct. 12.

"There are always two sides to every lawsuit," he said.

The lawsuit presents the first inside look at what led to the meltdown at Coast, a 20-office bank whose financial condition was so weakened that it accepted a bargain-basement buyout from First Banks Inc. of St. Louis.

Filed by two Boca Raton law firms, the suit contains numerous details from unnamed former employees, who presumably will have to step forward as the case proceeds.

A federal grand jury in Tampa is investigating the Coast loan mess. The Securities and Exchange Commission has started an "informal inquiry." More than 100 borrowers are suing to get out of their loan deals.

The new lawsuit, which seeks class-action status for all shareholders, argues that Coast artificially inflated its stock price by failing to tell the truth about its loan deals and subsequent problems. It alleges violations of federal securities laws.

Coast's stock traded over $16 before the crisis became public in January. At the current price of $2.70, investors have lost about $87 million in value.

The suit also claims Coast filed "false and misleading" financial statements with regulators that ignored the industry-standard generally accepted accounting principles.

The suit blames the board of directors for failing to stop the loan scheme.

It also cites Hacker Johnson & Smith, the bank's Tampa-based auditor, for "misbehavior or recklessness" in not disclosing the bank's problems in audits.

'The Brians'

The scheme began, the suit claims, shortly after Peters was named CEO in February 2004. He and Grimes -- nicknamed "The Brians" by employees -- contacted John Miller, a former colleague from Republic Bank, who was then president of American Mortgage Link Company of Tampa.

Peters and Grimes introduced Miller to Phillip Coon, the head of residential lending at Coast known for "his deal-making prowess." Peters and Coon had worked together at another bank.

Their plan was to sell lots and home construction packages in North Port to investors who would put no money down but provide their good credit ratings to obtain loans. They would flip the completed homes for a profit.

Coast would get the interest and closing fees from the loans. American Mortgage would earn high broker fees.

Coast and Miller approached Jesse Battle III, owner of Construction Compliance Inc.,, a struggling home builder from St. Petersburg.

Battle owned up to 40 lots in North Port. Even though CCI was losing millions of dollars a year and was delinquent in paying federal income taxes, Coast agreed to finance homes it would build.

American Mortgage and CCI became the "front men" who found investors, mostly from New York and New Jersey, to borrow money from Coast for the homes.

CCI promised to pay closing costs and interest on the loans during construction.

Homes would be finished within a year and could be quickly sold in the sizzling Southwest Florida real estate market.

"Droves of investors signed up, enticed by this investment scheme filled with false promises," the lawsuit states.

Coon ran the loan program for Coast, but Peters and Grimes "remained intimately involved" and oversaw program.

"Both of the Brians were always aware of everything that Phil did," an unidentified former mortgage closer at Coast says in the suit. "Phil was the golden goose, and Phil talked to them both every single day."

Also in the loop were Anne Lee, the bank's current CEO, and Justin Locke, now the chief financial officer.

Coast allowed CCI to draw more money from each loan than a bank would typically allow.

The builder co-mingled that money, paying some subcontractors and buying other lots to sell to new investors, thus creating a Ponzi scheme.

The program worked for a while, and Coast profited nicely.

The bank never disclosed that a high percentage of its loan portfolio was tied to one builder.

Things turned down after the 2005 hurricanes. CCI was hit with a shortage of skilled laborers and higher costs for building materials, which increased the time frame and cost of homes.

The company also had trouble getting permits.

By the end of 2005, only 60 homes had been completed and 350 loans were outstanding, a former employee says.

In all, Coast funded 481 loans for $110 million in CCI homes -- one-fourth of its total loan portfolio. Nearly half of those homes had no work done on them.

CCI soon stopped paying subcontractors, and work on homes stopped.

When the real estate market cooled, it was clear the homes would not sell for a profit. Coast gave CCI $2 million more from the borrowers accounts, but it wasn't enough to prop up the company.

Peters was soon fired, and Grimes was named CEO.

The company repeatedly filed public financial reports boasting of its loan growth without revealing its close ties to CCI.

Coast finally had to admit the problems in January, realizing it would take a huge hit to earnings because so many loans were going bad.

Grimes was fired in May at the urging of the Federal Deposit Insurance Corp., which ordered Coast to meet deadlines to clean up its lending problems.

First Banks Inc. will inherit Coast's loan problems and the lawsuits when it acquires the company this year.

Wednesday, 09 July 2008

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