On February 23, 2017, the Honorable Andre Birotte Jr., for the United States District Court for the Central District of California appointed Cohen Milstein lead counsel in the pending securities class action litigation against Defendants Opus Bank (“Opus” or the “Bank”), the Bank’s current CEO Stephen H. Gordon (“Gordon”), and the Bank’s former Co-President and former President of the Commercial Bank Division, Michael L. Allison (“Allison”). Arkansas Public Employees Retirement System was appointed Lead Plaintiff.
Opus Bank is a publicly chartered commercial bank with offices in California, Washington, Oregon, and Arizona. The Bank offers a wide variety of loan products to its clients, who include small and mid-sized companies, entrepreneurs, real estate investors, professionals, and high net worth individuals. The class action suit is on behalf of purchasers of Opus common stock between January 26, 2015 and January 30, 2017, inclusive (the “Class Period”), and focuses on loans generated by Opus’ Commercial Bank division.
The Amended Class Action Complaint (the “Complaint”) alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 thereunder. Specifically, the Complaint alleges that Defendants misled investors by repeatedly representing during the Class Period that Opus had a disciplined and conservative approach to credit, stringent underwriting standards, and robust credit controls in place. Defendants also falsely represented that Opus had appropriate personnel, resources, systems, and procedures in place to monitor and accurately report on the health of the Bank’s loan portfolio and to establish proper loss reserves for the loan portfolio.
The Complaint alleges that Defendants knew, but did not disclose, that: 1) Opus’ credit culture was aggressive and not conservative; 2) Opus’ underwriting standards were not stringent and the Bank underwrote risky loans to entities with little to no cash flow or collateral; 3) Opus’ credit controls were either disregarded or ineffective at identifying problem loans; and 4) Opus did not have appropriate personnel and resources in place to monitor its loan portfolio or to establish proper loss reserves for the loan portfolio.
The truth regarding Opus’ loan portfolio was leaked to the market through a series of partial corrective disclosures. First, on October 17, 2016, prior to the market’s open, Opus announced loan charge-offs of $38.8 million related to eight loans in its Commercial Bank division. In response to this news, the price of Opus’ common stock dropped 7% before the market opened, opening at $32.00 per share. Opus’ stock price plummeted an additional 15% over the course of the trading day, closing at $27.20 per share.
On October 19, 2016, Opus held a “listen only” conference call with investors to discuss the loan charge-offs and announced that the Bank was overhauling its credit controls in response to the charge-offs. Following this call, Opus stock price tumbled 12%, closing at $24.12 per share.
On October 24, 2016, Opus announced, prior to market open, that the charge-offs would result in a net loss of $.09 per diluted share, four cents higher than the Bank previously disclosed, due to the Bank’s increasing specific reserves for loan losses. As a result, before the market opened, Opus’ stock price dropped 20% from the prior day’s close of $23.16, opening at $18.50 per share.
On November 9, 2016, Opus filed its quarterly report on Form 10-Q with the Federal Deposit Insurance Corporation (“FDIC”) and disclosed that contrary to its prior public representations, Opus in fact had material weaknesses in internal controls over financial reporting related to inadequate review of the allowance for loan losses on impaired loans during the fourth quarter of 2016. Following this disclosure, Opus’ stock price dropped 1.36% from $21.29 to $21.00 per share.
On January 30, 2017, Opus announced that its fourth quarter earnings would be impacted by a $69.5 million provision for loan losses, which included additional loan charge-offs of $19.2 million. Following this disclosure, Opus’ stock price dropped precipitously, closing at $20.40, down 14% from the day’s opening price of $23.95 and a decline of 25% from the prior day’s closing price of $27.25 per share.
Following the Class Period, on March 31, 2017, the Bank filed its 2016 annual report with the FDIC on Form 10-K (the “2016 10-K”). The 2016 10-K admitted that Opus had material weaknesses over financial reporting related to its review of the allowance for loan losses throughout all of 2016.