Zions Bancorporation experienced a drop of $1 billion in its market value within a single day on Thursday after revealing $60 million in loans deemed unlikely to be recovered.
The situation unfolded from a complex, entangled network of loans that Zions claimed were secretly subordinated by the borrowers while the collateral was essentially rendered nonexistent.
Shares in regional banks plummeted on Thursday as anxiety grew regarding the robustness of their loan operations. Zions’ 13% plunge in shares generated concerns about potential widespread problems within the lending landscape for regional banks, resulting in a downturn for the entire U.S. stock market on Thursday, with the Dow Jones Industrial Average closing down by 300 points.
Zions’ affiliate, California Bank & Trust, has filed a lawsuit against Andrew Stupin and Gerald Marcil – managers previously less known, overseeing several funds using the name “Cantor Group,” along with their associate Deba Shyam.
This lawsuit, lodged in Los Angeles County on Wednesday, claims a “profound breach of trust by sophisticated financial borrowers who exploited CB&T’s confidence, manipulated loan arrangements for their own benefit, and systematically removed the collateral safeguards that were intended to secure the bank’s lending.”
Neither Zions nor a lawyer for the defendants responded to multiple requests for comments from CNBC. The relationship in focus revolved around approximately $60 million in financing that Zions’ CB&T provided in 2016 and 2017 to two associated investment vehicles, Cantor Group II and Cantor Group IV.
The credit facilities were intended for the funds to acquire distressed residential and commercial mortgage loans.
Zions indicated they had a binding agreement ensuring them first-priority interest, implying the bank’s rights to the collateral took precedence over other creditors in case of default.
However, the deeds intended to secure the loans were ultimately subordinated without the knowledge of CB&T, Zions stated in the lawsuit.
The underlying properties were either transferred to other entities or were in foreclosure, which meant the collateral was “irretrievably lost,” according to Zions.
Moreover, the new senior lenders, who supplanted CB&T, were the same managers of the Cantor funds or those associated with the group, as per the lawsuit. “Essentially, CB&T’s losses morphed into Defendants’ profits,” Zions claimed in the lawsuit. “Through a network of affiliated firms, the borrowers and guarantors executed a scheme that benefited themselves while depriving CB&T of its collateral, all while misleading the bank for years about the actual status of its securities interests…”
Zions discovered this information after a related Cantor fund, under the same leadership, faced a fraud lawsuit by Western Alliance.
This prompted CB&T to launch its own investigation. Subsequently, Zions released an 8-K on Wednesday, stating that “based on the information currently available,” it opted to record a provision for the $60 million in outstanding loans and write off $50 million, which will appear in the third-quarter earnings report on Monday.
In a separate 8-K following Zions’, Western Alliance revealed that it had initiated its own lawsuit against Cantor, accusing the borrower of fraud for “failing to provide collateral loans in the primary position, among other allegations.” Nonetheless, Western Alliance asserted that it believes the existing collateral secures the obligation and reiterated its guidance. Western Alliance will announce its earnings on Tuesday.
