Zion Bank’s main office in Salt Lake City, Utah, USA, on Friday, April 7, 2023.
George Frey | Bloomberg | fake images
Zions Bancorporation lost $1 billion from its valuation in a single day Thursday after disclosing $60 million worth of loans it had made that were unlikely to be repaid.
What led up to that point was a confusing and tangled web of loans that sions These were surreptitiously subordinated by the borrowers while the collateral was effectively eliminated.
Shares of regional banks plunged on Thursday as fears grew over the health of their lending businesses. The 13% drop in Zions shares ended up raising concerns about possible broader problems with lending for the regional banking sector, hitting the entire US stock market on Thursday and the Dow Jones industrial average ending down 300 points.
Zions subsidiary California Bank & Trust is suing Andrew Stupin and Gerald Marcil, until now relatively unknown managers of several funds that use the name “Cantor Group,” along with their associate Deba Shyam.
The lawsuit, filed in Los Angeles County on Wednesday, alleges a “radical betrayal of trust by sophisticated financial borrowers who abused CB&T’s trust, manipulated loan structures for their own enrichment, and systematically eliminated collateral protections that were supposed to guarantee the bank’s loans.”
Zions and a lawyer representing the defendants did not respond to multiple requests for comment from CNBC. The relationship in question arose from about $60 million in financing that Zions’ CB&T made in 2016 and 2017 to two related investment vehicles, Cantor Group II and Cantor Group IV.
Zion, 5 days
The funds were to use the lines of credit to purchase distressed residential and commercial mortgage loans.
Zions said they had a signed agreement that guaranteed them first priority interests, meaning the bank’s claim on the collateral was superior to other creditors’ claims in the event of default.
However, the deeds that were supposed to secure the loans were ultimately subordinated without CB&T’s knowledge, Zions said in the lawsuit.
Those underlying properties were transferred to other entities or were in foreclosure, meaning the collateral was “irretrievably lost,” Zions said.
And the new senior lenders, which replaced CB&T, were the same managers of the Cantor funds or those affiliated with the group, according to the lawsuit. “In effect, CB&T’s losses became defendants’ profits,” Zions said in the lawsuit. “Acting through a network of affiliated companies, the borrowers and guarantors orchestrated a scheme that enriched themselves while stripping CB&T of its collateral, while keeping the bank in the dark for years about the true status of its securities interests…”
The way Zions found out about this was after a related Cantor fund, managed by the same leadership, was sued for fraud by Western Alliance.
Western Alliance, 5 days
That prompted CB&T to launch its own investigation. Zions subsequently released an 8-K on Wednesday, saying that “based on information currently available,” it decided to take a provision for outstanding loans of $60 million and write off $50 million, which will be reflected in third-quarter earnings when the company reports on Monday.
Western Alliance said in a separate 8-K after Zions’ that it had filed its own lawsuit against Cantor, alleging fraud by the borrower for “failing to provide first-position collateral loans, among other claims.” However, Western Alliance said it believes the existing warranty covers the obligation and affirmed its guidance. Western Alliance reports its results on Tuesday.
