Sonoma Valley Bank---What about the Board and Regulators?

What role did the Board and committee play in the failure? What role did the Regulators play in failing to supervise Sonoma Valley Bank?

Recycled from February 2013 to compare predictions with results. 

Recent articles were published this week regarding the FDIC Prohibition Orders and Civil Money Penalties assessed to two of the key bankers in the failure of Sonoma Valley Bank.  But these individuals didn't act in isolation.  Loans to Bijian Madjlessi and his affiliates approached $40 million and represented one of the largest if not the largest borrower concentration within the bank.  The Loan Committee and full board would certainly have been voting to approve these loans and workout plans as they began to deteriorate.  Safe and Sound concentrations risk and credit risk management would require such.

The Loan Committee had voting members of Dale Downing committee Chairman, Robert Nicholas the bank Chairman, Mel Switzer a former regulator and long time banker, Suzanne Brangham a well accomplished commercial real estate developer and others.  These people would have reviewed and approved applications and ongoing extentions, renewals and workout programs.  Why are they not being referenced or fined?  Why are they not being banned from ever serving on any future bank boards?

Finally, the FDIC and California Department of Financial Institutions regulated Sonoma Valley Bank and on average inspected operations on at least an annual basis.  Standard examination procedure require examiners to review the largest borrowers in the bank.  They typically ask for a report of the top 10 or top 25 borrowers by dollar exposure.  They also ask for records of the central information files used to aggregate all affiliated borrowings.  Bijian Madjlessi borrowed under a number of LLC real estate holding companies but it was well known to bank management that Madjlessi was the driving force behind the shell companies.  Sonoma Valley Bank management were known to be "character lenders" developing a relationship of trust with borrowers in the local community, a common practice in community banking.  Why then did the Board allow them to take Sonoma Valley funds out of area to a relatively unknown outsider like Madjlessi?  Who vouched for him?  Who brought him into this tight knit circle?  Bank management did not possess the expertise and staff capable of analyzing complex financial statements like Madjlessi must have presented.  If they did they would have seen several red flags on public records.

Regulators also ask for concentrations reports and analyze new lending patterns.  Surely they should have noticed large loans to out of area borrowers (namely Madjlessi). The Self Storage unit in Santa Rosa, the Courtside Village (aka Park Lane Villas) west of Santa Rosa, and Petaluma Greenbriar apartments intended for condo conversion were all large and out of area and should have attracted attention.  Any examiner should have asked..."why all of a sudden the large out of area lending...who is Bijian Madjlessi?"  An exam team should have reviewed these loans and noted Bijian's name in common in all, deriving benefit.  By virtue of Madjlessi deriving benefit from all these loans despite the fact he may not have signed directly or may not have been listed as an owner on the LLC, constitutes an unsafe and unsound concentration.  This would have all but likely violated the California Legal Lending Limit.  These practices certainly were not prudent from a concentrations risk management practice yet the Board voted to approve and regulators don't appear to have objected?

The California Legal Lending Limit to any one "relationship" is generally limited to 25% of Risk Based Capital for all real estate related loans which most all Madjlessi's loans were commercial real estate loans (except the 101 Houseco, LLC loan to Madjlessi's long time friend Jim House).  Sonoma Valley Bank's capital did not exceed approximately $35 million at any time while Madjlessi dominated bank lending from approximately 2003 to 2010 when it failed.  Had Regulators cited violations of legal lending limit laws they would have required diversiture to reduce exposure to the bank and if caught earlier on, before they defaulted, could have been participated or refinanced out of the bank.  Regulators appear to have been complacent in identifying and addressing corrective actions which contributed significantly toward, and exacerbated loan losses and ultimately failure.

The FDIC, during much of the Madjlessi era, operated under what was commonly referred to as the "MERIT" program a special internal streamlined supervisory program that allowed scaled down supervision of historically well run and well capitalized banks.  However, the large growth, out of area deals up on the 101 corridor, potential violations of legal lending limit, and conentrations of credit should have signaled concern to regulators and warranted more in depth scope of reviews and more traditional exams.  Additionally the changing of management with Cutting moving from Senior Lender to President and other additions to credit staff suggest changing risk profiles and credit risk appetites.  These observed patterns and practices should have disqualified Sonoma Valley Bank from this program and resulted in removal from these abbreviated MERIT supervision models.  The FDIC appears negligent in conducting their affairs.

What liability does the FDIC and the DFI bear?  Ironic they were the ones that missed excessive exposures and then failed the bank.  Did they have a conflict of interest?  Does the FDIC have motive to now cover their mistakes?  Perhaps Charter Oak Bank in Napa would also be open now if the FDIC acted to curtail lending exposures to Madjlessi?  (Charter Oak Bank held significant Madjlessi loan participations from Sonoma Valley Bank and resulted in significant losses and their ultimate demise as well just a few short months after Sonoma Valley Bank toppled).

Sonoma Valley deserves to know.  Nearly 3,000 shareholders in a 9,000 person valley with even more people either customers or somehow connected to Sonoma Valley Bank, were impacted.  It was a tragedy that reached beyond Sonoma.

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Ralph Hutchinson March 01, 2013 at 06:40 AM
The SVB Ethics Policy dated 9-16-09 was lifted off the Holding Company website before the FDIC took it down. Lets review what the policy was in light of Loan Officer Brian Melland's Prohibition Order where the FDIC ruled he "personally benefitted." Acceptance of Gifts Insiders and their immediate family shall not solicit, accept or retain a personal benefit from: -Any Bank customer, -Any individual or organization doing or seeking to do business with the Bank, or A personal benefit shall include any type of gift, gratuity, favor, service, loan, legacy (except from a relative), fee, compensation or anything of monetary value. The personal benefit may not exceed the value of the following: -Normal business courtesies, such as a meal or entertainment, involving no more than ordinary amenities; -Non-cash gifts of nominal value such as those received at holiday time or special occasions that represent expressions of friendship; Any insider receiving a personal benefit, other than for the exceptions listed above, must report the benefit to the President or appropriate Board Chairman as provided in the "Reporting Requirements" section of this Policy.
Ralph Hutchinson March 01, 2013 at 06:41 AM
Ethics Policy continued: We recognize that federal law makes it a crime for any insider of a federally insured bank or bank holding company to ask, solicit, accept, receive or agree to receive anything of value from anyone as part of any business transaction with the Bank. The Bank Bribery Act requires that the insider have a corrupt intent for this to be considered a crime. We also acknowledge that the penalty for violating this law is a fine or imprisonment or both. Any improper payment should be immediately reported to the Company's CEO or appropriate Board Chairman.
Ralph Hutchinson March 10, 2013 at 07:15 PM
How could the FDIC rule "no unusual activity noted" in the March 2011 report to congress with what appears in my opinion to be straw borrowing and straw buying, going on? This appears to be a cover-up of your mistakes on 101 Houseco, LLC at IndyMac, selling Bijian Madjlessi's less than arms length friend James House a $30+ million property for $5 million and costing the taxpayers 10's of millions and accepting TARP proceeds from Sonoma Valley Bank. Then missed Lending Limit Violations for years before the bank failed on your MERIT program examinations. Also attaching the recent Federal Bankruptcy Judge ruling where he declares SVB solicited Frieberg to fraudulently pledge assets he knowingly had no right to pledge in an effort to "mislead bank examiners" as the Judge determined? No unusual activity? Come on! See page 57 on link ---> http://www.fdicoig.gov/semi-reports/sar2011mar/OIGSemi06-11.pdf
Ralph Hutchinson March 26, 2013 at 06:56 PM
RUMORS of DISGRUNTED PERSON: Recently an old rumor arose about my being a former disgruntled person who applied for a job at Sonoma Valley Bank and didn't get it is the motivation for my relentless pursuit of Truth. This surfaced January 2011 when Steve Page former Director of Sonoma Valley Bank and current Exec at Infineon Raceway and supporter of Jazzfest etc. described me as bitter in a Press Democrat Letter to the Editor when the first of a trilogy expose stories first broke about the true cause of Sonoma Valley Bank's failure. THE TRUTH: I was asked to conduct a Management Assessment for the Credit Department by Sean Cutting then Senior Lender. Mel Switzer then President was also involved. You can imagine my conclusions in 2007 of which I still have a copy of the report I issued. After the report was issued, Sean Cutting approached me and offered me a position at Sonoma Valley Bank to try to shore up Credit Administration since I was a former 20+ year Bank Examiner. I declined the offer. I kept all the emails between Sean and myself and still have them. Just like I have the emails to Lynch and Bolling failing to write the truth as they were being tipped or when I was editing Lynch's stories when the bank first failed. What I write is Truth for the Shareholders, and countless Sonoma Citizens who can't get straight news from the Index Tribune. For that, I pay a price of attempted character attacks. Know this, only the Truth will set them free.


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