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The Walls Are Closing In On The Branchless Bank

Summary

A recent securities fraud lawsuit against BOFI in a Federal District Court shows that many more former BOFI employees have come forward to share stories of fraud at the company.

Almost one dozen former employees tell a tale of Salvadoran gambling gangs, felonious executives, opaque Venezuelan trusts, corrupt appraisals, CEO check forgery, and falsified audits.

Multiple formers claim BOFI regularly and potentially inappropriately used an appraiser named Brendan Flynn who reportedly has personal ties to the Chief Credit Officer.

BOFI's CEO already alluded to this lawsuit on the last earnings call - the company was clearly aware that more formers had stepped forward to expose suspected wrongdoing.

The smoke from last October is turning into fire and we reiterate our belief that this company’s eventual demise will come as a result of government intervention.

A record 70 days have now passed since the last BofI Holding (NASDAQ:BOFI) article was published on Seeking Alpha, leaving small cap stock prognosticators across the country baffled. "Are the shorts running out of material?" "Is the Friendly Bear in hibernation?" "Did Aurelius return to Rome?" "Does Real Talk Investments really wear a bathrobe while writing his reports?"

Based on our projections, we think that BOFI was on course to see slippage in its industry leading efficiency ratio as a result of crossing the key "days without a short report" threshold. Rumor has it that management promised all BOFI employees a company-wide cupcake celebration if a whole quarter went by without a short report.

After reviewing the recently filed case of Houston Municipal Employees Pension System v BofI Holding (amended on April 11th, 2016), it is clear that a whole host of new issues have emerged. A chorus of former BOFI employees have stepped forward and outlined numerous new fraud allegations against BOFI. It is worth remembering that investigations take time. The lawyers representing the Houston Municipal Employees Pension System took months to develop their case and probe their witnesses - and they are backed by robust resources, financial motivation, and a lack of due process burden (versus the government that inevitably must move very carefully and deliberately).

We believe in the doctrine of the presumption of innocence until being found guilty, but note that these new allegations (from former employees, NOT short sellers) continue to suggest something is horribly wrong at this company and that the company's legal woes are only just beginning.

So far, bulls have taken comfort in thinking that only one employee has stepped forward and alleged wrongdoing at BOFI. However, the recent filing in Houston Municipal Employees Pension System v. BofI Holding suggests that almost one dozen other former BOFI employees have provided investigators with mounds of evidence against BOFI.

We take a deep dive into the lawsuit below, but wanted to give readers a quick summary of the case's contents below:

Source: Case No. 3:15-cv-02324-GPC-KSC, April 11th 2016 filing

The case is riveting and we encourage readers to go through it in detail. Allegations from former employees combine the money laundering sex appeal of the Panama Papers, the grow at any cost mantra of Enron, a culture of sweeping wrongdoing under the rug, the appraisal fraud dynamics made famous by Indymac, and a loan book overseen by a convicted felon whose employment at the bank was hidden from bank examiners.

Some of the loans formers discuss include a loan tied to a Salvadoran gambling gang and one to a Venezuelan trust where underlying borrower information was (according to the case) never verified for the purposes of OFAC (which if true is a crime).

Formers also tell stories of being strong-armed by BOFI's Chief Credit...


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