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Former BOFI Head Auditor's Career History Raises Questions About His Declaration
Dec. 16, 2015 9:44 AM • BOFI
Summary
BOFI’s best defense against fraud allegations have been statements made by Jonathan Ball (Erhart’s former boss) that “appear” to refute Erhart…therefore Ball’s credibility is of critical importance to BOFI.
Investors should therefore know that prior to BOFI, Ball ran internal audit for 18 years at La Jolla Bank, a bank that failed due to fraud and excessive growth.
Bank regulators claimed that La Jolla Bank had inadequate internal controls that failed to catch rampant fraud, raising questions about Ball’s effectiveness in the lead internal audit role.
Ball’s declaration, which features selective recollection of specific details from conversations with BOFI management, yet no recollection of conversations with bank regulators, should therefore be viewed with skepticism.
Garrabrants bought stock directly in front of Ball's non-public declaration, which suggests that BOFI itself did not view Ball's declaration as a "material/market moving worthy" piece of information.
This article primarily serves to provide readers with contextual background about Jonathan Ball's career history that has gone unmentioned by both the sell side and by Bofi Holding (NASDAQ:BOFI). This article also takes a closer look at Jonathan Ball's declaration, showing how the details in Ball's declaration actually lend greater credibility to Erhart's claims.
Here is an actual copy of a recent declaration provided by Jonathan Ball, Matt Erhart's former supervisor at BOFI and the former head of BOFI's internal audit department. I have provided the document so that readers can come to their own conclusions regarding the court filing.
In the opening section of his declaration (para 2), Mr. Ball says he led the audit department at La Jolla Bank for 18 years. Ball says he left La Jolla Bank in March 2010, and according to his Linkedin profile he joined BOFI one month later, in April 2010.
Ball provides no color as to why he left La Jolla Bank for BOFI in his declaration. However, I think the history at La Jolla Bank is highly relevant to investors in BOFI today.
This is because BOFI is not the first instance in Mr. Ball's career in which Mr. Ball has been head internal auditor at a bank accused of significant internal control deficiencies.
La Jolla Bank (the largest US bank failure in 2010), where Ball ran internal audit for almost two decades, failed in February 2010 after going down as one of the biggest bank frauds in Southern California history. The company's executives admitted to accepting bribes, and the bank's failure cost taxpayers a $1 billion loss. The bank was publicly criticized by the government for having weak and inadequate internal controls, conditions that the government claimed persisted for years while Ball was tasked with running the internal audit division. Mr. Ball leaves La Jolla Bank off his Linkedin profile so this point has likely gone missed by many market participants.
Let me be very clear here that Mr. Ball was never accused of having any role in the actual fraud at La Jolla Bank. I am not alleging that his actions were in any way improper from a legal perspective. However, given that he ran internal audit at a bank that failed as a result of fraud and weak internal controls, and has subsequently found himself in a very similar situation only five years later at BOFI, his past is clearly very relevant to BOFI investors.
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Source: FBI.gov
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Source: Fox San Diego
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Source: Court filings
Readers who are familiar with Erhart's case may see similarities between the OIG report on La Jolla Bank (link) and the conditions described at BOFI.
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Source: Treasury.gov

Source: Treasury.gov
Mr. Ball's Declaration Included Selective Memories
In his declaration, Ball is able to somehow quickly mentally reverse engineer UCC filings and connect Elm Tree to ETIA LLC. I am surprised that a professional in internal audit would recall a single loan to a single borrower so easily. I'm also surprised that he was able to connect ETIA LLC to a newspaper article about an individual with a criminal issue.
Ball also recalled specifics of conversations with various members of BOFI management (i.e. remembering a specific comment from a meeting in which Constantine talked about how he is not responsible for the accuracy of BOFI's financials, or a specific conversation with Thomas Williams regarding deposit concentration). However, Ball claimed to be unable to recall the contents of his conversations with the OCC following his departure. He did however believe that he answered the OCC's questions accurately. This portion of his declaration surprised me:
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Source: Court filings
I will now pivot the discussion and look more closely at the specific claims Ball makes in his declaration. Unsurprisingly, the sell side decided to focus on the bullet points that BOFI management wanted you to hear about, rather than giving you a full picture of what Mr. Ball actually said in his declaration.
Below, the key issues Ball addresses are analyzed.
Issue A - The Issue NOT Discussed - The Presence of Numerous Grand Jury Subpoenas and Other Government Subpoenas
Ball never once denies that BOFI was served with numerous subpoenas from federal and state agencies. This portion of Erhart's lawsuit is notably ignored. This is hugely noteworthy as one of the key debates around BOFI is whether or not there is an ongoing government investigation. The company altered its transcript around this point as I have previously pointed out. Ball's complete and utter lack of a denial regarding the existence of subpoenas indicates that the likelihood of an ongoing government investigation is quite high. If investigations do exist, it is unlikely BOFI can raise capital until the investigations are concluded as the bank needs to rep to the lack of government investigations as part of its distribution agreements for ATMs. This representation was present in BOFI's last distribution agreement and appears to be boilerplate. Therefore, BOFI's growth may come to a screeching halt should it be unable to continue to fund its growth through continued equity offerings. Further, recent findings regarding the bank's loans also suggest that when growth ends, the bank's delinquencies (assuming they actually are on balance sheet and not hidden in SPEs) will begin looking much larger as a proportion of the overall book. The "missing" ATM prospectus therefore is even MORE notable for BOFI bulls playing for EPS upside.
Issue B - Loans to Criminals and Politically Exposed Persons
First of all, Ball's declaration does not refute the point made in Erhart's lawsuit about BOFI making loans to "notorious criminals".
Should we interpret Ball's failure to dispute loans to notorious criminals as his implicit acknowledgement that BOFI has indeed been making loans to criminals without proper due diligence checks?
Second, Ball's declaration confirms that BOFI made loans to politically exposed persons. This is a major issue for both BDO (who continues to sign off of financials that provide no risk factor disclosures relating to BOFI's hairy foreign national lending practices) as well as for bank examiners who should be concerned about BOFI's willingness to write loans to PEPs period. A branchless bank based in San Diego with an industry leading efficiency ratio seems quite poorly equipped to be in the business of making hairy loans to Ukrainian and Saudi Arabian billionaires.
Notably, Mr. Ball does not even claim that BOFI ever had the right paperwork in PEP loan files to support its lending activities to Politically Exposed Persons. Apparently he was "did not know whether in fact the documentation existed".
Ball mentions that he "resigned from his position before Mr. Erhart completed [the] audit". This phrase was used so frequently in Ball's declaration that it may as well have been file stamped on the footer.
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Source: Court filings
Issue C - Garrabrants's Improprieties in Accounts
I was surprised when I saw the Form 4s hit the tape showing that CEO Greg Garrabrants had bought 3k shares of BOFI stock in the 24-48 hours ahead of BOFI filing the Ball declaration publicly with the court.
If BOFI viewed Ball's declaration as a positive for the stock (presumably it did, as Ball is BOFI's star witness), then I would imagine it would be difficult for a CEO to receive clearance to trade in the stock with specific knowledge of an upcoming positive litigation development.
On the flip side, if BOFI viewed the declaration as a "neutral" event that did not prohibit trading (which presumably it did, given the CEO bought stock ahead of the declaration), then investors need to follow his lead and realize that the declaration was not a valuable or material piece of information.
In other words, I think that Garrabrant trading in BOFI stock ahead of a non-public Ball declaration suggests the Ball's declaration is immaterial to investors and should not inform their view of the stock.
Mr. Ball also all but confirmed that Greg deposited third party checks into his own account. Ball's defense? It happened a while ago. Ball's declaration simply ignored the more recent allegations of improprieties.
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Source: Court filings
So why was Garrabrants depositing third party beneficiary checks into his account? Will he ever tell us? Was he laundering money to avoid taxes? Was the IRS informed? And why did Mr. Paul Grinberg find it appropriate to leave this information off the record and not share it with BOFI investors.
Issue D - Ball Appears Willing to Stymie the Actions of a Whistleblower on the ETIA LLC Subpoena Situation
Whether or not the SEC subpoena regarding ETIA LLC was appropriately handled is a topic that only the SEC and BOFI can address. However, one particularly alarming piece of the Ball declaration was the statement Ball made below:
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Source: Court filings
If Erhart did have good reason to believe that BOFI was acting inappropriately, it is his right under Sarbanes Oxley to flag these issues to the SEC in an act of a whistleblower. Mr. Ball's declaration seems to suggest that he ran an audit organization in which potential violations of the law should have been filtered through the general counsel first. What if Mr. Erhart had found wrongdoing that itself had been covered up by BOFI's general counsel. Wouldn't it be Erhart's responsibility as an internal auditor to flag this issue with the government?
Why did Mr. Ball think it was his place to restrict his staff's ability to raise issues in a whistleblower capacity using the SEC whistleblower tip-line as Erhart claimed to have done in his original lawsuit?
Issue E - Ball's Conversations with Williams and Michelleti Point to Cozy Audit/Executive Relationship and Lack of Independence…
Deposit concentration is obviously a big deal for a bank as it can quickly lead to liquidity problems. When Mr. Ball was faced with questions raised by Erhart regarding BOFI deposit concentration, the logical next step would have been to do a full blown investigation including interviewing multiple members of the bank's executive team, pulling forensic evidence, and then kicking the issue up to the Audit Committee.
Instead, Mr. Ball appears to have relied on a conversation with an executive at the bank who mysteriously left the bank in June 2015.
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Source: Court filings
In another instance, Mr. Ball, in an interaction with the CFO, came across issues with 401k deferrals. The issues were significant enough that as part of his conversation with the CFO, Ball actually asked the CFO if BOFI would self-report the problem to a government agency. Apparently Mr. Ball and Mr. Michelleti then got in a room together to determine whether non-reporting was legal or not. The two put their minds together, cracked open some law textbooks, and said OK - are we breaking the law or not?
Why was this never raised with the Audit Committee? Why did the CFO of BOFI have such undue influence on the outcome of an audit investigation?
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Source: Court filings
Both of these examples illustrate an internal audit department that appears to have been far too cozy with executives at the company.
Issue F - BOFI's Failure to Disclose Accounts with No Tax ID Numbers
Ball did not even deny whether or not Erhart stumbled upon accounts with no Tax ID numbers. Ball's refutation was simply "it was not our job".
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Source: Court filings
Issue G - BOFI's Accounting for Loss Reserves (BDO, I really hope you read this far down)
This was probably the best of all the points in Ball's declaration.
When faced with allegations of fraudulent loan loss reserves, Ball did what any reasonable head of internal audit would do. He said - sorry this is not our department's problem.
Again, this seems like an instance in which internal audit should have raised this issue to higher powers (i.e. the Audit Committee, the SEC, or BOFI's external auditors McCormick and Bridge at BDO).
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Source: Court filings
Issue H - Throwing Tolla Under the Bus
In perhaps the most surprising move, in multiple instances Ball appears to have thrown Tolla "under the bus". This makes me wonder whether the company is now angling to pin more of the problems that took place at BOFI on John Tolla.
First in this passage, Ball admits that Tolla told internal audit members to not talk about the "GCC situation" with regulators (as a reminder, this was the piece of Erhart's lawsuit in which he claimed Tolla covered up bad results out of a prepaid card exam).
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Source: Court filings
Ball's memory again suddenly fades in this portion of the document. His memory seems to regularly fade whenever BOFI may be shown in a bad light.
Then later on, Ball essentially admits that Tolla threatened Erhart, which is likely to at the very least assist Erhart in making the legal case of harassment/retaliation in response to raising concerns regarding BOFI's financials:
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Source: Court filings
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Source: Here
Summary:
Investors have a right to know about Mr. Ball's career history given that his claims are BOFI's main line of defense against Erhart's fraud allegations. Investors should take little comfort in knowing that Ball ran the internal audit function of 2010's largest US bank failure / one of the most significant bank frauds in Southern California history…so far….
So in closing, I leave readers with a few questions. Did Mr. Ball resign because he was simply overworked? Or did he resign, as New York Times reporter Peter Eavis claimed, because he was uncomfortable with how BOFI was dealing with regulators?
Either way, Ball appears to be in the rather unique situation of finding himself twice in ~5 years at the helm of an internal audit division of a bank accused of fraudulent wrongdoing.
Disclosure: I am/we are short BOFI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article represents the opinion of the author as of the date of this article. This article is based upon information reasonably available to the author and obtained from public sources that the author believes are reliable. However, the author does not guarantee the accuracy or completeness of this article. It is merely the author's interpretation of the information contained in the article. The author may also cover his/her short position at any point in time without providing notice. The author encourages all readers to do their own due diligence. This is not a recommendation to buy or sell a security.

請問 目前$BofI控股(BOFI)$ 最大的問題是什麼
因為前審計員的問題應該不被法院受理跟相關單位的調查
但目前股價持續下探 是因為股東控告的問題沒解決嗎