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Suit Says Balboa National Executives Hid Problems

November 11, 1987|GREG JOHNSON | Times Staff Writer

SAN DIEGO — A class-action lawsuit filed in U.S. District Court on Friday by the owners of a San Diego Pontiac dealership alleges that a group of executives and directors at Balboa National Bank fraudulently concealed loan losses and management problems before a successful public stock offering in 1984.

National City-based Balboa used proceeds from that 1984 offering to "further sustain its operations and the illusion of ongoing profitability and growth" during the next two years, according to allegations in the lawsuit filed by Gary and Diane Polakoff, the owners of Parkway Pontiac GMC Inc. in National City.

The suit alleges that several of Balboa's officers and directors portrayed the bank "as a fast-growing, capably managed and profitable commercial bank," when in reality, "Balboa was making large amounts of substandard loans, or uncollectible loans, particularly in its automobile installment loan portfolio."

It also alleges that Balboa failed to classify loans as problem loans and that the bank suffered from "significant management failures and shortcomings at the highest levels."

The suit contends that certain Balboa executives and directors conspired to hide the bank's troubled financial situation in order to retain their compensation packages and bonuses.

Parkway bought 6,000 shares of Balboa stock for $51,000 in December, 1984. According to the suit, the dealership was one of hundreds of shareholders who, based upon allegedly fraudulent financial statements, acquired Balboa stock between Dec. 31, 1984, and March 13, 1987.

The suit names Michael K. Jones, who served as Balboa's president from 1984 until 1987; Arthur E. Engel, chairman of the board, and Shannon E. Vinson, senior vice president. It also names directors Robert K. Castetter, Jon P. Chester, Harry C. Fraser, Anthony J. Pierangelo and Robert R. Stockholm.

The suit also alleges that Arthur Young and Peat Marwick, Balboa's accounting firms filed false and misleading financial statements for the bank during 1984 and 1985.

Capital Infusions

The suit seeks an unspecified amount for compensatory and punitive damages.

Last month, federal regulators asked the U.S. District Court in San Diego to force Balboa to increase its net worth-to-assets ratio to 7%, as directed in 1984 by the U.S. comptroller of the currency.

Twice in recent months, Balboa board members have infused capital into the bank, actions that evidently kept Balboa from being closed by federal regulators. In May, a group of board members contributed $3 million in capital. In September, board members agreed to infuse another $2 million.

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