Barry R. Lloyd v. CVB Financial Corp. 10-CV-06256-First ...securities.stanford.edu/filings-documents/1045/... · Ca 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 5 of 96

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BERNSTEiN LITOWITZ BERGER & GROSSMANN LLP

BLAIR A. NICHOLAS (Bar No. 178428)

MOMYrnlbglaw.com) A. DeLANGE (Bar No.190768)

(timothy&NDOZ-Ablbglaw.com)

NTKI L. (Bar No. 214646) (nikirnblbglaw. corn) JON WORM (Bar. No. 248260) (jonwb1bglaw.corn) JOSEPH GOODMAN (Bar No. 230161)

[email protected]) M. JONNA (Bar No. 265389)

M811flighuljblbglaw.com)

Bluff Drive, Suite 300 San Diego, CA 92130 Tel: (858) 793-0070 Fax: (858) 793-0323

-and- GERALD H. SILK

W72blbglaw. corn) SEFSON

(aviblbglaw. corn) 1285Avenue of the Americas New York, NY 10019 Tel:(212) 554-1400 Fax: (212) 554-1444

Counsellor Lead Plaintiff Jacksonville Police & Fire Pension Fund and Lead Counselfor the Class

UNITED STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

WESTEIN DIVISION

BARRY R. LLOYD, Individually and CASE NO. CV 10-06256 MMM (PJWx) on Behalf of All Others Similarly CLASS ACTION Situated,

Plaintiff, FIRST AMENDED CONSOLIDATED CLASS

V. ACTION COMPLAINT

CVB FINANCIAL CORP., et al.,

Defendants. DEMAND FOR JURY TRIAL

FIRST AMENDED CONSOLIDATED CLASS ACTION COMPLAINT

Case No. 1O-cv-06256-MMIVI (PJWx)

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TABLE OF CONTENTS

Page

I. NATURE AND SUMMARY OF THE FRAUD ............................................ 1

II. JURISDICTION AND VENUE ...................................................................... 6

III. PARTIES .........................................................................................................7

A. Lead Plaintiff ......................................................................................... 7

B. Defendants .............................................................................................. 7

IV. CONFIDENTIAL WITNESSES...................................................................13

V. DEFENDANTS' FRAUDULENT SCHEME...............................................16

A. Defendants Fraudulently Made Impaired Loans Appear "Current" ...........................................................................................18

B. Defendants Inflated Values For Properties Serving As Collateral For CVB's Loans ................................................................ 24

C. Defendants Used Fraudulent Accounting Practices To Materially Misstate CVB's Financial Statements Throughout The Class Period..............................................................26

1. CVB Intentionally Failed To Disclose Its Loan Losses, Loan Loss Reserves, And Its Restructured, Past Due, Non-Performing And Nonaccrual Loans ByLoan Type ............................................................................ 28

2. CYB Failed To Accurately Report Its Past Due, Restructured And Non-Performing Assets And Its Realized Losses .......................................................... ............... 31

3. Defendants Failed Tio Record Timely Loan Loss Provisions As Losses Were Incurred........................................33

Defendants' Failure To Write Off Loan Losses As They Occurred Inflated CVB's Understated Reserves....................................................................................35

CVB's Omitted Financial Statement Disclosures In Violation Of GAAP ..................................................................36

Following Commencement Of The SEC Investigation, CVB Has Now Changed Its Disclosure Practices .................................................................. 39

VI. DEFENDANTS' MATERIALLY FALSE AND MISLEADING STATEMENTS AND OMISSIONS DURING THE CLASS PERIOD .................................................................................... 41


Case No. 1O-cv-06256-MIMN'I (PJWx)

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A. Third Quarter 2009 Statements ...........................................................41

B. November And December 2009 Presentations ...................................46

C. Fourth Quarter 2009 Statements .........................................................50

D. March 2010 Presentations ...................................................................54

B. First Quarter 2010 Statements............................................................. 55

F. May 2010 Presentation ........................................................................ .58

G. Second Quarter 2010 Statements ........................................................ 59

VII. DEFENDANTS ACTED WITH SCIENTER...............................................61

A. Myers And CVB Executives Personally Negotiated Modifications With Garrett During The Class Period ........................62

B. Defendants' False Statements And Omissions Concerned, CVB's Core Business ............................................................................ 63

C. Defendants Myers And Biebrich Regularly Monitored The Status Of The Bank's Loans And Its Lending Practices............................................................................................... 65

D. Defendants' Close Relationship And Regular Communications With Garrett Support A Strong Inference Of Scienter ........................................................................... 68

B. Defendants Were Motivated To Commit Fraud..................................70

VIII. LOSS CAUSATION .....................................................................................72

IX. THE PRESUMPTION OF RELIANCE........................................................80

X. INAPPLICABILITY OF THE STATUTORY SAFE HARBOR .................. 81

XI. CLASS ACTION ALLEGATIONS..............................................................82

XII. CLAIMS FOR RELIEF.................................................................................84

COUNT I For Violation Of § 10(b) Of The Exchange Act And Rule lOb-S Against CVB, Myers And Biebrich .................................84

COUNT II For Violation Of § 20(a) Of The Exchange Act Against Myers And Biebrich...............................................................87

XIII. PRAYER FOR RELIEF ................................................................................89

XIV. JURY DEMAND...........................................................................................89


Case No. 1O-cv-06256-MMIIVI (PJWx)

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These allegations are based upon information and belief with information

I obtained through the investigation made by and through Lead Counsel. Lead

Counsel's investigation has included, among other things: (i) interviews of former

employees of CVB Financial Corp. ("CVB," the "Company," or the "Bank") and

former employees of Paul Garrett's real estate development firm, The Garrett

Group LLC ("Garrett"'), with first-hand knowledge of the events alleged herein;

(ii) reviews and analyses of CVB's filings with the Securities and Exchange

Commission ("SEC"), Company press releases, slide presentations, and other

public statements; and (iii) reviews of news, media, web resources, property title

searches, tax lien documents, foreclosure records, and analyst research reports.

I. NATURE AND SUMMARY OF THE FRAUD

1. This is a securities class action on behalf of purchasers of CVB

common stock between October 21, 2009, and August 9, 2010, inclusive (the

"Class Period"). Lead Plaintiff asserts claims pursuant to Sections 10(b) and 20(a)

of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 1 Oh-S

promulgated thereunder (17 C.F.R. § 240.10b-5), against CVB and its top

executive officers, the Bank's Director, President, and Chief Executive Officer

("CEO"), Christopher D. Myers ("Myers"), and its former Chief Financial Officer

("CFO") and Executive Vice President, Edward J. Biebrich, Jr. ("Biebrich"). 2

2. Defendants' fraud largely centers on their efforts to conceal from

investors that CVB's $85 million in loans to Garrett - by far CVB's largest

borrowing relationship - were "impaired" 3 by September 2008, when Defendants

1 Unless otherwise indicated, "Garrett" refers to Paul Garrett, The Garrett Group LLC, and all of its related or owned entities. 2 Defendants Myers and Biebrich are referred to collectively as the "Individual Defendants."

CVB repeatedly stated in its SEC filings that "[a] loan is impaired when principal and interest are deemed uncollectible in accordance with the original contractual

FIRST AMENDED CONSOLIDATED -1- CLASS ACTION COMPLAINT

Case No. 1O-cv-06256-MMIM (PJWx)

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I knew that Garrett could not pay its existing loans and said it would have to file for

bankruptcy if CVB did not extend additional credit and modify loan terms. Instead

of disclosing the problems with the Garrett loans, Defendants secretly extended

I additional credit to Garrett and repeatedly restructured its loans to allow Garrett to

escape bankruptcy and delay defaulting on its loans to CVB, all while falsely

assuring investors that it had strict lending standards and that its borrowers had

I strong credit.

3. Former Garrett executives and employees, including its Chief

Operating Officer ("COO") at the time, confirm that Defendant Myers and other

CVB executives met with Garrett in or around September 2008 and requested and

received additional loans - funds that were needed to help Garrett meet its ongoing

obligations and avoid filing for bankruptcy. According to Garrett's former COO,

the additional funding was used to get Garrett current on prior loans from CVB:

"CVB was trying to keep the house of cards standing."

4. CVB's assistance only delayed Garrett defaulting on its obligations to

the .Bank. CVB repeatedly modified the Garrett loans throughout 2009, while

publicly informing CVB's shareholders that its loans to Garrett were current and

performing as agreed. According to Garrett's former COO, Myers and CVB

executives met with Paul Garrett and top Garrett executives in January 2010 to

discuss Garrett's troubled loans. At the meeting, Garrett told Myers that CVB

needed to modify the loan terms or Garrett would file for bankruptcy. CVB again

modified Garrett's loan terms.

terms of the loan," and that "[a] loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts (contractual interest and principal) according to the contractual terms of the loan agreement." See, e.g., CVB's Form 10-K filed with the SEC on March 4, 2010. Here, where multiple confidential witnesses confirm that Garrett was unable to keep its loans current under their original contractual terms, CVB's loans to Garrett were impaired beginning no later than September 2008.


Case No. 1O-cv-06256-MIIVIIVI (PJWx)

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5. Even setting aside Myers' first-hand negotiations with Garrett, there is

2 no question that Myers and Biebrich were aware of the status of the loans to

3 Garrett. Defendants claimed that they monitored the Bank's loans on a regular

4 basis. Both participated in Loan Committee meetings at which problem loans were

5 discussed, and commitments over $7 million had to be approved by the Loan

6 I Committee and reviewed on a regular basis. Moreover, Myers specifically

7 discussed the Garrett loans in public statements. Finally, given the importance of

8 the Garrett loans to CVB's bottom line, it is inconceivable that Myers and

9 Biebrich, the two most senior officers at the Company, would not have been aware

10 of the status of the loans. Indeed, when CVB was forced to recognize certain

11 losses on the Garrett loans after the close of the Class Period, those losses were

12 more than 80% of the $52 million in common stock net income that CVB reported

13 for the entire year in 2009. Further, the Garrett write-downs were more than

14 CVB's total reported write-downs for the previous five quarters combined.

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6. Defendants also engaged in other deceptive practices to hide from

16 investors the true condition of CVB's loan portfolio in the rapidly declining real

17 estate market. For example, witnesses describe how CVB overvalued the

18 properties serving as collateral for CVB's loans, including its loans to Garrett. By

19 overvaluing the collateral, Defendants understated CVB's reserves and overstated

20 its profits.

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7. In stark contrast to these practices, Defendants assured investors

22 throughout the Class Period that CVB's strict underwriting standards had helped it

23 avoid the fate of many of its peer lenders in California that had been decimated by

24 skyrocketing defaults. Defendants distinguished CVB's practices from the reckless

25 and improper lending practices of other lenders (which were coming to light as

26 lenders struggled and went out of business). Defendants publicly stressed that,

27 unlike its peers, CVB had a "strong credit culture," its "underwriting integrity

28 FIRST AMENDED CONSOLIDATED

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1 remain[edJ paramount," and "/t/he overall credit quality of [CVB'sJ loan

2 portfolio is sound."

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8. Defendants made a host of other materially false and misleading

4 statements and omissions to conceal the true state of CVB 's loan portfolio, lending

5 practices, and financial condition. Among other things, despite Garrett's threats of

6 bankruptcy and CVB's repeated modifications of the Garrett loans in response,

7 Defendants reported in SEC filings that they were not aware of any loans for which

8 credit problems of the borrower would cause serious doubts as to the ability of the

9 borrower to comply with the terms of the loan. Defendants also used fraudulent

10 accounting to misstate various entries in CVB's publicly filed financial statements,

11 which gave the appearance that CVB was more profitable and had better

12 performing loans than was the case.

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9. Investors and analysts were particularly focused on CVB's loan

14 portfolio and lending practices given the economic climate and the lending

15 practices and financial troubles of other lenders and real estate-related businesses.

16 Thus, Defendants' misrepresentations and omissions inflated CVB's purported

17 profits (and artificially inflated its stock price). In addition, by falsely claiming to

18 have strong capital, conservative lending practices, and low loan losses, CVB was

19 able to continue its stated "growth strategy" of transitioning from a community

20 bank to a regional bank through acquisitions of failing banks with favorable loss-

21 sharing agreements with the Federal Deposit Insurance Corporation ("FDIC")

22

10. By August 2010, however, Defendants could no longer hide the truth

23 about its loan portfolio, lending practices, and finances. On August 9, 2010, CVB

24 announced that two weeks earlier, on July 26, 2010, the SEC had issued a

25 subpoena to the Bank demanding information about how the Bank handles and

26 discloses troubled loans - the very allegations detailed herein. The SEC

27 investigation is ongoing and has included depositions of certain confidential

28 witnesses whose accounts are included herein. Specifically, the subpoena FIRST AMENDED CONSOLIDATED

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1 questioned the Bank's loan underwriting guidelines, its allowance for credit losses

2 and how CVB calculates its allowance for loan losses. Analysts immediately

3 reacted to the announcement, stating that the SEC probe was notable because it

4 I revealed that CVB was not fully disclosing potentially problematic loans and that

5 I CVB's largest exposure - Garrett - was backed by collateral whose market value

6 was well below that of the loan amount (mirroring the allegations herein).

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11. The market reacted swiftly to this previously undisclosed truth about

8 the quality of CVB's loan portfolio and financial reporting, and CVB investors

9 suffered severely. Following this disclosure, CVB's stock price plunged 22% in a

10 single day, from $10.30 to $8.00, representing a market capitalization loss of

11 approximately $245 million on extremely high trading volume.

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12. One month later, on September 9, 2010, CVB finally admitted that

13 1 analysts' and the market's interpretations of the SEC subpoena were correct - that

14 CVB's loans to its largest borrower, Garrett, were in trouble. Specifically, on

15 September 9, 2010, CVB disclosed that Garrett defaulted on $82 million worth of

16 loans, that CVB had negotiated a Forbearance Agreement with Garrett, and that

17 CVB was forced to remove all $82 million in Garrett loans from its purported

18 "performing" loans, where they had been improperly accruing interest income

19 throughout the Class Period. Moreover, CVB also effectively admitted its prior

20 violations of Generally Accepted Accounting Principles ("GAAP"). The entire $82

21 million Garrett loan portfolio was overvalued: $34 million was a total loss and had

22 to be written off completely, while the remaining $48 million was deemed

23 "impaired," which required CVB to immediately stop accruing interest income,

24 and to reverse previously reported interest. In its press release, CVB admitted that

25 its loan loss allowance was inadequate to cover the $34 million in credit losses on

26 the Garrett loans, forcing CVB to immediately record an additional loss provision

27 of $9.3 million in third quarter 2010.


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13. Finally, on January 20, 2011, CVB admitted that Garrett had violated

2 forbearance agreements, and that CVB was considering the sale of certain notes,

3 initiation of foreclosure proceedings, and alternative repayment plans.

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14. In contrast to members of the investing public, Myers and Biebrich

5 took advantage of their knowledge of the true state of CVB's loans and financial

6 condition. While publicly claiming that CVB had managed its risks and that its

7 largest borrower was performing as agreed, Defendants Myers and Biebrich sold

8 nearly 100,000 of their own shares at artificially inflated prices, cashing in over

9 $700,000 during the less than ten-month Class Period. This trading was highly

10 unusual and suspicious. In the full year prior to the beginning of the Class Period,

11 Defendant Myers sold no shares and acquired 258,000 shares, and Defendant

12 Biebrich sold only 1,608 shares. Moreover, Myers sold 5,500 shares after CVB

13 received the SEC subpoena but before CVB announced receipt of the subpoena to

14 the public.

15 II. JURISDICTION AND VENUE

16

15. This action arises under Sections 10(b) and 20(a) of the Exchange Act,

17 15 U.S.C. §§ 78j (b) and 78t(a), and Rule 1 Ob-5 promulgated thereunder by the

18 SEC, 17 C.F.R. § 240.1Ob-5.

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16. This Court has jurisdiction over the subject matter of this action

20 pursuant to 28 U.S.C. § 1331, and § 27 of the Exchange Act, 15 U.S.C. § 78aa.

21 Venue is proper in this District pursuant to Section 27 of the Exchange Act,

22 15 U.S.C. § 78aa, and 28 U.S.C. § 1391(b). Defendant CVB maintains its

23 principal place of business within this District, Defendants conduct and/or

24 conducted business in this District, and many of the acts giving rise to the

25 violations alleged herein, including the preparation and dissemination of materially

26 false and misleading information and omissions, occurred in substantial part in this

27 District.


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17. In connection with the acts alleged in this Complaint, Defendants,

2 directly or indirectly, used the means and instrumentalities of interstate commerce

3 including, but not limited to, mail, interstate telephone communications, and the

4 I facilities of the national securities markets.

5 III. PARTIES

6

A. Lead Plaintiff

7

18. Lead Plaintiff Jacksonville Police & Fire Pension Fund ("Jacksonville

8 P&F" or "Lead Plaintiff") was created in 1937, and is a single-employer

9 contributing defined benefit pension plan covering all full-time police officers and

10 firefighters of the Consolidated City of Jacksonville. Jacksonville P&F purchased

11 CVB common stock during the Class Period, as set forth in the certification

12 previously filed with the Court, and suffered damages as a result of the federal

13 securities law violations alleged herein. By Order dated January 21, 2011, the

14 Court appointed Jacksonville P&F as the Lead Plaintiff in this action.

15

B. Defendants

16

19. Defendant CVB is a California corporation with its principal place of

17 business at 701 North Haven Avenue, Suite 350, Ontario, California 91764.

18 According to the Company's profile, CVB operates as a bank holding company for

19 Citizens Business Bank, which provides various retail banking and financial

20 services to small and mid-sized businesses, high net-worth individuals, and

21 professionals in the United States. The Bank offers various deposit products,

22 including checking, savings, money market, and time certificates of deposit for

23 business and personal accounts. As of September 30, 2011, CVB operated 43

24 business financial centers located in the Inland Empire, Los Angeles County,

25 Orange County, and the Central Valley of California. CVB reports to be the largest

26 financial institution headquartered in the Inland Empire region of Southern

27 California. CYB reports that its primary asset, Citizens Business Bank, has more

28 than $6 billion in assets. CVB's income is derived primarily from interest earned FIRST AMENDED CONSOLIDATED

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1 on the Bank's loans and deposits and is highly dependent upon the underlying

2 credit quality of its loan portfolio. In 2001, when CVB first listed its stock on the

3 NASDAQ National Market Exchange ("NASDAQ"), it had more than $1 billion in

4 loans; by the end of the third quarter of 2009, loans had grown to more than $3.5

5 billion, with more than half of them in commercial real estate.

6

20. (a) Defendant Myers is, and was throughout the Class Period, the

7 Company's CEO, President, and Director of the Company, as well as CEO and

8 President of Citizens Business Bank. During the Class Period, Defendant Myers

9 signed and/or certified the Company's SEC filings and made additional false

10 statements and omissions as set forth herein.

11

(b) Defendant Myers had access to the adverse undisclosed

12 information about CVB's business, operations, products, trends, financial

13 statements, markets, and present and future business prospects via direct

14 communications with Garrett, access to internal control documents (including but

15 not limited to the Bank's Problem Loan Reports); conversations and connections

16 with other corporate officers, employees, and borrowers; participation at

17 management and Board of Directors ("Board") meetings and meetings of related

18 committees (including the Bank's monthly Loan Committee meetings, which had

19 to review and approve lending relationships greater than $7 million), and reports

20 and other information provided to him in connection with those meetings,

21 including special credit administration "quarterly reports" on "borrowers who were

22 under stress."

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(c) For each of the Bank's periodic SEC filings during the Class

24 Period, Defendant Myers signed certifications representing that: (i) the periodic

25 filings fairly represented CVB's financial condition; (ii) the periodic filings did not

26 contain "any untrue statement of a material fact or omit to state a material fact

27 necessary to make the statements made, in light of the circumstances under which

28 such statements were made, not misleading"; (iii) the financial statements and FIRST AMENDED CONSOLIDATED

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1 I other financial information included with the periodic filings fairly presented in all

2 material respects CVB's financial condition, results of operations and cash flows;

3 I and (iv) that the periodic filings were prepared in accordance with GAAP.

4

(d) As an officer, director, and controlling person of a publicly held

5 company whose common stock was, and is, registered with the SEC pursuant to

6 the Exchange Act, traded on the NASDAQ, and governed by the provisions of the

7 federal securities laws, Defendant Myers had a duty to promptly disseminate

8 accurate and truthful information with respect to the Bank's financial condition and

9 performance, growth, operations, financial statements, business, products,

10 borrowers, markets, management, earnings, and present and future business

11 prospects, and to correct any previously issued statements that had become

12 materially misleading or untrue, so that the market price of the Bank's publicly

13 traded common stock would be based upon truthful and accurate information.

14 Myers' misrepresentations and omissions during the Class Period violated these

15 specific requirements and obligations.

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(e) Defendant Myers personally uttered materially false and

17 misleading statements as described herein, and he participated in the drafting,

18 preparation, and/or approval of the various public, shareholder, and investor reports

19 and presentations, and other communications alleged herein. Defendant Myers

20 was aware of, or deliberately disregarded, the misstatements contained therein and

21 omissions therefrom, and was aware of their materially false and misleading

22 nature.

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(f) Defendant Myers, because of his position of control and

241 authority as President, CEO, and Director of the Bank, was able to and did control

25 the content of the various SEC filings, press releases, investor presentations, and

26 other public statements pertaining to the Bank during the Class Period. Defendant

27 Myers was provided with copies of the documents alleged herein to be misleading

28 prior to or shortly after their issuance and/or had the ability and/or opportunity to FIRST AMENDED CONSOLIDATED

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1 I prevent their issuance or cause them to be corrected. Accordingly, Defendant

2 Myers is responsible for the accuracy of the public reports and releases detailed

3 herein and is therefore primarily liable for the representations contained therein.

4

(g) Defendant Myers engaged in highly suspicious stock sales

5 during the Class Period. During the entire year prior to the beginning of the Class

6 Period, Defendant Myers did not sell any shares, but purchased 8,000 shares on the

7 open market and acquired another 250,000. Then, after the beginning of the Class

8 Period, on February 24, 2010, Defendant Myers sold 13,000 shares. Shortly

9 thereafter, on June 15, 2010 (just five weeks before receipt of the SEC subpoena),

10 Myers instituted a lObS-i trading plan (the "Plan"), with the reported purpose of

11 allowing Myers "to pay the income taxes related to the vesting of his restricted

12 stock grants." On August 2, 2010 - after Defendants received the SEC subpoena

13 but before they disclosed it to investors - Myers sold 5,500 shares pursuant to the

14 Plan. In total, during the Class Period, Defendant Myers purchased no shares, but

15 sold 18,500 shares, for proceeds of $180,889.

16

21. (a) Defendant Biebrich was, during the Class Period, the

17 Company's CFO and Principal Accounting Officer ("PAO"), and the CFO and

18 Executive Vice President of Citizens Business Bank. According to CVB's

191 Schedule 14A filed with the SEC on April 16, 2010, "Mr. Biebrich led financial

20 communication with the investor and analyst communities at a very difficult time

21 for Inland Empire financial institutions." Further, Biebrich "provided operational

22 support to achieve financial goals, including assuring the safety and soundness of

23 CVB Financial Corp. and Citizens Business Bank, supporting strategy

24 development and execution, and supporting the growth initiatives of CVB

25 Financial Corp. and Citizens Business Bank." The filing also noted that "Mr.

26 Biebrich's efforts facilitated access to the financial markets." During the Class

27 Period, Defendant Biebrich signed and/or certified the Bank's SEC filings and

28 made additional false statements and omissions as set forth herein. FIRST AMENDED CONSOLIDATED

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1

(b) Defendant Biebrich was CVB's senior most financial and

2 accounting officer, and he was ultimately responsible for ensuring that CVB's

3 financial statements complied with GAAP and did not present a misleading picture

4 of the Company's financial condition. Defendant Biebrich had access to the

5 adverse undisclosed information about CVB's business, operations, products,

6 trends, financial statements, markets, and present and future business prospects via

7 access to internal control documents (including but not limited to the Bank's

8 Problem Loan Reports); conversations and connections with other corporate

9 officers, employees, and borrowers; participation at management and Board

10 meetings and committees thereof (including the Bank's monthly Loan Committee

11 meetings), and reports and other information provided to him in connection

12 therewith.

13

(c) For each of the Bank's periodic SEC filings during the Class

14 Period, Defendant Biebrich signed certifications representing that: (i) the periodic

15 filings fairly represented CVB's financial condition; (ii) the periodic filings did not

16 contain "any untrue statement of a material fact or omit to state a material fact


18 such statements were made, not misleading"; (iii) the financial statements and

19 other financial information included with the periodic filings fairly presented in all

20 material respects CVB's financial condition, results of operations and cash flows;

21 and (iv) that the periodic filings were prepared in accordance with GAAP.

22

(d) As an officer and controlling person of a publicly held company

23 whose common stock was, and is, registered with the SEC pursuant to the

24 Exchange Act, traded on the NASDAQ, and governed by the provisions of the

25 federal securities laws, Defendant Biebrich had a duty to promptly disseminate

26 accurate and truthful information with respect to the Bank's financial condition and

27 performance, growth, operations, financial statements, business, products,

28 borrowers, markets, management, earnings, and present and future business FIRST AMENDED CONSOLIDATED



1 I prospects, and to correct any previously issued statements that had become

2 materially misleading or untrue, so that the market price of the Bank's publicly

3 traded common stock would be based upon truthful and accurate information.

4 I Biebrich's misrepresentations and omissions during the Class Period violated these

5 I specific requirements and obligations.

6

(e) Defendant Biebrich participated in the drafting, preparation,

7 and/or approval of the various public, shareholder, and investor reports and

8 presentations, as well as other communications alleged herein. Defendant Biebrich

9 was aware of, or deliberately disregarded, the misstatements contained therein and

10 omissions therefrom, and was aware of their materially false and misleading

11 nature.

12

(f) Defendant Biebrich, because of his position of control and

13 authority as CFO and PAO of the Bank, was able to and did control the content of

14 the various SEC filings, press releases, investor presentations, and other public

15 statements pertaining to the Bank during the Class Period. Defendant Biebrich was

16 provided with copies of the documents alleged herein to be misleading prior to or

17 shortly after their issuance and/or had the ability and/or opportunity to prevent

18 their issuance or cause them to be corrected. Accordingly, Defendant Biebrich was

19 responsible for the accuracy of the public reports and releases detailed herein and

20 is therefore primarily liable for the representations contained therein.

21

(g) On July 26, 2010 - the same day that CVB received the SEC

22 subpoena - CVB announced Biebrich's projected December 31, 2010 "retirement."

23 Shortly thereafter, on August 12, 2010, the Bank reported that Biebrich had

24 "postponed" his retirement, claiming that the timing of his resignation "is strictly a

25 coincidence." On February 1, 2011, CVB announced that Biebrich was, in fact,

26 retiring effective March 1, 2011.

27

(h) Defendant Biebrich reaped significant gains from stock sales

28 executed at fortuitous times, and his trading was particularly suspicious in FIRST AMENDED CONSOLIDATED

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1 comparison to his prior trading patterns. During the Class Period, CFO Defendant

2 Biebrich sold 57,680 shares for a total of $565,618. During the entire year prior to

31 I the beginning of the Class Period, Biebrich had only one transaction, selling 1,608

Eli shares for a total of $16,080. During the Class Period, Defendant Biebrich sold

5 approximately half of the 110,929 shares he held at the start of the Class Period.

6 Specifically, Defendant Biebrich sold 10,000 shares on November 16, 2009, at

7 $8.39 per share; sold another 20,000 shares on January 25, 2010, at $9.37 per

8 share; sold another 10,000 shares 4 days later on January 29, 2010, at $9.95 per

9 share; sold another 3,000 shares on March 24, 2010, at $10.53 per share; sold

10 another 10,000 shares on April 26, 2010, at $11.51 per share; and sold another

11 4,680 shares on May 27, 2010, at $10.29 per share.

12 IV. CONFIDENTIAL WITNESSES

13

22. The allegations herein are supported, in part, by first-hand accounts of

14 confidential witnesses, including persons who were employed at CVB or Garrett

15 during the Class Period. As set forth below, the confidential witnesses were each

16 in a position to know the information alleged, and many corroborate the allegations

17 of one another as well as information that is publicly available, such as tax and real

18 property records. The confidential witnesses have been identified with

19 particularity but without disclosing identities in order to address concerns about

20 retaliation or career injury:

21

(a) Confidential Witness 1 ("CW1") worked for the Bank from

22 March 2005 to August 2010. CW1 was a Vice President, Special Assets Manager

23 for the Special Assets Department, a department which handles troubled credits

24 and impaired loans. In March 2009, CW1 became a Portfolio Manager. As a

25 Special Assets Manager, CW1 monitored and handled the delinquencies for every

26 branch to make sure they were not "reportable." If a loan was delinquent for more

27 than thirty days at quarter-end, then the loan was considered reportable to the

28 Board and publicly. CW1 reported to the Bank's Executive Vice President and FIRST AMENDED CONSOLIDATED


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1 I Chief Credit Officer ("CCO"), James Dowd ("Dowd"), who reported to CEO,

2 Defendant Myers.

3

(b) Confidential Witness 2 ("CW2") worked for the Bank from

4 September 1998 to August 2010. CW2 was a Senior Vice President, Regional

5 Manager for the Inland Empire Region. CW2 reported to Todd Hollander

6 ("Hollander"), who reported to CEO, Defendant Myers.

7

(c) Confidential Witness 3 ("CW3") worked for the Bank from

8 March 2009 to September 2010. CW3 was a Senior Vice President and Special

9 Assets Manager of CVB's Special Assets Department. In this capacity, CW3 was

10 in charge of troubled loans and managed loan workouts. CW3 reported to

11 Executive Vice President and CCO Dowd, who reported to CEO, Defendant

12 Myers. R

13

(d) Confidential Witness 4 ("CW4") worked for the Bank from

14 1999 to February 2010. From 2002 to 2010, CW4 worked for the Bank's Agri-

15 Business Department, and was the Executive Administrative Assistant to the

16 Bank's Vice President of Dairy & Livestock Industries Group, Larry Zivelonghi,

17 who reported to CEO, Defendant Myers. In this capacity, CW4 was responsible

18 for managing the daily calendar and travel plans, and for receiving the incoming

19 calls of the customers for Zivelonghi.

20

(e) Confidential Witness 5 ("CW5") worked for the Bank from

21 May 2006 to February 2010. CW5 was the Bank's Executive Vice President,

22 Relationship Manager. In this position, CW5 managed a loan portfolio and was

23 responsible for new business production, credit analysis including loan write-up

24 and presentation for approval. CW5 has 14 years of experience in commercial

25 lending, and has effectively underwritten and managed all types of commercial

26 credits including installment loans, lines of credit, and short-term working capital

27 loans. CW5 reported directly to Branch Manager Neal Newman, who reported to




1 I Regional Manager Ted Dondanville. Dondanville reported to Chief Loan Officer

2 I Hollander, who reported to Defendant Myers.

3

(f) Confidential Witness 6 ("CW6") worked for the Bank from

4 March 1997 to May 2010. CW6 was the Deputy Chief Credit Officer for the

5 Bank's Special Assets Division from June 2006 until March 2009. In this position,

6 CW6 was responsible for the Dairy and Livestock portfolio. From March 2009

7 until May 2010, CW6 worked within the Credit Administration department. CW6

8 reported first to Frank Basirico, then to Ed Mylett, and then to CCO Dowd.

9

(g) Confidential Witness 7 ("CW7") worked for the Bank from the

10 time of the Bank's acquisition of San Joaquin Bank in October 2009 until February

11 2010. CW7 was the Note Department Manager, which was the department through

12 which all loans had to pass during orientation and renewals.

13

(h) Confidential Witness 8 ("CW8") worked for The Garrett Group

14 LLC from January 2004 through February 2009. CW8 was a Vice President of

15 Garrett. In this capacity, CW8 was responsible for oversight of asset and portfolio

16 management, analysis, leasing, construction, property management (both internal

17 and third party), and loan administration.

18

(i) Confidential Witness 9 ("CW9") was the Chief Operating

191 Officer of The Garrett Group LLC from April 2005 until March 2011. In this

20 capacity, CW9 interacted directly and regularly with the executive staff at Garrett,

21 including Paul and Diane Garrett, CEO Kirk Wright, and CFO Bill Whinna. CW9

22 was deposed by the SEC in connection with its investigation of CVB.

23

(j) Confidential Witness 10 ("CW10") worked for The Garrett

24 Group LLC from September 2004 to February 2009, first as a Senior Analyst and

25 later as an Assistant Asset Manager. CW10 worked with and was familiar with

26 properties serving as collateral for loans from CVB to Garrett. CW1O was deposed

27 by the SEC in connection with its investigation of CVB.



Cas


#:1141

1

(k) Confidential Witness 11 ("CW1 1") worked for The Garrett

2 Group LLC from May 2004 until November 2008 as a Property Manager Income

3 Division and Assistant to Vice President Asset Management. CW11 managed

4 thirteen properties for Garrett and reported to Kimberly Stevenson, Asset Manager.

5

(1) Confidential Witness 12 ("CW12") was a Vice President of

6 CVB and Commercial Loan Officer in Ontario, California from August 2005

7 through March 2010. CW12 managed a loan portfolio of $100,000,000 and

8 interacted regularly with the credit administration department. CW12 was familiar

9 with credit administration reports and communication of information within the

10 department and to senior executives.

11 V. DEFENDANTS' FRAUDULENT SCHEME

12

23. Throughout the Class Period, CVB stated in its SEC filings that its

13 primary source of income was interest earned on its loans and investments. CVB

14 focused on commercial real estate, construction, commercial and industrial,

15 agribusiness, mortgage, consumer, lease and other real estate loans in the Inland

16 Empire and Central Valley regions, and Los Angeles and Orange Counties.

17

24. By the start of the Class Period, however, land and developed real

18 estate prices were plummeting in the geographic region in which CVB did

19 business. Delinquencies, defaults, and foreclosures were increasing rapidly. As

20 The Wall Street Journal reported in an article dated January 14, 2009, entitled

21 "Commercial Sector Expects Things to Get Worse," the commercial sector in the

22 Inland Empire region went "from a booming smorgasbord to a basket case in a few

23 short years." The article reported that, from 2007 to 2008 in the Inland Empire,

24 office vacancies, retail vacancies, and warehouse vacancies increased substantially,

25 effective rents and annual asking rents decreased across the board, and single

26 family home prices plummeted.

27

25. CVB's peer lenders, as well as larger banks and real estate-related

28 businesses, were experiencing rapidly increasing losses on their loan portfolios, FIRST AMENDED CONSOLIDATED


2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 20 of 96 Page I Cas #:1142

with many going out of business. Moreover, investigations, lawsuits, and press

reports detailed rampant improper lending practices and poor loan underwriting

that contributed to the failure of many banks and lenders. In this environment,

investors and analysts were keenly focused on CVB's statements regarding its

lending and underwriting practices and the status of the loans in its portfolio.

26. Just like its peer lenders, CVB's commercial borrowers, many of

whom also owed money to other commercial lenders, were facing severe financial

difficulties and were not able to pay CVB according to the original terms of their

loans. Moreover, the collateral underlying CVB's loans to these borrowers was

plummeting in value.

27. If Defendants revealed the truth regarding CVB's loan portfolio,

lending practices, and financial condition, the Bank would have had to increase its

loan loss reserves and increase its write-offs, which would have reduced profits

and resulted in a lower price for CVB stock (as occurred when the truth was

ultimately revealed).

28. Further, if Defendants disclosed the truth regarding CVB's lending

practices and provided an accurate picture of its loan portfolio, the Bank would not

have been able to continue its publicly stated growth strategy of acquiring other

banks.4 In order to make such acquisitions and continue growth, CVB had to

maintain the appearance that it had strong capital, conservative lending practices,

Both prior to and throughout the Class Period, Defendants expressed the goal to grow CVB and "transition[] from a Community Bank to a Regional Bank." For example, in a December 2, 2010 private analyst slide presentation, the Bank shared its "10 Year Vision": "Citizens Business Bank will strive to become the dominant financial services company operating throughout the state of California, servicing the comprehensive financial needs of successful small to medium sized businesses and their owners." Defendants sought to accomplish this growth and dominance primarily through acquisitions of other banks. CVB had already acquired First Coastal Bank in June 2007. Then, on October 16, 2009, C\TB announced that it acquired San Joaquin Bank, which had approximately $732 million in total assets.


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and experienced very low loan losses. Tellingly, since the truth about CVB was

revealed as alleged below, CVB has not acquired any other banks, and its total

I assets have declined.

29. Rather than disclose the truth, Defendants resorted to various

fraudulent practices so that they could distinguish CVB from other struggling

lenders in their public statements, keep claiming that borrowers were "current,"

report comparatively low loan losses and reserves, and keep reporting record

profits.

A.

30.

Defendants Fraudulently Made Impaired Loans Appear "Current"

Aware that certain borrowers were unable to pay their loans according

to the original terms, Defendants made these borrowers appear "current" for

reporting purposes by extending loan due dates, using loan proceeds to keep other

loans current, refinancing or restructuring payment terms, extending additional

credit, or increasing the borrowers' credit limits. Because these practices were

made to accommodate borrowers' existing loans, each constituted a "modification"

and was required to be accounted for as a "troubled debt restructuring." GAAP

required CVB to record additional loan loss reserves, reverse and discontinue

accrual of unpaid interest, and make specific disclosures.

31. None of these practices, however, some of which are commonly

referred to in the industry as "extend and pretend," "amend and pretend," and

"delay and pray," were disclosed to investors. Instead, contrary to the actual

condition of the loans, CVB continued to report high profits and comparatively low

levels of reserves and charge-offs and publicly touted that its loan portfolio

remained "sound" and the loans were performing "as agreed."

32. CVB's fraudulent practices in connection with its loans to its largest

borrower, Garrett, are illustrative, and the practices were especially deceptive

considering the size of the commitment and investor focus on CVB's loans to FIRST AMENDED CONSOLIDATED


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Case 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 22 of 96 Page ID #:1144

1 Garrett. CVB committed $85 million in loans to Garrett, more than double the size

2 of CVB's next largest lending relationship, and the commitment represented

3 approximately 14% of the Bank's tangible common equity, a closely watched

4 measure of an institution's net worth. Further, the loans to Garrett dwarfed CVB's

5 reported net income for each of the years 2006 through 2010 and thus could have

6 swung CVB to a loss.

7

33. According to CW9, Garrett's COO at the time, CVB already knew

8 Garrett was in a "perilous financial condition" in or around September 2008 when

9 Garrett told CVB that it needed additional funds or it would have to file for

10 bankruptcy. At this time, Garrett executives met with Defendant Myers and James

11 Dowd, CYB's Chief Credit Officer, and asked for additional funding. According to

12 CW9, Garrett informed CVB that it needed the additional funds just to meet its

13 ongoing obligations, which CW9 said were mostly to CVB. According to CW9,

14 CVB advanced Garrett additional funds at this time, and Garrett used the funds to

15 get current on existing loans from CVB. CW9 also stated that Garrett had many

16 loans outstanding and that when a loan closed, some of the proceeds were used to

17 make other loans current. According to CW9, "CVB was trying to keep the house

18 of cards standing."

19

34. CW10 confirmed that Garrett was on the verge of bankruptcy at this

20 time and recalled meetings between CVB and Garrett in or around September 2008

21 about Garrett needing additional funds. CW10 explained that Garrett's financial

22 condition was "rotten" throughout 2008 and until CW10 left in February 2009, and

23 that the company went through four rounds of layoffs. CW10 stated that

24 employees received no raises and no bonuses during this time period and that

25, "everybody knew" that Garrett's financial condition was dire as of September

26 VIIIJ:J

27

35. Several Garrett employees confirmed the dire situation Garrett faced

28 at this time and how desperately Garrett needed CVB's help. These accounts also FIRST AMENDED CONSOLIDATED

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2:10-cv-06256-MMM -PJW

Document 61 Filed 02/27/12 Page 23 of 96 Page I I #:1145

1 I make it clear that Defendants were aware (or recklessly disregarded) Garrett's

2 condition. According to CW10, in or about September 2008, Garrett's CEO, Kirk

3 Wright, presided over a meeting of 30-35 Garrett employees. Prior to this meeting,

4 Garrett had recently laid off a number of employees. At the meeting, all

5 employees' salaries were cut by 10%. CW10 stated that employees were told by

6 I Wright at the meeting that Garrett was trying to save the company, that Garrett was

7 in a dire situation, and that Garrett needed to secure additional funding from CVB

8 or Garrett would not survive. Former employees of Garrett were consistent in their

9 view that CVB would have known that Garrett was in serious trouble at this time.

10

36. In this summer/fall 2008 time period, according to CW10, Garrett

11 executives discussed bankruptcy and met with bankruptcy attorneys. CW8

12 confirmed that Garrett executives discussed a potential bankruptcy filing during

13 2008 and 2009. CW8 continued to hear talk of Garrett filing for bankruptcy even

14 after CW8 left Garrett in February 2009. CW11 said that "Garrett was hanging on

15 by a thread" during this time period, with many buildings in receivership, and

16 remembered that CVB was trying to partner with Garrett in 2008 to "help keep

17 Garrett afloat."

18

37. Defendants knew or recklessly disregarded (but failed to disclose and

19 affirmatively concealed in their public statements as set forth in Section VI below)

20 Garrett's perilous financial condition during this time period. Indeed, CW8

21 described properties financed by CVB that sat vacant for years and provided no

22 income. According to CW8, two properties in Murrieta, California, Silverhawk 8

23 and Silverhawk 10, totaling approximately 100,000 square feet, sat vacant through

24 CW8's departure from CVB in February 2009. CW8 believes that they were still

25 vacant as of 2011. CW8 was responsible for finding tenants for the buildings, but

26 due to the economy souring, tenants were hard to secure. Through conversations

27 with Garrett's CEO, Kirk Wright, CW8 explained that CVB executives met


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2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 24 of 96 Page I #:1146

regularly with Garrett executives throughout 2009 to discuss the status of the loans

I to Garrett.

38. Not surprisingly, CVB's extension of additional credit in 2008 merely

delayed Garrett's eventual default on the loans. Just a couple of months later, in

I March 2009, CVB restructured more than $53 million of the Garrett loans. CVB

I secretly modified the Garrett loans several more times throughout 2009. Deed and

title records provide additional details regarding CVB's repeated modifications to

the terms of loans to Garrett throughout 2008 and 2009, often at quarter-end:

• End of First Quarter 2008: On March 25, 2008, just days before the

close of the first quarter, the Bank provided Garrett a $50 million

revolving line of credit;

• End of Third Quarter 2008: On August 23, 2008, the Bank provided

$16 million in "refinancing" to Garrett; and

• End of First Quarter 2009: In late March 2009, including the very last

day of the quarter, March 31, 2009, the Bank provided Garrett with

$53,325,284 in "refinancing," which consisted of $44 million in a

"stand-alone second," and $9,325,284 in "non-purchase money." The

Bank used at least eleven parcels as collateral for the over $53 million

refinancing. 5 Liens for unpaid county property taxes had previously

been issued on April 25, 2008, on at least two of the properties serving

as collateral. The deeds of trust reveal that the loans were directly

handled by the Company's Deputy Chief Credit Officer.

The Assessor's Parcel Numbers for the parcels serving as collateral for the $53,325,284 refinance include the following: 445-150-001, 426-420-008, 308- 140-007, 439-180-015, 438-040-008, 302-030-002, 919-350-020, 919-350-019, 919-350-018, 919-350-017, and 438-040-009.


Case No. 1O-cv-06256-MMM (PJWx)

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Document 61 Filed 02/27/12 Page 25 of 96 Page ID #:1147

1 • End of Third Quarter 2009: On September 23, 2009, just one week

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before quarter-end, the Bank provided Garrett $4,025,000 in

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"refinancing"; and

4 • End of Fourth Quarter 2009: On December 29, 2009, just two days

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before the end of the quarter and fiscal year, the Bank provided

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Garrett nearly $38 million in "refinancing."

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39. During the late 2009 time frame, other lenders to Garrett refused to

engage in these deceptive practices and effectively left CVB as Garrett's lender of

last resort. Garrett's dire situation and inability to pay its obligations is

10 corroborated by the other lenders who foreclosed on loans to Garrett. According to

11 foreclosure records and later press accounts, in November 2009, Jefferson-Pilot,

12 part of Lincoln Financial Group, foreclosed on two office buildings in Ontario,

13 California, that served as collateral for a $15.3 million loan to Garrett. Likewise,

14 in December 2009, Bank Midwest foreclosed on a plot of land serving as collateral

15 for a $25.7 million loan to Garrett. CW8 also reported that Garrett lost several

16 properties in 2009-2010 to foreclosure proceedings by other lenders, and CW8

17 specifically recalled three such properties. According to CW8, Lincoln Financial

18 foreclosed on two of Garrett's office space properties, one located in Denver,

19 Colorado, and another located in Ontario, California, referred to as "Gateway."

20 CW8 also recalled a bank foreclosing on a 100,000 square foot office building in

21 Tempe, Arizona, in this same time frame.

22

40. In contrast to these other lenders, CVB continued to engage in secret

23 I loan modifications with Garrett and, as detailed in Section VI below, issue

24 additional false statements and omission hiding from investors the true condition of

25 the impaired Garrett loans. In or around January 2010, CVB again modified its

26 loan commitments to Garrett, as Garrett told CVB it would have to file bankruptcy

27 unless CVB modified the loans. According to CW9, Garrett's COO at the time,

28 company founder Paul Garrett met with Defendant Myers, George Borba, and FIRST AMENDED CONSOLIDATED

-22- CLASS ACTION COMPLAINT Case No. 10-cv-06256-MMItVI (PJWx)


1 James Dowd of CVB in or around January 2010 and told CVB that unless CVB

2 extended additional credit or modified loan terms, Garrett would file for

3 bankruptcy. CW9 sat in meetings with Paul and Diane Garrett, Kirk Wright, Bill

4 Whinna, and Marty Weiss before and after these meetings with Myers and other

5 CVB executives. Despite these discussions and modification, Defendants

6 continued to conceal this information from investors.

7

41. Under SEC Regulations and GAAP, a change in any term of any

8 Garrett loan made to accommodate Garrett was both a loan "modification," and a

9 "troubled debt restructuring," as defined. In a "troubled debt restructuring," for

10 accounting purposes, CVB's Garrett loans had suffered a collective loss in value

11 and thus, were "impaired." SEC Regulations and GAAP required that CVB record

12 adequate loan loss reserves specific to its Garrett loan portfolio and make

13 substantial additional public disclosures, beginning in the period of modification.

14 When CVB provided additional credit to Garrett, these amounts were required to

15 be added to the existing troubled debt restructuring balance for Garrett loans and

16 disclosed to investors.

17

42. In addition to the Garrett relationship, CVB engaged in similar

18 improper "extend and pretend" practices with other borrowers to make loans to

19 these borrowers appear current for reporting purposes. CW4 - who worked for

20 CVB for a total of eleven years in various Bank departments including Credit,

21 Finance, and Loan Documentation - explained that CVB extended additional lines

22 of credit or increased existing lines of credit to customers who already had troubled

23 loans in order to pay down the late or delinquent accounts. One such troubled

24 account was the account of Vintage Dairy ("Vintage"), which consisted of credit

25 lines for feed and hay. When Vintage did not make payments, the Bank took an

26 advance off Vintage's line of credit to make the payments so that it appeared as

27 though Vintage made a payment and was not behind. According to CW4, CW4's

28 boss - the Head of the Bank's Agri-Business Department, Larry Zivelonghi, who FIRST AMENDED CONSOLIDATED

-23- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MIIVIIVI (PJWx)


reported directly to Defendant Myers - told CW4 directly that on occasion, when

Vintage was maxed out on its line of credit and nothing was available, the Bank

borrowed from the credit line of a related entity to pay down the line of credit in

order to make the payment. In addition, Zivelonghi held internal staff meetings in

which he openly discussed the practice of granting additional funds in order to

conceal delinquencies.

B. Defendants Inflated Values For Properties Serving As Collateral For CVB's Loans

43. Defendants also overvalued properties serving as collateral for CVB's

loans, concealing that the market value of the collateral was rapidly deteriorating

and that the actual value was less than the value CVB assigned to the collateral

when making the corresponding loan. CVB 's inflated values of the collateral were

particularly misleading in light of CVB's repeated claim in its periodic filings that

it "strive[s] to have a maximum loan-to-value ratio of 65-75%." By manipulating

the value of collateral in connection with its loans, C\TB understated its reserves

and overstated its profits. Further, CVB's inflated collateral values concealed the

true risk of loss associated with the Bank's loan portfolio.

44. For example, CW1 explained that CVB often obtained two different

appraisal values for properties serving as collateral for loans: (i) a higher value if

the property was "stabilized with market rent," meaning no deferred maintenance

was required and the property was fully occupied and leased up at market rent; and

(ii) a lower value for the property in the "as-is" condition, meaning the property

did not meet those requirements. Due in part to the implied continuity of income

from a fully occupied property, there is a large difference between the two values.

45. A Senior Vice President and Special Assets Manager ordered CW1 to

use the higher of the two appraisals for properties, even if the properties had

deferred maintenance and zero occupancy. This practice had a direct impact on the

Bank's bottom line, in particular the Allowance for Loan and Lease Loss FIRST AMENDED CONSOLIDATED

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ii I ("ALLL") Reserves, because any difference between the principal loan balance

2 and estimated proceeds from sale of the collateral (current appraised value less cost

3 of sale) had to be written off or reserved for. Using the higher (inflated) appraisal

II I values overstated CVB's expected proceeds from foreclosing on distressed loan

5 collateral. This practice artificially reduced CVB's recorded reserves, thereby

6 overstating its profits.

7

46. CW1 described one specific example of this practice from March

8 2010 related to the collateral for a commercial loan to borrower American World

9 Investment. The property, located at 9500 Haven, Rancho Cucamonga, California,

101 was a vacant, one tenant, two-story office building in need of maintenance. At the

11 time, the loan's outstanding principal balance was over $2.77 million. In early

12 March 2010, CW1 informed a Senior Vice President and Special Assets Manager

13 that the "as-is" appraised value was $1.9 million, and thus, the Bank would need to

14 take a $1 million charge-off. The Senior Vice President and Special Assets

15 Manager then ordered CW1 to use an appraisal value of $2.5 million, instead of the

16 $1.9 "as-is" appraisal value, despite the fact that the property was in need of

17 maintenance and vacant. The American World Investment account was taken away

18 from CW1 a month later, and reassigned to another employee.

19

47. Similarly, CVB overvalued a property that served as collateral for

20 some of CVB's loans to Garrett, the Empire Corporate Center in Ontario, by

21 millions of dollars during the Class Period. According to an Assistant Asset

22 Manager at the Garrett Group, the Empire Corporate Center was used as collateral

23 for one of the loans from CVB to Garrett and was valued at $16 million for

24 purposes of the loan. CW8, who was responsible for managing all of Garrett's

25 commercial properties, described the history of the Empire Corporate Center.

26 According to CW8, the property was originally carried on Garrett's books at

27 $21-22 million and was lowered to $16 million. CW8 recalled that the property

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I $12-13 million, $9- 10 million less than the appraised value on CVB's books. The

property did not sell during CW8's tenure, which lasted until February 2009.

According to a June 8, 2011 press release by Lee & Associates, the realtor

representing both sides in the transaction, the Empire Corporate Center finally sold

in June 2011 for just $9.25 million. As became evident when CVB disclosed the

I Garrett-related write-offs, CVB never appropriately valued the collateral backing

I the Garrett loans.

48. The value of numerous properties serving as collateral for CVB's

loans to Garrett were also subject to significant property tax deficiencies, directly

reducing their value in any foreclosure proceeding. According to the Riverside

County Office of the Treasurer-Tax Collector, Garrett was delinquent on its

property taxes for at least tax years 2008, 2009, and 2010 (first installment), on at

least 32 properties that CVB financed. As a result, the County of Riverside

assessed substantial penalties against Garrett, which directly reduced the value of

the collateral if C\TB foreclosed on Garrett. Indeed, after the Class Period, in its

September 9, 2010 press release (discussed below), CVB admitted that one of the

Garrett properties was sold for $2.5 million, and that $0.5 million of the proceeds -

or 20% - was used to pay "past due property taxes, sales commissions and

borrower cost reimbursements."

C. Defendants Used Fraudulent Accounting Practices To Materially Misstate CVB's Financial Statements Throughout The Class Period

49. Throughout the Class Period, Defendants Myers and Biebrich caused

CVB to issue financial statements that were materially misstated and not presented

in accordance with GAAP at the time they were issued. Further, Defendants Myers

and Biebrich signed sworn certifications regarding CVB's financial statements and

the adequacy of the Company's internal controls that were materially false and

misleading when made, as these sworn certifications failed to reveal the

Company's then-existing violations of GAAP and poor internal controls. FIRST AMENDED CONSOLIDATED


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#:1152

50. GAAP are the authoritative standards, interpretations, rules, and

underlying concepts established and relied on in the United States as the best and

most reliable financial reporting and accounting practices. Regulation S-X, to

which CVB is subject as a registrant under the Exchange Act, provides that annual

I and interim financial statements filed with the SEC that are not prepared in

compliance with GAAP are presumed to be misleading and inaccurate, regardless

of accompanying disclosures. See 17 C.F.R. § 210.4-01(a)(1) and § 210.10-01(a),

as to annual and interim financial statements, respectively. The SEC recognizes

the financial reporting and accounting standards of the Financial Accounting

Standards Board ("FASB") as GAAP. See SEC Release Nos. 33-8221, 34-47743,

and FR-70. 6 SEC Rule 12b-20 requires that periodic reports contain such further

information as is necessary to make the required statements, in light of the

circumstances under which they are made, not misleading. 7

51. Management is solely responsible for preparing financial statements

that comply with GAAP. Public Company Accounting Oversight Board

("PCAOB") Auditing Standard No. 1, AU § 110.03, Distinction between

Responsibilities of Auditor and Management; see also Sarbanes-Oxley Act of

2002, §§ 302, 401, and 404.

52. As detailed herein, CVB's public financial statements and related

earnings releases during the Class Period were materially misstated and in

6 Effective July 1, 2009, FASB replaced existing GAAP with its Accounting Standards Codification ("ASC"). Accordingly, the SEC recognizes ASC as GAAP. 17 C.F.R. §§ 211, 231, and 241; Releases Nos. 33-9062A, 34-60519A, and FR-80A. CVB's GAAP violations in periods ended before July 1, 2009, violated the same or similar GAAP provisions under the prior taxonomy.

' CVB and its operating bank subsidiaries are also required by federal and state regulators including the Federal Reserve Bank ("FRB"), FDIC and Federal Home Loan Bank ("FHLB") to comply with banking regulations and accounting rules set forth herein.


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violation of GAAP. Defendants materially overstated, among other things, CVB's

net interest income, net earnings, earnings per share, stockholders' equity, and loan

values by improperly accounting for its loans and committing other GAAP

violations. More specifically, on a quarterly basis, CVB failed to record an

adequate loan loss provision (expenses), failed to properly account for restructured

loans and failed to properly account for losses in the market value of its collateral,

all of which overstated income. CVB's allowance for credit losses (reserves) was

much too small to absorb expected losses, which overstated CVB's loan values and

stockholders' equity. Further, CVB omitted several GAAP and SEC required

disclosures concerning its loans, operating results, and management's discussion

and analysis ("MD&A"), including disclosures that would have revealed problems

with specific loans and specific loan portfolios by first quarter 2009 instead of third

quarter 2010.

53. CVB's accounting errors totaled tens of millions of dollars and

affected the most important accounts to investors and analysts of bank holding

companies. For example, on the income statement: interest income, interest

expenses, net income, loan loss provisions; on the balance sheet: loan loss reserves,

net asset values and shareholders' equity, along with associated rates of return and

loss. If Defendants had complied with GAAP, the Bank's reported Class Period

financial results would have been materially different.

1. CVB Intentionally Failed To Disclose Its Loan Losses, Loan Loss Reserves, And Its Restructured, Past Due, Non-Performing And Nonaccrual Loans By Loan Tve

54. In order to conceal the impairment in its loan portfolio, CVB did not

disclose loan loss reserves, non-accrual loans, and troubled debt restructurings by

loan type. Defendants thus violated GAAP and express SEC guidance on the

issue, for example (effective from 1996 to the present):

Disclosures about risk elements and impaired loans should reflect the

particular methodology established for certain loans pursuant to SFAS FIRST AMENDED CONSOLIDATED

-28- CLASS ACTION COMPLAINT Case No. IO-cv-06256-MIVIM (PJWx)

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#:1154

114 and 118. The table of impaired loans should disclose the

carrying value by type of loan, broken out into groups based on how

such loans were measured (e.g., present value of expected cash

flows; fair value of collateral; observable market price). The

components of the end of period allowance for loan losses should

distinguish the portion attributable to loans accounted for pursuant to

SFAS 114.

See SEC Publication, SEC Practice 09, Specialized Industries, Bank Holding

Companies, Interpretations and Guidance (emphasis added); see also Guide 3,

Statistical Disclosure by Bank Holding Companies, Summary of Loan Loss

Experience (from the same publication).

55. The SEC has long articulated requirements for lender loan loss reserve

disclosures that exceed some interpretations of FASB's minimum requirements. 8

GAAP expressly provides that SEC conclusions that differ from FASB's control

for GAAP purposes.

56. CVB's disclosure requirements for past due, restructured, and non-

performing (nonaccrual) loans were substantially the same for its loan losses

incurred and loan loss reserves. Similarly, the SEC explicitly required disclosures

8 For example, in December 1996, the SEC said that conclusions reached by FASB in EITF 96-22 (concerning impaired loan disclosure) were insufficient for SEC registrants, and instructed public companies to provide details not yet required by FASB. The SEC's 1996 statement was a part of GAAP throughout the Class Period. See ASC § 310-40-S99-1. Also applicable is FRR-28, codified as SEC Regulation § 401.09, Accounting for Loan Losses by Registrants Engaged in Lending Activities (1986). The SEC regularly reminds financial institutions and others about the need for enhanced disclosures, including, for example, in letters dated January 12, 1999, July 12, 1999, and March 21, 2001. As recently as December 2009, the SEC disseminated an extensive slideshow reminding banks of their disclosure requirements. This slideshow directly addressed the issues CVB faced with Garrett and other borrowers.


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aseII 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 33 of 96 Page I

II #:1155

1 for banks before the requirement for such disclosures was made explicit by FASB

2 for all entities. For example, in its basis for conclusions, ASU 2010-20 (July 2010)

31 I states:

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[C]ertain SEC loan loss disclosures . . . are required to be

5

disaggregated by domestic and foreign loans. The charge-off and

6

recoveries information also is required to be presented with further

7

disaggregation by loan-type categories, such as commercial,

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financial, and agricultural; real estate construction; real estate 11

9 mortgage; installment loans to individuals; and lease financing.

10 (emphasis added).

11

57. The SEC requires banks, in particular, to disclose loan loss and

12 reserve data by loan category because the characteristics of risks and rewards for

13 different loan types (such as commercial, construction, mortgage, consumer, etc.)

14 vary as to amount and timing. Further, lending is inherently cyclical, but the cycles

15 vary by loan type. The SEC has concluded that investors who cannot assess

16 concentrations of loans made, loan losses incurred, and loan loss reserves within a

17 bank's total loan portfolio are not adequately informed.

18

58. In order to conceal the impairment in the Garrett loans, which were

19 too large to be concealed within individual loan categories, CVB did not disclose

20 loan loss reserves, non-accrual loans, and troubled debt restructurings by loan type.

21

59. CVB concealed its inadequate loan loss provisions and allowances for

22 credit losses by, among other things, providing only one number for its loan loss

23 provisions, rather than disclosing the loss amount in each of its eight loan

24 portfolios. During the interim quarters, even the allowance for credit losses was

25 only provided as a single number. Without a breakdown of provisions and

26 allowances at the loan portfolio level, portfolio analysis of loan quality was not

27 possible.


-30- CLASS ACTION COMPLAINT Case No. 10-cv-06256-MMM (PJWx)


#:1156

60. CVB compounded this problem by assigning a different set of labels

to its categories of non-performing and delinquent loans, preventing investors from

matching the problem loans to their corresponding loan portfolio, and blinding

investors to the fact that CVB's largest loan portfolios were comprised of its worst

performing loans.

61. CVB also concealed its fraud in other ways. For example, it padded

the allowance account by failing to write off loans that had already gone bad. As a

result, much of CVB's reported allowance for credit losses was illusory, because it

had actually been absorbed by past losses but improperly left on the books.

Further, CVB failed to accurately report its impaired loans and troubled debt

restructurings, making the allowance for credit losses appear sufficient. This made

CVB and its loan portfolios appear much healthier than its peers.

2. CVB Failed To Accurately Report Its Past Due, Restructured And Non-Performing Assets And Its Realized Losses

62. During the Class Period, C\TB failed to comply with GAAP and SEC

accounting and disclosure requirements and provided its investors inaccurate

(understated) figures for its delinquent and non-performing loans.

63. For example, SEC Industry Guide 3, Statistical Disclosure by Bank

Holding Companies, explains that the vast majority of loans "perform" from

inception until maturity and their accounting treatment does not change. Loans

that do not perform become delinquent, signaling in advance that some or all of the

principal and interest will not be collected when due, or ever. Such loans -

especially real estate loans - take a long time to work through various accounting

"buckets" that indicate relative risk to investors. When a loan begins to show signs

of distress by becoming delinquent, GAAP requires changes in accounting for

and reporting the loan. See, e.g., id.; ASC 942-210-S99, ¶7, Financial Services-

Depository and Lending, Balance Sheet, SEC Materials, Loans (citing SEC

Regulation S-X, Rule 9-03). FIRST AMENDED CONSOLIDATED

-31- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-M1vllvI (PJWx)

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#:1157

64. If loan distress worsens as time passes, the loan moves through a

series of reporting categories for the loan and its related allowance for credit

losses. A distressed loan progresses from: (i) past due under 30-59 days; to

(ii) past due 60-89 days; to (iii) past due 90 or more; to (iv) non-performing and

non-accrual status (i.e., in default). At this point, interest income is no longer

recognized and the last 90 days of interest is reversed. With most problem loans,

distress intensifies, and, typically around six months past due, the loan is either

(i) restructured; (ii) foreclosed on and repossessed (becoming "OREO," or other

real estate owned); and/or (iii) written off, each one of which require an earnings

charge to reflect a loss in loan principal value. Troubled loans should be strictly

reported in different "buckets," depending on where in the

default/foreclosure/write-off timeline the loan falls. See, e.g., SEC Industry Guide

3, Statistical Disclosure by Bank Holding Companies, Item 111• 9

65. Contrary to these requirements, during the Class Period, CVB

provided its investors with inaccurate (understated) figures for the Bank's

delinquent and non-performing loans. A chronological review of the Bank's largest

borrowing relationship in particular reveals CVB's failure to comply with a host of

GAAP and SEC accounting and disclosure requirements.

66. CVB failed to account for the Garrett loans as a troubled debt

restructuring, beginning in third quarter 2008 and continuing throughout all

The SEC amended Guide 3 with Financial Reporting Release No. 13, adding a new disclosure section, Risk Elements, which states: "A significant change in the amended guidelines for disclosure of nonaccrual, past due and restructured loans is the exclusion of certain instructions present in the current Guide which allowed for the use of different criteria, and permitted exclusion of certain loans. This change has the effect of enhancing comparability of disclosures among registrants. Users of this information, particularly financial statement analysts, have stressed the importance of comparability in this area." See FRR.T.40 1 .08a, Risk Elements Involved in Lending Activities.


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#:1158

I subsequent reporting periods until third quarter 2010, when CVB finally admitted

problems with Garrett. The resulting accounting errors and disclosure violations

caused CVB's financial statements to be materially misstated throughout the Class

I Period.

3. Defendants Failed To Record Timely Loan Loss Provisions As Losses Were Incurred

67. Under GAAP, accounting for losses on lending activities are governed

by ASC 450, Contingencies, and ASC 310, Receivables, and related literature.

68. A loss contingency is an existing condition, situation, or set of

circumstances involving uncertainty as to possible loss. FASB ASC, Master

Glossary. "The assets of an enterprise may include receivables that arose from

credit sales, loans, or other transactions. The conditions under which receivables

exist usually involve some degree of uncertainty about their collectibility, in which

case a contingency exists." See ASC 310-10-35-7, Losses From Uncollectible

Receivables. GAAP requires that estimated losses from loss contingencies be

accrued by a charge against income when a loss is both probable and reasonably

estimable. ASC 450-20-25-2. Loans are explicitly subject to ASC 450. Id.

69. For public companies like CVB, among the most important related

literature is FRR.T.40 1.09, Accounting for Loan Losses by Registrants Engaged in

Lending Activities, as set forth in SEC Financial Reporting Release No. 28 ("FRR

28"), Accounting for Loan Losses by Registrants Engaged in Lending Activities.

FRR 28 goes well beyond the GA-AP literature, prescribing a detailed and

systematic reserve-setting methodology, along with policies and procedures with

which SEC registrants must comply when assessing and recording expected loan

losses.

70. CVB failed to comply with the GAAP requirements set out above.

For example, CVB failed to record timely loan loss provisions when losses were

probable and reasonably estimable. Indeed, Defendants were aware that CVB's FIRST AMENDED CONSOLIDATED

-33- CLASS ACTION COMPLAINT Case No. IO-cv-06256-MIVIJVI (PJWx)

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1 largest borrower, Garrett, was on the verge of bankruptcy no later than September

2 2008. In fact, multiple confidential witnesses confirm that Defendants were aware

3 that Garrett was "in a perilous financial condition," had met with Myers and other

4 top CVB executives in or around September 2008, and needed additional funds to

5 get current on prior loans and to carry on its operations. Given that Garrett was

6 already behind on loans to CVB and needed additional loans just to survive, losses

7 on Garret's loans were "both probable and reasonably estimable."

8

71. Likewise, CVB failed to accrue a charge against income in March

jI 2009, when CVB was forced to restructure the largest Garrett loan, and in January

10 2010, when Garrett again explicitly threatened Defendants that it would file for

11 bankruptcy unless CVB extended additional credit or modified key loan terms.

12

72. By third quarter 2010, CVB could no longer conceal that Garrett was

13 in dire financial straits and its loans were impaired. Because CVB had not taken

14 sufficient Garrett loss provisions in prior periods, however, and because much of

15 the reported allowance for credit losses was needed for prior losses that had not

16 been written off, CVB 's allowance at the time was insufficient to both write off a

17 portion of Garrett and still appear credible and sufficient to account for future

18 expected losses. Thus, in third quarter 2010, CVB had to record an additional

19 provision to set up an allowance for Garrett so the Bank could write off a portion

20 of Garrett in the same period. CVB knew investors would require an explanation

21 and issued its September 10, 2010 press release.

22

73. CVB also failed to record in a timely manner loan loss provisions

23 during the Class Period despite the fact that an increasing number of loans faced

24 delinquency. Indeed, at least eight confidential witnesses corroborate that

25 Defendants knew no later than the beginning of 2009, but failed to disclose, that an

26 increasing number of the Bank's loans were facing delinquency. Rather than

27 comply with GAAP and timely record the increasing number of losses, CVB hid


-34- CLASS ACTION COMPLAINT Case No. lO-cv-06256-MIVIM (PJWx)

Case 2:10-cv-06256-MMM -PJW


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from the investing public the true state of its loan portfolio and, in fact, slowed its

write-offs of bad loans during the Class Period.

74. Moreover, in calculating CVB's loan losses, Defendants were required

to consider the declining value of the collateral underlying its loans. FASB

Emerging Issues Task Force, in EITF Topic No. D-80, states: "An institution

should ensure that an appraisal of collateral reflects a realistic estimate of fair

value, which takes into consideration the time it will take the institution to realize

the value of the collateral and current market conditions for selling the

collateral." CVB's management should have reviewed nonperforming loans prior

to foreclosure and evaluated the current market values of the underlying collateral

to arrive at estimated impairment losses.

75. Rather than comply with GAAP and disclose the true nature of the

value of the collateral underlying its loans, Defendants used overvalued properties

as collateral for CVB's loans. This enabled Defendants to conceal that the market

value of the collateral held by CVB had deteriorated and was well below the value

used when CVB originated the loan. For example, confidential witnesses and

public sources confirm that CVB overvalued a property that served as collateral for

some of CVB's loans to Garrett, the Empire Corporate Center in Ontario,

California, by millions of dollars during the Class Period.

76. Given that values of the collateral underlying CVB's non-performing

loans were dropping rapidly, market conditions required that Defendants record

additional loan loss provisions to reflect the increasing default loss risks.

Defendants, however, failed to timely and sufficiently adjust CVB's ALLL

Reserves or reassess the value of the Bank's collateral assets.

4. Defendants' Failure To Write Off Loan Losses As They Occurred Inflated CVB 's Understated Reserves

77. Loans that become uncollectible or worthless must be written off

(removed, "derecognized") from reported loans, along with related reserves. See


Case No. 10-cv-06256-MMM (PJWx)


ASC 310-40-40, Receivables - Troubled Debt Restructurings by Creditors -

Derecognition. When estimated loan losses are properly recorded, the effect on

income of derecognizing loans is negligible. When loans are properly

derecognized, the remaining reserve balance is an accurate reflection of reserves

available for losses on loans not yet deemed uncollectible or derecognized.

78. During the Class Period, however, Defendants failed to derecognize

(write off) loan losses when required. CVB failed to write off loan losses to inflate

its true loan loss reserve balance, and to provide the illusion that its reserves were

much stronger than they actually were. CVB's practice of not writing off loan

losses grossly distorted its reported loan loss reserves, because the misstatement

rate on CVB's reserves was roughly 40 times the misstatement rate on gross loans.

Consequently, throughout the Class Period, CVB's reported allowance for credit

losses was materially greater than the amount reportable under GAAP and SEC

rules. Thus, for reporting purposes, CVB inflated its understated allowance.

5. CVB's Omitted Financial Statement Disclosures In Violation Of GAAP

79. To help conceal their financial statement fraud, Defendants violated

numerous SEC and GAAP disclosure requirements by making false and misleading

disclosures and omitting to make required disclosures in the Bank's financial

statements, footnotes, and MD&A. 10 According to SEC rules and GAAP, such

disclosures were necessary to prevent CVB's financial statements from being

misleading. See, e.g., SEC Regulation S-K, Item 303 and Accounting Principles

Bulletin Opinion No. 22, Disclosure ofAccounting Policies.

10 "The term 'financial statements' as used in this part shall be deemed to include all notes to the statements and all related schedules." See SEC Regulation S-X, Article 1, Rule 1-01(b), Application of Regulation S-X



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80. Even if CVB had not materially overstated its income, earnings per

2 share, stockholders' equity, and loan values, its financial statements still would

3 have been false and misleading as a result of the omissions set forth below. These

4 omissions included the following specific disclosures required by the SEC:

5 Concentration Of Credit Risk

6

81. CVB failed to comply with the requirements that it present detailed

7 information about CVB's material loss exposure specific to Garrett, including

8 disclosures of loan provisions, allowances, restructuring, and write-offs,

9 throughout 2008, 2009, and 2010. See SEC Regulation S-X, Rule 9-03, ¶7(a)(7),

10 Assets.

11 Risk Elements Involved In Lending Activities

12

82. CVB failed to comply with SEC Financial Reporting Release No. 13,

13 which required it to disclose details about lending risks. See FRR.T.40 1, Banks

14 and Bank Holding Companies, § 401.08, Risk Elements Involved in Lending

15 Activities. Furthermore, according to GAAP, an "entity shall disclose all

16 significant concentrations of credit risk arising from all financial instruments,

17 whether from an individual counterparty or groups of counterparties." See ASC

18 825-10-50-20, Concentrations of Credit Risk ofAll Financial Instruments. CVB's

19 omitted disclosures include the $85 million maximum loss on the Garrett

20 relationship and a description of Garrett's collateral. Id. 825-10-50-21. CVB

21 failed to make the required disclosures about its concentration of risk associated

22 with Garrett.

23 Management's Discussion And Analysis

24

83. CVB failed to comply with SEC Regulation S-K, Item 303(a)(3),

25 Management Discussion and Analysis of Financial Condition and Results of

26 Operations, which required disclosure of any unusual or infrequent transactions

27 that materially affected CVB's income from continuing operations. Regulation

28 S-K, Item 303(b), Interim Periods, also required registrants to include a FIRST AMENDED CONSOLIDATED

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ii I management's discussion and analysis in all interim period financial statements

2 filed with the SEC, "so as to enable the reader to assess material changes in

3 financial condition and results of operations" for the most recent quarter and

4 year-to-date periods for both the current and prior year. (Emphasis added). This

5 required CVB to discuss Garrett's financial status in each reporting period.

I Accordingly, CVB failed to comply with GAAP and SEC Regulation S-K

7 1 I throughout the Class Period because CVB failed to disclose changes in Garrett loss

8 estimates and their impact on CVB's financial statements.

9 Critical Accounting Estimates -

10

84. SEC Release 33-8040, Cautionary Advice Regarding Disclosure

11 about Critical Accounting Policies (codified as FRR.T.501.14), instructs registrants

12 to comply with Regulation S-K, Item 303(a), Management's Discussion and

13 Analysis of Financial Condition and Results of Operations. When estimates are

14 susceptible to material change, the company must discuss not just the possibility

15 that its estimates may turn out differently, but also (i) the factors that may cause

16 different outcomes, and (ii) the potential amount of variability in its significant

17 estimates: "Companies should provide quantitative as well as qualitative

18 disclosure when quantitative information is reasonably available and will provide

19 material information for investors." See SEC Release 33-8350. With respect to the

20 Garrett loans, throughout the Class Period, CVB was in violation of SEC

21 Regulation S-K, Item 303(a).

22

85. CVB also failed to disclose to its investors the fact that its loan loss

23 provisions were estimated using a method that was either heavily dependent on

24 favorable historical periods with respect to the actual losses, not readily adaptive to

25 changing circumstances, or both. During the Class Period, CVB failed to update

26 its reserves or reserve setting methodologies based on changes in market

27 conditions that had taken place throughout 2007 and 2008. CVB should have told

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#:1164

I downturn was temporary and would reverse, and that the effect on its financial

I statements would be severe if the market downturn failed to reverse.

6. Following Commencement Of The SEC Investigation, CVB Has Now Changed Its Disclosure Practices

86. After the Class Period, and faced with the continuing SEC

investigation, on March 1, 2011, the Bank effectively admitted in its 2010 Form

10-K that its prior disclosures about its loan portfolios and delinquent and non-

performing loans were improper and deficient. In its 2010 Form 10-K, CVB

provided, for the first time, certain loan details alleged herein to be required

disclosures throughout the Class Period. Information that CVB provided for the

first time in its 2010 Form 10-K included:

Combined information about the Bank's real estate loans as a whole,

including nine categories of real estate underlying the loans and other

information not previously provided.

A new disclosure that included a "rollforward" of the allowance for

credit losses for each individual portfolio. A rollforward is an activity

statement that shows beginning and ending balances and all components of

change that took place during the period. The table was called "Allowance

for Credit Losses and Recorded Investment in Financing Receivables" and

reflected all eight loan portfolios, with individual provisions, charge-offs,

recoveries, and the beginning and ending allowance for credit losses for each

portfolio. Previously, the Bank had reported the roliforward information in a

single table, with just one beginning and ending balance.

A table called "Non-Covered Impaired Loans" showing, for each of

the eight loan portfolios, the original loan amount, the unpaid loan balance,

the allowance, and the average recorded investment. This information was

split between two groups - loans with no related allowance recorded and

loans with a related allowance recorded. During the Class Period, this FIRST AMENDED CONSOLIDATED


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information was not only omitted at the portfolio level, it was not provided

2

at all.

3

A new TABLE 6, "Non-Performing Assets, Non-Covered," which

4 properly combined all non-accrual loans, restructured loans and other real

5 estate owned ("OREO") assets in a single table.

6

A new TABLE 8, "Summary of Credit Loss Experience," which

7 provided the provisions, charge-offs and recoveries for each loan portfolio.

8

CVB had not previously presented this critical information in the proper

9

format, or with the required information.

10

A new TABLE 9, "Allocation of Allowance for Credit Losses,"

11 showing all eight loan portfolios, their beginning and ending individual

12 allowances for credit losses, and the percentage of the total which each

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portfolio comprised.

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• A table entitled "Non-Covered Past Due and Non-Accrual Loans,"

15 showing five "buckets" of payment status for all loans. Previously, the Bank

16 provided only three categories for payment status. The loans were grouped

17

into ten categories, and the table included important information not

18 provided previously, such as "Construction - Speculative," and

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"Construction - Non-Speculative."

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• "Credit Quality Indicators," which included "Credit Risk Profile by

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Internally Assigned Grade." CVB showed the same ten categories as "Non-

22

Covered Past Due and Non-Accrual Loans," and the amount of loans labeled

23

"Pass," "Watch List," "Special Mention," "Substandard," or "Doubtful" for

24 each of the ten. During the Class Period, this information was not only

25 omitted at the portfolio level, it was not provided at all.

26

27


-40- CLASS ACTION COMPLAINT Case No. 10-cv-06256-MMIVI (PJWx)



1 VI. DEFENDANTS' MATERIALLY FALSE AND MISLEADING STATEMENTS AND

2

OMISSIONS DURING THE CLASS PERIOD

3

87. Defendants' false and misleading material statements and omissions

4 during the Class Period, which are alleged below chronologically, fit into four

5 categories: 1) misrepresentations regarding the status of CVB's loan portfolio,

6 particularly the Garrett loans, characterizing them as "current" and "performing,"

7 when they were not; 2) misrepresentations regarding CVB's "credit" and "loan

8 underwriting culture" as "strong," that "C'VB's credit metrics are superior" to its

9 peers and that its "underwriting integrity remains paramount" when CVB was

10 engaging in deceptive conduct to present troubled loans and lending practices as

11 healthy; 3) misrepresentations that the real estate market was a "risk factor" that

12 "could" affect the ability of loan customers to remain current on their obligations,

13 when, in fact, the risk had already materialized; and 4) a myriad of GAAP

14 violations that rendered CVB's financial statements materially misstated

15 throughout the Class Period.

16

Third Quarter 2009 Statements

17

On the first day of the Class Period, October 21, 2009, the Bank

proclaimed "Record Results for Third Quarter 2009." (Emphasis in original.) In a

press release, the Bank stated it reported net income of $19.3 million for the third

20 quarter of 2009, the highest quarterly net income in the history of the Bank. The

21 Bank (and in particular, its CEO, Defendant Myers) assured investors that "/t/he

22 overall credit quality of the loan portfolio is sound."

23

89. Reasons Why False and Misleading: The above statement was false

24 and misleading because Defendants knew at that time, or recklessly disregarded,

25 that the "overall credit quality" of CVB's loan portfolio was not "sound." In fact,

26 Defendants extended loan due dates, used loan proceeds to keep other loans

27 current, refinanced or restructured payment terms, extended additional credit or

28 increased credit limits to make certain borrowers appear "current" even though the FIRST AMENDED CONSOLIDATED



ii I borrowers were unable to pay their loans according to the original terms. For

2-1 I example:

3

• At least four confidential witnesses, as well as multiple property title

4 searches, corroborate Defendants' secret "extend and pretend"

5 practices described in detail above, including providing additional

6 capital to borrowers to bring prior loans current and extending loan

7

due dates. Among other things, these practices made the loans appear

8 current, gave the appearance of low delinquencies, and avoided

9

increased reserve requirements and reduced profits.

10 • CW9, Garrett's COO at the time, confirms that Defendants were

11 aware that Garrett was already "in a perilous financial condition" in

12

or around September 2008 and that Garrett had met with Defendant

13

Myers and other top CVB executives at that time and demanded

14 additional funds to get current on prior loans and to carry on its

15 operations. According to CW9, Garrett informed CVB that it needed

16

the additional funds to meet its ongoing obligations, which CW9 said

17 were mostly to CVB.

18

• According to CW9, CVB advanced Garrett additional funds in or

19

around September 2008, and Garrett used the funds to get current on

20 existing loans from CVB. CW9 also stated that Garrett had many

21

loans outstanding and that when a loan closed, some of the proceeds

22 were used to make other loans current. According to CW9, "CVB

23 was trying to keep the house of cards standing."

24

• Deed records corroborate that, at least as early as 2008, Defendants

25

kept Garrett's loans "current" only by virtue of CVB extending

26 additional lines of credit or new loans.

27

• According to CW4, when Vintage Dairy did not make payments on its

28

loan, CVB extended Vintage Dairy's credit line so that payments FIRST AMENDED CONSOLIDATED



#:1168

1 could be made until its credit line maxed out, and then moved money

2

from a related entity's credit line to make payments and keep the

3

account looking current.

4 . Defendants overvalued properties serving as collateral for CVB's

5

loans, allowing Defendants to conceal the true market value of the

6 collateral held by CVB. For example, confidential witnesses and

7 public sources confirm that CVB overvalued a property that served as

8 collateral for some of CVB's loans to Garrett, the Empire Corporate

9

Center in Ontario, by millions of dollars during the Class Period.

10

These practices are inconsistent with a purportedly "sound" loan

11 portfolio and are contrary to statements in its regular periodic filings

12 with the SEC that CVB "strive[s] to have a maximum loan-to-value

13

ratio of 65-75%."

14

90. The Bank's November 5, 2009 Form 10-Q repeated the Bank's

15 purported record results. It stated, "[W]e are not aware of any other loans as of

16 September 30, 2009 for which known credit problems of the borrower would

17 cause serious doubts as to the ability of such borrowers to comply with their loan

18 repayment terms, or any known events that would result in the loan being

19 designated as non-performing at some future date."

20


21 and misleading because Defendants knew at that time, or recklessly disregarded,

22 and failed to disclose "known credit problems" with many of CVB's loans,

23 including those of its largest borrower, Garrett, that "cause[d] serious doubts about

24 the ability of those borrowers to comply with their loan repayment terms." The

25 above statement is also false and misleading because Defendants were aware of at

26 that time, but failed to disclose, "known events that would result in the loan being

27 designated as non-performing at some future date," such as the very real possibility

28 that Garrett would file for bankruptcy or otherwise default. For example: FIRST AMENDED CONSOLIDATED

-43- CLASS ACTION COMPLAINT Case No. 10-cv-06256-MM1VI (PJWx)


1

• At least two confidential witnesses confirm that Defendants were

2 aware that CVB's largest borrower, Garrett, was "in a perilous

3

financial condition" and that Garrett had met with Myers and other

4

top CVB executives in or. around September 2008 and needed


6 operations. Given that Garrett was already behind on loans to CVB

7 and needed additional loans just to survive, at a minimum there were

8

"serious doubts" as to Garrett's ability to comply with the terms of its

9

debts to CVB.

10 • According to CW4, Vintage Dairy did not make payments on its loan

11 and CVB extended Vintage Dairy's line of credit to make payments

12 on the loan until its line of credit was maxed out. CVB then

13

borrowed money from a related entity's credit line to make payments

14 and keep the account looking current.

15

92. The Bank's third quarter 2009 Form 10-Q also included a purported

16 "risk factor" that continuing deterioration in the real estate market "could" affect

17 the ability of loan customers, including the Bank's largest borrowing relationships,

18 to service their debt, which "could" result in loan charge-offs and provisions for

19 credit losses "in the future."

20


21 and misleading because Defendants knew, or recklessly disregarded, that

22 continuing deterioration in the real estate market had already affected the ability of

23 loan customers, including its largest borrowing relationship, Garrett, to service

24 their debt. In other words, Defendants failed to disclose that the purported "risk"

25 had already come to fruition. For example:

26

• At least eight confidential witnesses corroborate that Defendants knew

27

by this time, but failed to disclose, that an increasing number of the

28

Bank's loans were facing delinquency. FIRST AMENDED CONSOLIDATED

-44- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MIIVIM (PJWx)


1 . At least eight confidential witnesses confirm that it was evident

2

internally at the Bank by this time that the loans to its largest

3

borrowing relationship, Garrett, were troubled.

4

94. The Form 10-Q also represented that it was "prepared in accordance

5 I with the rules and regulations of the Securities and Exchange Commission for

6 I Form 10-Q and conform to practices within the banking industry and include all

7 the information and disclosures required by accounting principles generally

8 accepted in the United States ofAmerica for interim financial reporting."

9

95. Reasons Why False and Misleading: For the reasons discussed

10 above in Section V.C, this statement was false and misleading because the Form

11 10-Q was not prepared in accordance with SEC rules and regulations, did not

12 conform to practices within the banking industry and did not include all the

13 information and disclosures required by GAAP. Rather, among other things, CVB

14 misrepresented its loan loss experience, loan loss reserves, and its restructured,

15 past due, non-performing and nonaccrual loans by loan type in order to conceal its

16 fraud; failed to accurately report its past due, restructured and non-performing

17 assets and its realized losses; failed to record timely loan loss provisions as losses

18 were incurred; and failed to make required disclosures in the Bank's financial

19 statements, footnotes, and MD&A.

20

96. Defendants Myers and Biebrich signed certifications that were

21 included in the Bank's third quarter 2009 Form 10-Q. These certifications

22 represented, among other things, that: (a) the Form 10-Q fairly represented CVB's

23 financial condition; (b) the Form 10-Q did not contain "any untrue statement of a

24 material fact or omit to state a material fact necessary to make the statements

25 made, in light of the circumstances under which such statements were made, not

26 misleading"; (c) the financial statements and other financial information included

27 with the Form 10-Q, fairly presented in all material respects CVB's financial

28 condition, results of operations and cash flows; and (d) the Form 10-Q was FIRST AMENDED CONSOLIDATED

-45- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MIMIVI (PJWx)



ii prepared in accordance with GAAP. Defendants Myers and Biebrich also signed

2 certifications pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of

3 the Sarbanes-Oxley Act of 2002, stating that the information in the Form 10-Q

4 fairly presents, in all material respects, the financial condition and results of

5 operations of the Bank.

6

97. Reasons Why False and Misleading: The representations in these

7 certifications were false and misleading because the Form 10-Q did not fairly

8 represent CVB's financial condition and because it omitted material facts

9 necessary to make the statements made not misleading. In addition to the reasons

10 put forward in Paragraph 89, and as detailed above in Section V.C, the Bank's

11 failure to report adequate loan loss provisions (expenses), failure to properly

12 account for non-performing and restructured loans, and failure to properly account

13 for losses in the market value of its collateral materially overstated CVB's income,

14 manipulated its insufficient allowance for credit losses (reserves), and inflated

15 CVB's loan values and stockholders' equity.

16

98. Analysts and investors reacted to the positive news. The day after the

17 third quarter 2009 earnings release, October 22, 2009, CVB 's stock closed up, on

18 heavy trading volume, from $7.86 per share to $8.81 per share. And analysts, such

19 as B. Riley & Co., reported that "[a]sset quality at CVBF remains very strong

20 relative to other banks operating in southern California."

21

B. November And December 2009 Presentations

22

99. During a November 9, 2009 investor presentation, Defendants

23 I repeated the Bank's "record" financial results. They further stressed that the

24 Bank's purported "strong credit culture and underwriting integrity remain

25 paramount at CVB," that "geographic diversification, a focus on relationship

26 banking, and a strong credit culture have allowed CVB to mitigate loan losses

27 through this economic downturn," that on a peer comparison basis "CVB's credit


-46- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MIN4M (PJWx)


#:1172

1 I metrics are superior," and that "CVB 's strong loan underwriting culture has

2 I limited its exposure to problem credits."

3

100. Reasons Why False and Misleading: The above statements were

4 false and misleading because CVB did not have a "strong" credit culture and its

5 "credit culture and underwriting integrity" were not "paramount." The above

6 statement was also false and misleading because CVB's "credit culture" did not

7 allow CVB to "mitigate loan losses through this economic downturn." The above

8 statements were also false and misleading because CVB's credit metrics where not

9 "superior" to its peers and CVB did not have a "strong underwriting culture" that

10 "limited its exposure to problem credits." In addition to all the reasons set forth

11 above in Paragraph 89, including CVB's repeated, secret modifications to troubled

12 loans, such as when CVB modified Garrett's loans in or around September 2008

13 after Garrett threatened bankruptcy, and CVB's failure to disclose impairment in

14 those loans:

15 • Defendants did not "mitigate loan losses" nor did they "limit[]

16

[CVB's] exposure to problem credits," but rather hid problem loans

17

from investors by extending loan due dates, using loan proceeds to

18

keep other loans current, refinancing or restructuring payment terms,

19 extending additional credit or increasing credit limits to make certain

20

borrowers appear "current" even though they were unable to pay their

21

loans according to the original terms.

22 • The credit and underwriting cultures at CVB were weak because

23

Defendants used overvalued properties as collateral for CVB's loans,

24 allowing them to conceal that the market value of the collateral held

25

by CVB was well below that of the corresponding loan.

26

101. Shortly thereafter, during a December 2, 2009 private analyst

27 presentation, in response to questions specifically concerning the Garrett loans,

28 Defendant Myers stressed that "its a fully performing asset in all respects," "we FIRST AMENDED CONSOLIDATED

-47- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MIVIIVI (PJWx)


1 don't have specific reserves against that," and that "[ljhey are paying everything.

2 It's performing as agreed." (Emphasis added.)

3


4 and misleading because Garrett's loans were not "fully performing in all respects"

5 and Garrett was not "paying everything" and the loans were not "performing as

ii I agreed." In fact:

7

• According to CW9, Garrett's COO at the time, Defendant Myers

8

knew Garrett was in a "perilous financial condition" as of the summer

9 of 2008, when Garrett executives met with Defendants Myers and

10

James Dowd of CVB and asked for additional funding. According to

11

CW9, Garrett informed CVB that it needed the additional funds just to

12 meet its ongoing obligations, which CW9 said were mostly to CVB.

13

According to CW9, CYB advanced Garrett additional funds in or

14 around September 2008, and Garrett used the funds to get current on

15 existing loans from C\TB. CW9 also stated that Garrett had many

16

loans outstanding and that when a loan closed, some of the proceeds

17 were used to make other loans current. According to CW9, "CVB

18

was trying to keep the house of cards standing."

19 • Deed records corroborate that, at least as early as 2008, Defendants

20

kept Garrett's loans appearing "current" only by virtue of CVB

21

extending additional lines of credit or new loans.

22 • At least two confidential witnesses confirm that Defendants were

23 aware that CVB's largest borrower, Garrett, was "in a perilous

24

financial condition" and that Garrett had met with Myers and other

25

top CVB executives in or around September 2008 and needed


27

operations.



ase 2:10-cv-06256-MMM -PJW


1 . At least eight confidential witnesses confirm that it was evident

2

internally at the Bank by this time that the loans to its largest

3

borrowing relationship, Garrett, were troubled.

4 . CW9 confirmed that Garrett's financial condition continued to

5

deteriorate throughout 2009.

6

103. Defendant Myers further explained that, of the five largest banks

7 headquartered in the region, four had disappeared and "we are the last man

8 standing," adding that CVB avoided trouble with loans faced by its peers. Myers

9 claimed that, with respect to credit quality, "we clearly are superior to most of our

10 competition."

11

104. Reasons Why False and Misleading: For the reasons set forth in

12 Paragraphs 100 and 102, including CVB's repeated, secret modifications to non-

13 performing loans, such as when CVB restructured Garrett's loans in or around

14 September 2008 after Garrett threatened bankruptcy, and CVB's failure to disclose

15 impairment in those loans, the above statement was false and misleading because

16 CVB's credit quality was not "clearly . . . superior." Indeed, because of CVB's

17 fraudulent accounting practices, it was not possible to compare CVB's credit

18 quality with its competitors, and Myers' claim to having done so here was false and

19 misleading. Defendant Myers also concealed from investors that the quality of

201 CVB's credit had deteriorated.

21

105. As further support for his statement that the Bank was not facing the

22 same loan loss problems as its peers, CEO Defendant Myers explained during the

23 presentation that, while ten buildings on the avenue where CVB is headquartered

24 each had a 75% vacancy rate, the Bank had "zero loans against those ten

25 buildings."

26


27 and misleading because the Bank did have a loan against a building on the avenue

28 where CVB is headquartered. In fact, directly contrary to Defendant Myers' FIRST AMENDED CONSOLIDATED



#:1175

1 I statement, the Bank had an interest in an office building on its street which partly

2 secured a $16 million promissory note issued by CVB and which served as

3 collateral for a $16.575 million revolving credit line that CVB had extended to

4 I Garrett in March 2008.

5

C. Fourth Quarter 2009 Statements

6

107. On January 21, 2010, CVB announced its fiscal year 2009 results,

7 I including "record net interest income." CEO Defendant Myers commented, "This

8 represents the highest net interest income in the history of the Company,

9 demonstrating our ability to continue to grow top-line income."

10

108. CVB reported the purported record results in its Form 10-K filed with

11 the SEC on March 4, 2010. The Bank's Form 10-K disclosed as a purported "risk

12 factor" that the Bank "may be required to make additional provisions for credit

13 losses and charge off additional loans in the future," and that the continuing

14 deterioration of the commercial real estate market "could" affect the ability of the

15 Bank's borrowers, including its largest borrowing relationships, to service their

16 debt, which "could" result in loan charge-offs and provisions for credit losses "in

17 the future," and declining real estate values "could be significantly reduced."

18

109. Reasons Why False and Misleading: For the reasons set forth in

19 Paragraph 93, the above statement was false and misleading because Defendants

20 knew, or recklessly disregarded, that continuing deterioration in the real estate

21 market was no longer a "risk factor" that "could" result in loan "charge-offs" and

22 provision for credit losses "in the future"; rather, the real estate market had already

23 affected the ability of loan customers, including its largest borrowing

24 relationship, Garrett, to service their debt, and CVB violated GAAP when it failed

25 "to make additional provisions for credit losses and charge off additional loans."

26 Among other things, Paul Garrett and the executive staff at Garrett met with Myers

27 and other executives of CVB in January 2010 and told them that CVB needed to

28 work something out with Garrett or Garrett would file for bankruptcy. In addition, FIRST AMENDED CONSOLIDATED



#:1176

1 Defendants failed to disclose that the Bank kept Garrett "current" at year end 2009

2 by extending Garrett a $38 million "refinance" on December 29, 2009, just two

3 days before year end. In other words, Defendants failed to disclose that the

4 purported "risk" had already come to fruition.

5

110. The Form lO-K represented that it was prepared "in accordance with

6 accounting principles generally accepted in the United States of America" and

7 that it "conform[sJ to practices within the banking industry."

8


9 above in Section VC, this statement was false and misleading because the Form

10 10-K was not prepared in accordance with GAAP and did not conform to practices

11 within the banking industry. Rather, CVB misrepresented its loan loss experience,

12 loan loss reserves, and its restructured, past due, non-performing and nonaccrual

13 loans by loan type in order to conceal its fraud; failed to accurately report its past

14 due, restructured and non-performing assets and its realized losses; failed to record

15 timely loan loss provisions as losses were incurred; and failed to make required

16 disclosures in the Bank's financial statements, footnotes, and MD&A.

17

112. The Form 10-K also stated: "[W]e are not aware of any other loans

UI as of December 31, 2009 for which known credit problems of the borrower would

19 cause serious doubts as to the ability of such borrowers to comply with their loan

20 repayment terms, or any known events that would result in the loan being

21 designated as non-performing at some future date." Defendant Biebrich and

22 Defendant Myers repeated their Sarbanes-Oxley certifications, and further signed

23 certifications pursuant to Section 111(b) of the Emergency Economic Stabilization

24 Act of 2008 as Amended, in light of CVB's receipt of TARP funds.

25

113. Reasons Why False and Misleading: For the reasons stated above in

Paragraph 91, the above statements were false and misleading because Defendants

27 knew at that time, or recklessly disregarded, and failed to disclose "known credit

problems" with many of CVB's loans, including those to its largest borrower, FIRST AMENDED CONSOLIDATED



#: 1177 ID

1 Garrett, that "cause[d] serious doubts about the ability of those borrowers to

2 comply with their loan repayment terms." The above statement is also false and

3 misleading because Defendants were aware of at that time, but failed to disclose,

4 "known events that would result in the loan being designated as non-performing at

5 some future date," such as the very real possibility that Garrett would file for

6 bankruptcy or otherwise default. Moreover, Defendants kept Garrett "current" at

7 year end 2009 by extending Garrett a $38 million "refinance" on December 29,

8 2009, just two days before year end.

9

114. The representations in the certifications were false and misleading

10 because the Form 10-K did not fairly represent CVB's financial condition and

11 because it omitted material facts necessary to make the statements made not

12 misleading. In addition to the reasons put forward in Paragraphs 89 and 102, as

13 detailed in Section V:

14 . Defendants failed to disclose that the Bank kept Garrett "current" at

15 year end 2009 by extending Garrett a $38 million "refinance" on

16

December 29, 2009, just two days before year end. Additionally,

17

Paul Garrett and the executive staff at Garrett met with Myers and

18 other executives of C\TB in January 2010 and told them that CVB

19 needed to work something out with Garrett or Garrett would file for

20

bankruptcy.

21 . Defendants also failed to disclose in the Form 10-K that $28.3 million

22 of the 2009 provision for credit losses was for Dairy, Livestock and

23

Agribusiness loans, constituting 35% of CVB's total provision for

24 credit losses of $80.5 million during the year ended 2009.

25

. Defendants also failed to disclose that $31 million of the Bank's

26

December 31, 2009 allowance for credit losses was for Dairy,

27

Livestock and Agribusiness loans, constituting almost 30% of the

28

total allowance for credit losses of $109 million as of December 31, FIRST AMENDED CONSOLIDATED

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• , Case 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 56 of 96 Page ID

#:1178

2009 . 11 This information about the troubled loans in the Dairy sector

was ultimately disclosed in the Bank's 2010 Form 10-K filed with the

SEC March 1, 2011, without explanation for why it had not

previously been timely disclosed.

• The numbers that Defendants reported in CVB's 2009 Form 10-K for

restructured loans were nearly $20 million lower than the numbers

Defendants reported to the FDIC for the same time period as stated in

the FDIC Uniform Bank Performance Report, as set forth below:

CVB Financial - Restructured Loans Reported as of December 31, 2009

Reported Reported

$ in thousands, rounded in Form to FDIC Discrepancy 10-K

Restructured loans - past due $ 2,500 $16,337 $13,837 Restructured loans - current 1,017 6,977 5,960 Restructured loans - Total $ 3,517 $23,314 $19,797

115. Macquarie (USA) Equities Research ("Macquarie") reported on

January 25, 2010 that "management noted that the $84 million Garrett Group credit

is performing as expected."


and misleading because the $84 million Garrett Group credit was not "performing

as expected." In addition to the reasons set forth in Paragraph 102, Paul Garrett

and the executive staff at Garrett met with Myers and other executives of CVB in

The provision is an income statement item - an expense - so it accumulates over a period of time. The provision for all of 2009 was $80.5 million. The allowance is a balance sheet item - a reserve - so it is reported as of a date. The allowance for both the year and quarter ended December 31, 2009, are the same: $109 million.


Case No. lO-cv-06256-MMIVI (PJWx)

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1 January 2010 and told them that CVB needed to work something out with Garrett

2 or Garrett would file for bankruptcy. In addition, Defendants failed to disclose that

3 the Bank kept Garrett "current" at year end 2009 by extending Garrett a $38

4 million "refinance" on December 29, 2009, just two days before year end.

5

117. Analysts, news commentators and investors were impressed with

6 CVB's reported results. Indeed, following CVB's reportedly strong 2009 financial

7 results, Forbes magazine named CVB the Nation's sixth-best bank. Likewise,

8 thereafter in 2010, the Bank Director Magazine ranked CVB ninth due to purported

9 "profitability, capital adequacy and asset quality," and the ABA Banking Journal

10 ranked CVB twentieth in the Nation. The New York Times recognized in an

11 April 3, 2010 article entitled "At CVB Financial, Praise and Questions," that "[a]

12 quick look at the company's books shows why investors are captivated by CVB: it

13 isn't suffering from the loan-loss problems plaguing so many of its peers. The

14 trouble is, if Citizens' loans start to go south more quickly than they have until

15 now, its reserves are not that robust."

16

D. March 2010 Presentations

17

118. On March 2, 2010, CEO Defendant Myers discussed a Bank slide

UI presentation at the Sandier O'Neill West Coast Financial Services Conference.

19 CVB filed copies of the slides, attached to a Form 8-K filed with the SEC the same

20 day. The slides reveal that Defendant Myers again emphasized that "strong credit

21 culture and underwriting integrity remain paramount at CVB," that "geographic

22 diversification, a focus on relationship banking, and a strong credit culture have

23 allowed CVB to mitigate loan losses through this economic downturn," that

24 "CVB strong loan underwriting culture has limited its exposure to problem

25 credits," and that CVB's "strategic focus" included making "Capital and strong

26 Loan Loss Reserves . . . paramount," and "[sJtrong, disciplined credit

27 underwriting/credit culture." Defendants Myers and Biebrich repeated these false

28 and misleading statements in a conference call on March 16, 2010. FIRST AMENDED CONSOLIDATED

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2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 58 of 96 Page I I #:1180

1


2 false and misleading because CVB did not have a "strong" or "disciplined" credit

3 or underwriting culture and its "credit culture and underwriting integrity" and

4 "capital and strong loan loss reserves" were not "paramount." The above

5 statements were also false and misleading because CVB's "credit culture" did not

6 allow CVB to "mitigate loan losses through this economic downturn." The above

7 statements were also false and misleading because CVB did not have a "strong

8 loan underwriting culture" that "limited its exposure to problem credits." In

9 addition to all the reasons set forth above in Paragraph 100, including CVB's

10 repeated, secret modifications to non-performing loans, such as when CVB

11 restructured Garrett's loans in or around September 2008 after Garrett threatened

12 bankruptcy, and CVB's failure to disclose impairment in those loans:

13

In January 2010, Paul Garrett and the executive staff at Garrett met

14 with Myers and other executives of CVB and told them that CVB


16

bankruptcy.

17

. Defendants failed to disclose that the Bank kept Garrett "current" at

18

year end 2009 by extending Garrett a $38 million "refinance" on

19

December 29, 2009, just two days before year end.

20

B. First Quarter 2010 Statements

21

120. After the close of the market on April 21, 2010, CVB announced its

22 first quarter 2010 results, including "increased earnings" that beat consensus

23 estimates. CVB reported the purported increased earnings in its Form 10-Q filed

24 with the SEC on May 10, 2010.

25

121. The Form 10-Q stated, "[W]e are not aware of any other loans as of I

26 March 10, 2010 for which known credit problems of the borrower would cause

27 serious doubts as to the ability of such borrowers to comply with their loan

28 repayment terms, or any known events that would result in the loan being FIRST AMENDED CONSOLIDATED

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(

2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 59 of 96 Page ID #:1181

1 designated as non-performing at some future date." It also stated that "[t]here are

2 no material changes to the risk factors as previously disclosed" in CYB's Form

3 10-K for fiscal year 2009.

4

122. Reasons Why False and Misleading: For the reasons stated in

5 Paragraph 113, including CVB's repeated, secret modifications to non-performing

6 loans, such as when CVB restructured Garrett's loans in or around September 2008

7 after Garrett threatened bankruptcy, the above statements were false and

8 misleading because Defendants knew at that time, or recklessly disregarded, and

9 failed to disclose "known credit problems" with many of CVB's loans, including

10 those of its largest borrower, Garrett, that "cause[d] serious doubts about the ability

11 of those borrowers to comply with their loan repayment terms." The above

12 statement is also false and misleading because Defendants were aware of at that

13 time, but failed to disclose, "known events that would result in the loan being

14 designated as non-performing at some future date," such as the very real possibility

15 that Garrett would file for bankruptcy or otherwise default.

16

123. In fact, Defendants kept Garrett "current" at year end 2009 by

17 extending Garrett a $38 million "refinance" on December 29, 2009, just two days

18 before year end. Additionally, Paul Garrett and the executive staff at Garrett met

19 with Myers and other executives of CVB in January 2010 and told them that CVB

20 needed to work something out with Garrett or Garrett would file for bankruptcy.

21. 124. In addition, for the reasons set forth in Paragraph 109, the above

22 statements were false and misleading because Defendants knew, or recklessly

23 disregarded, that continuing deterioration in the real estate market was no longer a

24 "risk factor" that "could" result in loan "charge-offs" and provision for credit

25 losses "in the future"; rather, the real estate market had already affected the

26 ability of loan customers, including its largest borrowing relationship, Garrett, to

27 service their debt and CVB violated GAAP when it failed "to make additional

28 provisions for credit losses and charge off additional loans." In fact, Paul Garrett FIRST AMENDED CONSOLIDATED


d


and the executive staff at Garrett met with Myers and other executives of CVB in

January 2010 and told them that CVB needed to work something out with Garrett

or Garrett would file for bankruptcy. In addition, Defendants failed to disclose that

the Bank kept Garrett "current" at year end 2009 by extending Garrett a $38

million "refinance" on December 29, 2009, just two days before year end. In other

words, Defendants failed to disclose that the purported "risk" had already come to

fruition.

125. The Form 10-Q also represented that it was "prepared in accordance

with the rules and regulations of the Securities and Exchange Commission for

Form 10-Q and conform to practices within the banking industry and include all

the information and disclosures required by accounting principles generally

accepted in the United States of America for interim financial reporting."

Defendants Myers and Biebrich repeated their certifications with respect to the

Form 10-Q.


above in Section V.C, this statement was false and misleading because the Form

10-Q was not prepared in accordance with SEC rules and regulations, did not

conform to practices within the banking industry, and did not include all the

information and disclosures required by GAAP. Rather, CVB misrepresented its

loan loss experience, loan loss reserves, and its restructured, past due, non-

performing and nonaccrual loans by loan type in order to conceal its fraud; failed

to accurately report its past due, restructured and non-performing assets and its

realized losses; failed to record timely loan loss provisions as losses were incurred;

and failed to make required disclosures in the Bank's financial statements,

footnotes, and MD&A.

127. The numbers that Defendants reported in the Form 10-Q for

restructured loans as of December 31, 2009 were nearly $20 million lower than the



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1 I numbers Defendants reported to the FDIC for the same time period as stated in the

2 I FDIC Uniform Bank Performance Report, as set forth in Paragraph 114.

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128. For these reasons, and the reasons put forward in Paragraphs 114 and

4 124, as detailed in Section V.C, the representations in the certifications were also

5 false and misleading because the Form 10-Q did not fairly represent CVB 's

6 I financial condition and because it omitted material facts necessary to make the

7 I statements made not misleading.

8

129. Following the announcement, analysts praised the higher than

9 expected earnings and lower than expected loan loss provision. B. Riley & Co.

10 reported that "the primary drivers of the better-than-expected results" included "a

11 lower loan loss provision than projected." Rodman & Renshaw likewise noted that

12 "overall, credit quality appears to be manageable given the Company's capital

13 levels and coverage ratios and the economy's apparent tepid recovery." Likewise,

14 Credit Suisse reported that CVB "has had the lowest charge-off rate" "among

15 publicly traded California based banks for one reason: it is exceptionally

16 conservative." Keefe, Bruyette & Woods praised CVB as a "superior credit

17 underwriter" with a "low level of problem assets and the low charge-off ratios

18 recorded," and stated that "CVBF has demonstrated that underwriting standards

19 can differentiate banks." Rodman & Renshaw further (correctly) predicted that

20 "[w]e would expect the stock to react favorably to this quarter's release; however,

21 trading enthusiasm may be tempered by the recent run in CVBF's stock."

22

130. Indeed, following the positive earnings announcement, CVB's stock

23 traded with extremely high volume, up from a close of $10.76 on April 21, 2010, to

24 close at $11.13 on April 22, 2010.

25

F. May 2010 Presentation

26

131. On May 12, 2010, CEO Defendant Myers discussed a Bank slide

27 presentation at the Davidson Companies 12th Annual Financial Services

28 Conference. CVB filed copies of essentially the same slide presentation, attached FIRST AMENDED CONSOLIDATED

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2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 62 of 96 Page I D #:1184

to a Form 8-K filed with the SEC the same day. Myers again emphasized that

"strong credit culture and underwriting integrity remain paramount at CVB,"

"geographic diversification, a focus on relationship banking, and a strong credit

culture have allowed CVB to mitigate loan losses through this economic

downturn," that "CVB's strong loan underwriting culture has limited its

exposure to problem credits," and that CVB's "strategic focus" included making

"Capital and strong Loan Loss Reserves. . . paramount," and "strong, disciplined

credit underwriting/credit culture."


false and misleading because CVB did not have a "strong" or "disciplined" credit

or underwriting culture and its "credit culture and underwriting integrity" and

"capital and strong loan loss reserves" were not "paramount." The above

statements were also false and misleading because CVB's "credit culture" did not

allow CVB to "mitigate loan losses through this economic downturn." The above

statements were also false and misleading because CVB did not have a "strong

loan underwriting culture" that "limited its exposure to problem credits." In

addition to all the reasons set forth above in Paragraph 119:

• In January 2010, Paul Garrett and the executive staff at Garrett met

with Myers and other executives of CVB and told them that CVB

needed to work something out with Garrett or Garrett would file for

bankruptcy.

• Defendants failed to disclose that the Bank kept Garrett "current" at

year end 2009 by extending Garrett a $38 million "refinance" on


G

Second Quarter 2010 Statements

133 L After the close of the market on July 21, 2010, and on July 22, 2010,

CVB issued a press release and supplemental press release, respectively,

announcing "record earnings" for second quarter 2010. Specifically, the Bank FIRST AMENDED CONSOLIDATED

-59- CLASS ACTION COMPLAINT Case No. 10-cv-06256-MIMPvI (PJWx)

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1 announced reported net income of $19.0 million for the second quarter of 2010, the

2 highest second quarter earnings in the history of the Bank. The Bank reported that

3 its second quarter 2010 loan loss provision was $11 million, down 9.8% from the

4 $12.2 million posted in the prior quarter, and which was lower than analysts

5 I expected.

6

134. In connection with its second quarter 2010 results, also on

7 July 21, 2010, CVB filed a slide presentation with the SEC which again

8 emphasized CVB's "strong credit culture and underwriting integrity remain

9 paramount at CVB"; that "geographic diversification, a focus on relationship

10 banking, and a strong credit culture have allowed CVB to mitigate loan losses

11 through this economic downturn"; that CVB's purported "credit metrics" were

12 "superior" to its peers, including with respect to Non-Performing Assets and Non-

13 Performing Loans, loan loss reserves, and net charge-offs; and that "CVB c strong

14 loan underwriting culture has limited its exposure to problem credits."

15


16 false and misleading because CVB did not have a "strong" or "disciplined" credit

17 or underwriting culture and its "credit culture and underwriting integrity" were not

18 "paramount." The above statements were also false and misleading because

19 CVB's "credit culture" did not allow CVB to "mitigate loan losses through this

20 economic downturn." The above statements were also false and misleading

21 because CVB did not have a "strong loan underwriting culture" that "limited its

22 exposure to problem credits." In addition to all the reasons set forth above in

23 Paragraph 132:

24 • In January 2010, Paul Garrett and the executive staff at Garrett met

25 with Myers and other executives of CVB and told them that CVB


27

bankruptcy.




D #:1186

1 . Defendants failed to disclose that the Bank kept Garrett "current" at

2 year end 2009 by extending Garrett a $38 million "refinance" on

3


4

136. Macquarie reported on July 23, 2010 that "management noted that its

51 $84 million exposure to the Garrett Group continues to perform as expected."

6


7 and misleading because the $84 million Garrett Group credit was not "continu[ing]

8 to perform as expected." In addition to the reasons set forth in Paragraph 116, Paul

9 Garrett and the executive staff at Garrett met with Myers and other executives of

10 CVB in January 2010 and told them that CVB needed to work something out with

11 Garrett or Garrett would file for bankruptcy. In addition, Defendants failed to

12 disclose that the Bank kept Garrett "current" at year end 2009 by extending Garrett

13 a $38 million "refinance" on December 29, 2009, just two days before year end.

14

138. The market and analysts responded positively. Credit Suisse reported

15 that "[o]ur outperform thesis largely rests in our credit analysis, which leads us to

16 believe that CVBF is well reserved and should see meaningful credit improvement

17 in 2011." B. Riley & Co. reported that "the primary drivers of the better-than

18 expected results" included "a lower loan loss provision than projected."

19 Macquarie also noted that the better than expected second quarter 2010 results

20 CVB reported was "driven by lower [loan loss] provision." Cantor Fitzgerald

21 likewise reported that the results "reflected stable credit quality."

22

139. The day after the earnings release, July 22, 2010, the stock price

23 traded with heavy volume, closing up to $10.28, from the prior close of $9.50. The

24 trend continued the next few trading days, with the stock price closing at $10.61 on

25 July 26, 2010.

26 VII. DEFENDANTS ACTED WITH SCIENTER

27

139. The allegations above setting forth Defendants' fraudulent scheme and

28 establishing the falsity of Defendants' statements and omissions also raise a strong FIRST AMENDED CONSOLIDATED




inference of Defendants' actual knowledge or reckless disregard as to the truth of

their statements. The additional allegations below further demonstrate that

Defendants acted with scienter when making the materially false statements and

I omissions described above.

A. Myers And CVB Executives Personally Negotiated Modifications With Garrett During The Class Period

140. As described in greater detail above, confidential witnesses describe

how Defendant Myers and other high level executives at CVB met personally with

Paul Garrett and Garrett's top executives to directly negotiate loans and loan terms

and to discuss the status of loans.

141. According to CW9, Garrett's COO at the time, Defendant Myers and

James Dowd, CVB's Chief Credit Officer, met with Garrett's top executives in or

around September 2008. At this meeting, Garrett informed CVB that it needed the

additional funds to meet its ongoing obligations and stay in business. According to

CW9, CYB advanced Garrett additional funds at this time, and Garrett used the

funds to get current on existing loans from CVB. CW9 also stated that Garrett had

many loans outstanding and that when a loan closed, some of the proceeds were

used to make other loans current. According to CW9, "CVB was trying to keep the

house of cards standing."

142. CW9 also described how Defendant Myers, George Borba, and James

Dowd of CVB met with Paul Garrett and Garrett's top executives in or around

January 2010. The Garrett team told Myers and CVB that unless CVB extended

additional credit or modified loan terms, Garrett would file for bankruptcy.

143. CW9 sat in meetings with Paul and Diane Garrett, Kirk Wright, Bill

Whinna, and Marty Weiss before and after these meetings with Myers and other

CVB executives.


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1 B. Defendants' False Statements And Omissions Concerned CVB 's Core Business

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144. Defendants' materially false and misleading statements and omissions

I centered around CVB's core operations - its lending practices, credit metrics,

5 underwriting practices, and the condition of its loan portfolio, including the status

6 of loans to its largest borrower, Garrett.

7

145. At all times during the Class Period, consistent with the statements of

8 the confidential witnesses and admissions in public statements, Defendants Myers

9 and Biebrich were aware of Garrett's financial troubles and CVB's false statements

10 and fraudulent accounting that concealed these problems from investors.

11

146. There was no single issue or relationship that was more important to

12 CVB's profitability than its Garrett loans. The importance of Garrett to CVB's

13 results is obvious based on the effect the Garrett losses had on CVB's earnings in

14 the Third Quarter of 2010. CVB finally admitted that it had incurred losses of $43

15 million on Garrett's $85 million loan portfolio ($34 million for loans which were

16 already in a total loss position - 100% of the loan balance - and an another $9

17 million in estimated future losses). By themselves, these losses were more than

18 80% of the $52 million in common stock net income that CVB reported for the

19 entire year in 2009. It is inconceivable that the Individual Defendants - CVB's

20 most senior executives - were not aware of the risk related to a single borrower

21 whose dire financial condition could suddenly wipe out nearly a year's worth of

22 income. Solely because of Garrett, CVB's return on average assets, return on

231 average equity, non-performing loans, efficiency ratio, net interest margin, yield

24 adjustment and other metrics plummeted. In addition, CVB's loans to Garrett

25 totaled approximately $85 million, more than double the size of CVB's next largest

26 lending relationship, and represented approximately 14% of the Bank's tangible

27 common equity, a closely watched measure of an institution's net worth.



Case 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 67 of 96 Page ID Ii #:1189

147. Similarly, as illustrated by the following chart, the size of the Garrett

write-downs dwarfed write-downs by CVB in surrounding reporting periods,

further demonstrating that Garrett's condition and modifications to the Garrett

loans undoubtedly would have been known and discussed by Myers and Biebrich:

CVB Financial: Loans Charged-Off, IQ 20094Q 2010

$34 million

$1 3.0 $11.5

$10.3 $89

- $4.0 $41

1Q09 2009 3Q09 4Q09 1Q10 2Q10 3Q10 4010

millions II Losno Charged-Off • Garrett Loans Charged-Off

148. Moreover, Myers spoke about, and in some cases responded directly

to questions concerning, CVB's largest borrowing relationship, which Myers

understood to be Garrett. For example, Defendant Myers stated during a

December 2, 2009 private analyst presentation that Garrett "is by two-fold, the

largest loan relationship in the bank." Myers also noted that the Bank's "largest

borrowing relationship" was "fully performing" and "performing as agreed."

Similar statements were repeated to analysts and disseminated to the public in

2010. For example, Macquarie reported in July 2010 that CVB's "management"

said its loans to Garrett continued to "perform as expected."

149. Defendants Myers and Biebrich also made disclosures to certain

investors regarding other specific loans, including during a March 16, 2010

investor presentation. These specific discussions about individual loans further

demonstrate that Defendants had detailed knowledge regarding the status of

problem loans.

FIRST AMENDED CONSOLIDATED

-64- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MIVII\4 (PJWx)

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Document 61 Filed 02/27/12 Page 68 of 96 Page D #:1190

C. Defendants Myers And Biebrich Regularly Monitored The Status Of The Bank's Loans And Its Lending Practices

150. Defendants repeatedly declared to investors that they actively

monitored CVB's commercial real estate portfolio. Defendant Myers stated that

CVB was able to remain the "last man standing" because of CVB's conservative

underwriting and acumen in assessing credit risk. Indeed, CVB's periodic SEC

filings reported that its management and Board of Directors reviewed and analyzed

loans and lending practices on a quarterly basis, including the character of the loan

portfolio, current economic conditions, past credit loss experience, and such other

factors that deserved current recognition in estimating inherent credit losses.

151. Moreover, as participants in CVB's Loan Committee, Defendants

Myers and Biebrich regularly monitored the status of CVB's major loans and

lending practices and had to approve the repeated modifications to the Garrett

loans. CVB's SEC filings establish that "major banking relationships (those over

$7 million)" are "reviewed and approved/declined by the Loan Committee of our

Board of Directors." See CVB's 2009 Form DEF 14A (Proxy) (filed with the SEC

on April 7, 2009). The Loan Committee "regularly review[sJ . . . both

underwriting standards and CVB Financial Corp.'s major banking

relationships." See CVB's 2010 Form DEF 14A (Proxy) (filed with the SEC on

April 9, 2010).

152. CW2 confirmed that CVB's executives and the Board of Directors

managed the loans on a monthly and quarterly basis, that the number of

delinquencies was always a priority concern for top executives, and that they were

looking out for those numbers frequently, sometimes daily.

153. Defendant Myers specifically admitted monitoring troubled loans.

According to an April 3, 2010 New York Times article, when asked about particular

troubled loans, Myers admitted that, "[w]e certainly are aggressively looking at

this stuff all the time." FIRST AMENDED CONSOLIDATED


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154. Moreover, confidential witnesses - all of whom were CVB employees

2 during the Class Period - explained that the Bank's senior management remained

3 well informed of the status of troubled loans, including the Garrett loans. These

4 witnesses described regular meetings attended - including the Loan Committee

5 meetings - and materials received by Myers and Biebrich. For example, CW1

6 confirmed that Defendant Myers held a Loan Committee meeting monthly,

7 typically the third Wednesday of each month (except for the month when the

8 shareholder meeting took place, in which case the Loan Committee meeting took

9 place the Monday before the shareholder meeting). Other participants regularly

10 included Defendant Biebrich, Chairman of the Board and founder George Borba,

11 Vice Chairman of the Board D. Linn Wiley, Board members who were on the Loan

12 Committee, including San Vaccaro (who is also a full-time attorney), Credit

13 Administration members, the CCO, and the Special Assets Managers. Defendant

14 Myers called the meetings to order, then the participants held discussions of the

15 loans approved the prior month and loans "of interest" (e.g., large amounts or large

16 customers), including the Garrett loans. Then the participants went through the

17 Bank's branches' information including the credits that were booked during the

18 month and the delinquencies.

19

155. CW1 described how the regular monthly Loan Committee meetings

20 took place in the Bank's headquarters, in the third-floor Directors' conference

21 room, and lasted between 1 and 1 1/2 hours, from approximately 11:30 a.m.-

22 1:00 p.m., with the meetings running longer when the group was going over

23 quarter-end information. These meetings were held in conjunction with other Bank

24 meetings that CEO Myers and CFO Biebrich held the same day.

25

156. CW1 also explained that in connection with each Loan Committee

meeting, each participant was given a 1-inch thick packet of materials, including

27 CEO Myers' 1-page agenda. The packet included, in approximately five to ten

us pages, a detailed list of all loans approved during the prior month, the loan amount, FIRST AMENDED CONSOLIDATED

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Case 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 70 of 96 Page I #:1192 ID

1 what the collateral was, the date of the loan, who approved the loan, who sustained

2 the loan, and information regarding any existing loans the borrower previously

3 had. The packet also covered new loans, renewals, second and third liens, loan

4 modifications, and restructured loans. The Bank's Board members were given this

5 packet as part of a larger "Board packet" - a 3-inch thick binder, with the Loan

6 Committee section as one of the first sections.

7

157. According to CW1, the Problem Loan Report ("PLR") was also

8 included in the Loan Committee materials. The PLR detailed the Bank's loans that

9 were classified as substandard, watch, or doubtful, and included information about

10 the borrower, the borrower's financials, the quantity of the loan, the reason for the

11 downgrade, and the collateral (including the appraised value, and any delinquent

12 taxes and insurance payments). CW6 confirmed the preparation of regular

13 PLRs, some of which CW6 reviewed, and that the information was provided to the

14 Board of Directors on a quarterly basis.

15

158. CW1 further explained that, in light of the size of the borrowing

UI relationship, as well as Garrett's large deposit relationship with the Bank, the

17 Bank's top executives paid particular attention to Garrett, including regularly

18 discussing Garrett during the Loan Committee meetings. Indeed, at least as early

19 as 2008, during a monthly Loan Committee meeting, CVB's founder and Chairman

20 of the Board, George Borba, asked questions regarding one or more loans to

21 Garrett that were approved the prior month.

22

159. CW2 elaborated that each office tracked its own loans and once a loan

23 was late by thirty days, someone from the office called and sent the loan to the

24 Bank's Credit Department. The Credit Department also furnished reports that were

25 sent to the executives. Every region and office tracked its loans monthly on a

26 standard banking report that looks at all delinquencies and all reserves. In addition

27 to regions and individual offices creating monthly reports, CVB made one master

28 report each quarter. FIRST AMENDED CONSOLIDATED

-67- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MNIIVI (PJWx)



160. CW12, a Vice President at the Bank who managed a loan portfolio of

I $100,000,000, explained that Defendant Myers had regular access to special credit

I administration "quarterly reports" and participated in regular meetings to assess

I "trends in the portfolio."

161. Other facts demonstrate that CVB 's senior management was keenly

I aware of the status of the real estate markets and CVB's deteriorating lending

relationships. As explained by CW1, because the Bank's senior management knew

there was going to be an increasing number of problems with loans, beginning in

March 2009, the Bank nearly tripled the number of employees in its Special Assets

Department, from four to eleven. CW7 likewise confirmed that CVB added

additional Special Assets divisions in 2009, including in the Bank's Rosedale

office.

162. Finally, Defendant Myers' knowledge of the status of CVB's troubled

loans - particularly those of its largest borrower - is further confirmed by Myers'

extreme "hands-on" management style. CW12 explained that "Myers knew

everything all the time. He did not get surprised." CW12 also stated that

Defendant Myers attended all of the Board of Directors meetings and he sat "at the

head of the table." CW5 stated that "Chris [Myers] got involved in credit issues

and was really a micromanager. He was pretty much involved in everything."

D. Defendants' Close Relationship And Regular Communications With Garrett Support A Strong Inference Of Scienter

163. Garrett and CVB - and in particular Defendant Myers - had a close,

familiar relationship. According to an e-mail from Wright to Myers filed in the

real estate transaction litigation among Garrett, Stratford, and homebuilder Artisan

Communities ("Artisan"), Stratford Ranch Partners, LLC v. Paul Garrett, Case No.

RIC 513524 (Riverside Super. Ct.), when a third-party, Stratford Ranch Partners

("Stratford"), requested Garrett's personal financial statements before it entered

into a transaction with him, Garrett's CEO, Wright, proposed that Stratford instead FIRST AMENDED CONSOLIDATED


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2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 72 of 96 Page D Cas #:1194

speak directly with Defendant Myers "regarding Paul, his performance over the

years, and his financial status .„ 12

164. Witnesses confirm that Defendants were in regular contact with

executives at the Garrett Group. For example, CW10 stated that CVB executives

(including CVB's Executive Vice President and Chief Credit Officer, James Dowd,

who reported to Defendant Myers) came to Garrett's offices in late 2008. CW8

stated that there were numerous meetings and discussions between Garrett

(specifically, founder Paul Garrett, CEO Kirk Wright, and Marty Weiss) and CVB

during 2008 and 2009, and continuing after CW8 left the company in February

2009. CW8 reported that these meetings "occurred regularly.” CW8 regularly

heard about these meetings from Garrett's CEO, Kirk Wright, who CW8 remained

in contact with even after CW8 left Garrett in February 2009. CW8 also stated that

it was common for CVB executives to come to Garrett's offices periodically during

this time period.

165. Further demonstrating the close relationship Myers and CVB had with

Garrett, CW8 recalled that Myers first came to visit Garrett's offices soon after

Myers was appointed CEO of CVB, in August 2006.

166. Finally, CW9 stated that Paul Garrett met regularly with "all the key

players at CVB," and recalled specifically that these included Defendant Myers,

George Borba (Chairman of the Board) and Jim Dowd.

12 Stratford filed the case against Paul Garrett on November 21, 2008, related to a loan Garrett received from Temecula Valley Bank (which has since failed) for $10.6 million in April 2008. In May 2007, Paul Garrett personally guaranteed a payment of $5 million to Stratford in return for part of a piece of land it was selling. Another portion of the land from the deal was transferred from a unit of Artisan to Garrett through a quitclaim deed in late May 2007. The property was then pledged as part of collateral for the $10.6 million loan from Temecula Valley Bank. Stratford obtained an Order for a Writ of Attachment against Garrett on May 29, 2009, and an Order for an additional Writ of Attachment against Garrett on November 10, 2009, in the amount of $5.95 million.


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E. Defendants Were Motivated To Commit Fraud

2

167. CVB's stated "growth strategy" was to transition from a community

3 bank to a regional bank through acquisitions of failing banks with favorable loss-

4 sharing agreements with the FDIC. Most recently, CVB acquired San Joaquin

5 Bank just days prior to the Class Period. Garrett's dire financial condition

6 interfered with this strategy, however, and two confidential witnesses confirmed

7 that Defendants strategically (and fraudulently) wanted to wait for a profitable

8 quarter to write down the Garrett loans. CW5 stated that, although the Garrett

9 loans were "going sideways" in 2008, the Defendants waited to publicly disclose

10 the troubled status of the Garrett loans in hopes that they could "piggy-back" on

11 top of a profitable quarter so that it did not have as large of an impact on Bank's

12 profitability. CW9, Garrett's COO, also independently reported that CYB wanted

13 to wait for a "big quarter" to write down the Garrett loans. Tellingly, since the time

14 the truth was revealed as set forth in Section VIII below, CVB has not acquired any

15 additional banks, and its total assets have decreased.

16

168. Defendants Myers and Biebrich also reaped substantial proceeds from

171 insider sales at artificially inflated prices during the Class Period. At the same

18 time, Defendants were emphasizing that the "interests of senior management and

19 board of directors [are] aligned with those of shareholders" (November 4, 2009

20 slide presentation), the "strong board ownership" in the Bank by the directors, and

21 how "we have really taken a longer-term intermediate term perspective on what we

22 do."

23

We are not as interested in our results in the next quarter, as we are

24 what [sic] we're building for the future . . . . We have strong board

25 ownership position 16%, so we make decisions for the long run.

26 (December 2, 2009 analyst presentation transcript).

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169. Notwithstanding Defendants' statements about their "longer-term"

28 perspective, during the Class Period, Defendants started selling off their shares. FIRST AMENDED CONSOLIDATED

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1 I Specifically, during the Class Period, CFO Defendant Biebrich sold 57,680 shares

2 for a total of $565,618. During the entire year prior to the beginning of the Class

3 Period, Biebrich had only one transaction, selling 1,608 shares for a total of

4 I $16,080. During the Class Period, Defendant Biebrich sold approximately half of I 5 the 110,929 shares he held at the start of the Class Period. Specifically, Defendant

6 Biebrich sold 10,000 shares on November 16, 2009, at $8.39 per share; sold

7 another 20,000 shares on January 25, 2010, at $9.37 per share; sold another 10,000

8 shares 4 days later on January 29, 2010, at $9.95 per share; sold another 3,000

9 shares on March 24, 2010, at $10.53 per share; sold another 10,000 shares on

10 April 26, 2010, at $11.51 per share; and sold another 4,680 shares on May 27,

11 2010, at $10.29 per share.

12

170. During the entire year prior to the beginning of the Class Period,

13 Defendant Myers did not sell any shares, but purchased. 8,000 shares on the open

14 market and acquired another 250,000. Then, after the beginning of the Class

15 Period, on February 24, 2010, Defendant Myers sold 13,000 shares. Shortly

16 thereafter, on June 15, 2010 (just five weeks before receipt of the SEC subpoena),

17 Myers instituted a lObS-i trading plan, with the reported purpose of allowing

18 Myers "to pay the income taxes related to the vesting of his restricted stock

19 grants." Then, on August 2, 2010 - after Defendants received the SEC subpoena

20 but before they disclosed it to investors - Myers sold an additional 5,500 shares

21 pursuant to the lObS-i trading plan. In total, during the Class Period, Defendant

22 Myers purchased no shares, but sold 18,500 shares, for proceeds of $180,889.

23

171. Defendants Myers and Biebrich received these proceeds while they

24 were in possession of material, non-public information concerning CVB,

25 including, as explained above, that:

26

(a) Defendants failed to properly account for CVB's commercial

27 real estate loans and failed to reflect impairment in the loans;




#:1197

1

(b) CVB had not adequately reserved for loan losses such that its

2 I financial statements were presented in violation of GAAP;

3

(c) Defendants knew or recklessly disregarded that CVB's largest

4 borrower, Garrett, had defaulted and was about to be foreclosed on; that the loans

5 were backed by collateral whose market value was well below that of the loan

6 amounts, and were kept "current" only by virtue of its "extend and pretend"

7 practice of extending new monies to help borrowers pay existing loans; that Garrett

8 threatened to file for bankruptcy if CVB refused to extend/modify its loans; and

9

(d) Defendants knew or recklessly disregarded that there was not a

10 mere "risk" that continuing deterioration in the real estate market "could" affect the

11 ability of CVB 's loan customers, including its largest borrowing relationships, to

12 service their debt; rather, Defendants knew or recklessly disregarded that this

13 "risk" had already come to fruition.

14 VIII. LOSS CAUSATION

15

172. After the close of the market on August 9, 2010, CVB shocked the

16 market when it announced that, two weeks earlier, on July 26, 2010, the Bank had

17 received a subpoena from the SEC demanding information about how the Bank

18 handles and discloses troubled loans. Specifically, the subpoena questioned the

19 Bank's loan underwriting guidelines, its allowance for credit losses and how CVB

20 calculates its allowance for loan losses. Analysts immediately reacted to the

21 announcement, stating that the SEC probe was notable because it revealed that

22 CVB was not fully disclosing potentially problematic loans and that CVB's largest

23 exposure - Garrett - is backed by collateral whose market value is well below that

24 of the loan amount - concerns the Bank had previously denied. Specifically, CYB

25 announced:

26

The subpoena requests information regarding our loan underwriting

27 guidelines, our allowance for credit losses and our allowance for loan

28

loss calculation methodology, our methodology for grading loans and FIRST AMENDED CONSOLIDATED

-72- CLASS ACTION COMPLAINT Case No. lO-cv-06256-MMM (PJWx)


#:1198

1

the process for making provisions for loan losses, and our provision

2

for credit losses. In addition, the subpoena requests information

3

regarding presentations we have given or conferences we have

4

attended with analysts, brokers, investors or prospective investors.

5

173. The Bank provided no explanation for why it had waited two weeks to

6 disclose the subpoena it had received on July 26, 2010 - the same day the Bank

had, instead, announced that CFO Defendant Biebrich was "retiring."

174. The market reacted quickly and negatively. Immediately following

9 the news of the SEC probe and analysts reports confirming that the subpoena

10 revealed that CVB was not fully disclosing potentially problematic loans, CVB's

11 stock fell $2.30 per share to close at $8.00 per share on August 10, 2010 - a one-

12 day decline of over 22% on extremely high volume of 13.25 million shares,

13 representing a market capitalization loss of approximately $245 million.

14

175. The announcement of the SEC investigation validated what until then

15 Defendants had publicly denied - namely, whether the Bank was (i) fully

16 disclosing potentially problematic loans, in particular, loans to its largest customer,

17 Garrett; (ii) whether the market value of the collateral was below the loan amounts;

18 and (iii) whether CVB extended new loans to borrowers to keep their existing

19 loans current. For example, after the announcement, on August 10, 2010, Dow

20 Jones published an article with the headline "HEARD ON THE STREET: CVB

21 Financial's Can of Worms," which stated in part:

22

A Securities and Exchange Commission probe of a midsized

23

California bank may open more than one can of worms.

24

CVB Financial, of Ontario, Calif., announced Monday that on July 26

25

it received a subpoena from the SEC, seeking information about,

26 among other things, bad loan reserves. Its stock plunged 22%

27

Tuesday.



se 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 77 of 96 Page ID II #:1199

1

The investigation is notable for two reasons. First, it could determine

2 whether CVB Financial's critics are right in thinking that the bank

3

isn It fully disclosing potentially problematic loans, an accusation

4

the bank rejects. Second, the subpoena was received after the Federal

5

Deposit Insurance Corp. in May had concluded an annual examination

6

of the bank.

7 * * *

8

Discussion of CVB Financial centers on its largest exposure, loans

9

to a property company called the Garrett Group. Skeptics believe

10

this exposure is backed by collateral whose market value is well

11

below that of the loan amount. Some also question whether CVB

12 extended a new loan to Garrett to help it pay existing loans,

13 something Myers denies. He said the Garrett Group was current on

14

its loans at the end of the second quarter, but the bank had reserves

15

against the exposure.

16

176. Similarly, Macquarie reported on August 10, 2010, that the SEC

17 investigation indicated that the adequacy or consistency of CVB's disclosures

18 could be at issue, and that it expected the investigation to remain a material

19 overhang on the stock, "particularly given lingering concerns in the investment

20 community around the company's asset quality and financial reporting."

21

177. CVB admitted the "extraordinary market activity in the Company's

22 stock volume and price today." The next day, on August 10, 2010, in an apparent

23 attempt to stop the stock price from continuing its downhill slide, CVB announced

24 a repurchase plan:

25

"We believe the decline in stock price presents an opportunity for us

26

to repurchase CVBF stock to enhance shareholder value. We are

27

taking advantage of this opportunity," said Chris Myers, President and

28

CEO. FIRST AMENDED CONSOLIDATED

-74- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MIvll\4 (PJWx)


#:1200

1

The Bank's regulators recently completed their annual safety and

2

soundness examination of Citizens Business Bank. "While the results

3

of this examination are confidential, the fact that there was no

4

negative disclosure on the FDIC website should speak for itself," said

5

Myers. Annual regulatory examinations involve a comprehensive

6

review of the Company's loan portfolio, underwriting practices, and

7

the adequacy of its loan loss reserves and methodology.

8

In addition to the annual safety and soundness examinations, we

9

regularly have our loan portfolio reviewed by outside consultants.

10

CVB Financial Corp. has reported over 130 consecutive quarterly

11

profits. On July 21, 2010, the Company reported record earnings for

12

the second quarter of 2010.

13

178. Also on August 10, 2010, Credit Suisse reported that the SEC

141 investigation revealed two issues, regarding: (i) the adequacy of CVB's reserves,

151 including specifically with respect to the Bank's largest loans (Garrett); and (ii) the

161 adequacy of CVB's disclosures.

17

179. On August 11, 2010, FIG Partners explained as follows:

18

It appears the SEC is looking into whether CVBF misled the Street

19

by hiding the true performance of loans the company said were

20 performing. In doing so, the SEC is also implying that company

21 management hid the true nature of the loan portfolio from the FDIC

22 and California Department of Financial Institutions (the bank's

23 primary regulators) . . . . The information sought [in the SEC

24 subpoena] is very similar to stories in the press recently that the

25 company was overstating credit quality. (Emphasis added.)

26

180. The report further explained that "[un response to the 22% decline in

27 the stock price yesterday, management issued a rare public statement after market

28 close." The Bank defended its internal credit monitoring process, reminded FIRST AMENDED CONSOLIDATED



Document 61 Filed 02/27/12 Page 79 of 96 Page I

#:1201

1 investors it is on good terms with banking regulators and executed, for the first

2 time, on an existing 10 million share repurchase program.

3

181. On September 9, 2010, just one month after the Bank announced its

4 receipt of the SEC subpoena questioning the Bank's loan underwriting guidelines

5 and loan loss reserves, CYB finally disclosed that Garrett was not in fact "fully

6 performing" or "current" on its debt. Rather, CVB had suddenly charged-off $34

7 million in debt owed by Garrett, and placed the remaining $48 million in the

8 Bank's non-performing and impaired loan category. The Bank also admitted

9 that the reserves it had previously allocated for the Garrett loans were

10 insufficient, at only $24.7 million (or 30% of the loan amount), and because of its

11 inadequate Garrett reserves, it had to record an additional provision of $9.3 million

12 in third quarter 2010.

13

182. Specifically, the Bank's announcements in its September 2010 press

14 release and conference call slides filed with the SEC stated that in August, the

15 Bank's largest borrower (Garrett) informed the Bank that they were not able to

16 make principal and interest payments on their loans as scheduled and wanted to

17 negotiate an alternative repayment schedule:

18

The borrowing relationship is comprised of seven loans and totals

19 approximately $82 million in outstanding debt. This is the largest

20

borrowing relationship in the Bank.

21

In response to the information from our largest borrower, we have

22

taken the following actions:

23 • On September 2, 2010 all of the loans were put on non-

24 accrual ($48 million in loans after charging off $34 million).

25 • We charged-off $34 million in loans versus our June 30,

26

2010 reserve of $24.7 million. Based on our charge-off of

27

$34 million, we are recording an additional $9.3 million

28 provision for credit losses in the third quarter.


Case No. 1O-cv-06256-MIvIIVI (PJWx)


1 • The $34 million charge-off figure was determined as

2

follows: we currently hold first trust deed liens on 25

3

different properties with an aggregate appraised value of

4

$52.1 million. Each of the 25 properties has been appraised

5

by MAT certified third party appraisers with the exception of

6

two properties which were appraised by a third-party State

7

Certified Real Estate appraiser. The combined value of the

8

two non-MAI appraised properties is $5.7 million. All of

9

the 25 property appraisals were updated in 2010 with the

10 exception of one property which was appraised in November

11

2009 and was valued at $3.0 million at that time. The

12 remaining $48 million in non-accrual loan balance

13 represents 92% of the $52.1 million in aggregate appraised

14 values.

15 • The Borrower sold a 26th property recently for $2.5 million.

16

The majority of the proceeds of this sale ($2 million) are

17

held as payment collateral for our loans, which collateral is

18 to be used to make all principal and interest payments

19 scheduled through December 15, 2010. The remaining $0.5

20 million in proceeds were used to pay past due property

21

taxes, sales commissions and borrower cost reimbursements.

22

This is part of a Forbearance Agreement with the subject

23

borrower. The Agreement expires December 15, 2010.

24

183. With respect to the largest of the seven Garrett loans, with a $42.5

25 million loan balance, the Bank disclosed that it had no direct liens on the properties

26 that were purportedly serving as collateral for the loan, and that the Bank was now

27 suddenly reducing the value of the Bank's UCC- 1 filings on the properties to zero.

28 The Bank disclosed as follows: FIRST AMENDED CONSOLIDATED



#:1203

1

This loan is further supported by UCC-1 filings on the borrower's

2

equity interests in 15 income producing properties, aggregating nearly

3

two million square feet of office and industrial space. All of the 15

4 properties have existing first trust deeds recorded by other lenders, so

5 we have no direct lien on the properties. The excess cash flow

6 realized on these properties (after paying the mortgage payments) has

7

been utilized to assist our Borrower in paying CBB loan obligations.

8

Of the 15 properties, all properties are income producing (nine are

9

industrial properties and six are office buildings). However, in recent

10 months, cash flow has declined significantly due to vacancies and

11 reduced rents. Due to our weakened equity-based collateral position

12 on these properties, we have discounted the value of our UCC-1

13

filings on the subject properties to zero.

14

184. Overall, the Bank reported that it expected its non-performing loans

15 ("NPLs") will increase $59 million for the third quarter going from $83 million to

16 $142 million; of this increase, $48 million represents the balance of the loans to

171 Garrett, after the $34 million charge-off, and the remaining $11 million in increase

18 is primarily attributed to two dairy borrowers, who recently were reclassified to

19 non-performing status. The Bank reported that charge-offs for the third quarter are

20 projected to total approximately $38 million; of this amount, $34 million

21 represents the charge-off on Garrett, and the remaining $4 million is for smaller,

22 unrelated loans to other borrowers. The Bank further reported that in order to

23 partially absorb the sharp increase in Net Charge-Offs, CVB recognized $28

24 million in sales of securities.

25

185. Following the Bank's disclosure after the close of the market on

26 September 9, 2010, the price of CVB stock dropped from $7.05 to a low of $6.88,

27 a drop of 2.41%, before closing at $6.99, on volume of 4,379,983, more than five

28 times the volume traded on the previous day Moreover, the decline was FIRST AMENDED CONSOLIDATED

-78- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MIVllvI (PJWx)

2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 82 of 96 Page D

#:1204

1 particularly significant in light of the fact that, the same day, the Standard and

2 Poors 500 ("S&P 500") increased, from 1104.18 to 1109.55, and the index of all

31 I state banks also increased.

4

186. On September 10, 2010, Credit Suisse, reported in part:

5

More importantly, in our view, CVBF announced that it was placing

6

its largest (and most controversial) loan on non-performing status, and

7 writing it down to its recent appraisal value (less assumed OREO

8

costs).

9

While the SEC subpoena remains outstanding, we believe the

10 announcement removes a major component of uncertainty in regards

11

to problem loans; for which the subpoena also seeks to address (to a

12

certain extent).

13

187. On September 13, 2010, Howe Barnes Hoefer & Arnett explained as

141

15

16

17

18

19

20

21

22

23

24

25

26

27

28

follows:

The company's share price plummeted by 22% to $8.00 on

August 10, which was the day after it disclosed the SEC investigation.

Since then, the share price has drifted down by an additional 13% to

$6.99 on September 10. There was only a modest decline of -.'l%

following the earnings preannouncement as further deterioration in

credit quality and uncertainty surrounding the SEC investigation are

already reflected in the share price.

188. Shortly thereafter, on January 20, 2011, CVB further disclosed that

Garrett had failed to comply with forbearance agreements (which CVB had

previously disclosed on September 9, 2010, was "a Forbearance Agreement,"

(singular), but which CVB now reported was multiple "forbearance agreements").

The Bank explained:

As a result, we are continuing to explore all of our rights and remedies

on a loan-by-loan basis, including without limitation the sale of FIRST AMENDED CONSOLIDATED



D #:1205

1 certain notes, initiation of foreclosure proceedings against certain

2 collateral and alternative repayment plans. There can be no assurance

3 as to the outcome of such efforts, which the borrower may oppose.

4

The current aggregate balance after prior payments and charge-offs is

5

$45.2 million. Further charge-offs may need to be taken based on

6

loan developments, borrower actions and/or reappraisals of collateral.

7

189. Eventually, CVB recorded numerous Notices of Default on Garrett,

8 including at least the following: (1) on January 24, 2011, for $8,711,151.55; (2) on

9 January 26, 2011, for $4,920,283.08; (3) on January 27, 2011, for $2,725,162.94;

10 and (4) on February 15, 2011, for $42,361,705.24.

11 IX. THE PRESUMPTION OF RELIANCE

12

190. At all relevant times, the market for CVB's publicly traded common

13 stock was an efficient market for the following reasons, among others:

14

(a) The Bank's common stock met the requirements for public

15 listing and was listed and actively traded on the NASDAQ, a highly efficient

16 market. The average daily volume of CVB's common stock during the Class

17 Period was 1,058,754 shares based on information from the Yahoo Finance

18 website. Further, approximately 60% of the stock was owned by institutional

19 investors;

20

(b) As a regulated issuer, CVB made public filings, including its

21 Forms 10-K, Forms 10-Q and related press releases, with the SEC;

22

(c) CVB was followed by analysts from major brokerages

23 including, among others, Cantor Fitzgerald, Sandler O'Neill & Partners, LP,. Stifel

24 Nicolaus, Wunderlich Securities, Macquarie, Keefe, Bruette & Woods, Credit

25 Suisse, and B. Rile & Company, Inc. The reports of these analysts were

26 redistributed to the brokerages' sales force, their customers, and the public at large;

27

(d) CVB regularly communicated with public investors via

28 established market communication mechanisms, including the Bank's website, FIRST AMENDED CONSOLIDATED


I


#:1206 ID

1 I regular disseminations of press releases on the major news wire services, and other

2 wide-ranging public disclosures, such as communications with the financial press

3 and other similar reporting services;

4

(e) The material misrepresentations and omissions alleged herein

5 I would tend to induce a reasonable investor to misjudge the value of CVB's

6 common stock; and

7

(f) Without knowledge of the misrepresented or omitted material

8 facts, Lead Plaintiff and the other members of the Class purchased or otherwise

9 acquired CVB common stock between the time Defendants made the material

10 misrepresentations and omissions and the time the truth was disclosed, during

11 which time the price of CVB common stock was inflated by Defendants'

12 misrepresentations and omissions.

13

191. As a result, the market for CVB's publicly traded common stock

14 promptly digested current information with respect to CVB from all publicly

15 available sources and reflected such information in the price of the Bank's

16 common stock. Under these circumstances, all purchasers of CVB's common

17 stock during the Class Period suffered similar injury through their purchase of the

18 stock at artificially inflated prices, and a presumption of reliance applies.

19 X. INAPPLICABILITY OF THE STATUTORY SAFE HARBOR

20

192. The statutory safe harbor provided for forward-looking statements

21 under certain circumstances does not apply to any of the allegedly false statements

22 pleaded in this Complaint. The statements alleged to be false and misleading

23 herein all relate to facts and conditions existing at the time the statements were

24 made. No statutory safe harbor applies to any of Defendants' material false or

25 misleading statement.

26

193. Moreover, the statutory safe harbor is inapplicable with respect to the

27 false and misleading statements included in CVB's financial statements, which

28 purported to be prepared in accordance with GAAP. FIRST AMENDED CONSOLIDATED



1

194. Many of the specific statements pleaded herein were not identified as

2 "forward-looking statements" when made. To the extent there were any forward-

3 looking statements, there were no meaningful cautionary statements identifying

UI important factors that could cause actual results to differ materially from those in

5 the purportedly forward-looking statements. Alternatively, to the extent that the

6 statutory safe harbor does apply to any forward-looking statements pleaded herein,

7 Defendants are liable for those false forward-looking statements because at the

8 time each of those forward-looking statements was made, the particular speaker

9 knew that the particular forward-looking statement was false and/or the forward-

10 looking statement was authorized and/or approved by an executive officer of CVB

11 who knew that those statements were false when made.

12 XI. CLASS ACTION ALLEGATIONS

13

195. Lead Plaintiff brings this action as a class action pursuant to Rule 23

141 of the Federal Rules of Civil Procedure on behalf of all persons who purchased or

15 otherwise acquired CVB common stock between October 21, 2009, and

16 August 9, 2010, inclusive, and who were damaged thereby (the "Class").

17 Excluded from the Class are the Individual Defendants, the officers and directors

18 of CVB and Citizens Bank Corp. at all relevant times, members of their immediate

19 families and their legal representatives, heirs, successors, or assigns and any entity

20 in which Defendants have or had a controlling interest.

21

196. The members of the Class are so numerous that joinder of all

221 members is impracticable. Throughout the Class Period, CVB common shares

23 were actively traded on the NASDAQ. CVB has over 106 million shares of CVB

24 common stock issued and outstanding. While the exact number of Class members

25 is unknown to Lead Plaintiff at this time and can only be ascertained through

26 appropriate discovery, Lead Plaintiff believes that there are hundreds or thousands

27 of members in the Class. Record owners and other members of the Class may be

28 identified from records maintained by CVB or its transfer agent and may be FIRST AMENDED CONSOLIDATED



1 notified of the pendency of this action by mail, using the form of notice similar to

2 that customarily used in securities class actions.

3

197. There is a well-defined community of interest in the questions of law

4 and fact involved in this case. Questions of law and fact common to the members

5 of the Class which predominate over questions which may affect individual Class

6 I members include:

7

(a) Whether Defendants violated the Exchange Act;

8

(b) Whether Defendants omitted or misrepresented material facts;

9

(c) Whether Defendants' statements omitted material facts


11 they were made, not misleading;

12

(d) Whether Defendants knew or deliberately disregarded that their

13 statements were materially false and misleading when made;

14

(e) Whether the price of CVB common stock was artificially

15 inflated; and

16

(f) The extent of damage sustained by Class members and the

17 appropriate measure of damages.

18

198. Lead Plaintiff's claims are typical of those of the Class because Lead

19 Plaintiff and the Class sustained damages from Defendants' wrongful conduct in

20 violation of federal law that is complained of herein.

21

199. Lead Plaintiff will adequately protect the interests of the Class and has

22 retained counsel who are experienced in class action securities litigation. Lead

23 Plaintiff has no interests which conflict with those of the Class.

24

200. A class action is superior to other available methods for the fair and

25 efficient adjudication of this controversy since joinder of all members of the Class

26 is impracticable. Furthermore, as the damages suffered by individual Class

27 members may be relatively small, the expense and burden of individual litigation

28 make it impossible for members of the Class to individually redress the wrongs FIRST AMENDED CONSOLIDATED

-83- CLASS ACTION COMPLAINT Case No. 10-cv-06256-MIVIM (PJWx)



I done to them. There will be no difficulty in the management of this action as a

I class action.

I XII. CLAIMS FOR RELIEF

COUNT I

For Violation Of § 1O(WOf The Exchange Act And Rule 10b-5 Against B, Myers And Biebrich

201. Lead Plaintiff incorporates by reference each and every allegation

contained above, as if set forth herein.

202. This claim is brought pursuant to Section 10(b) of the Exchange Act

and Rule 1 Ob-5 promulgated thereunder, on behalf of Lead Plaintiff and members

of the Class against Defendants CVB, Myers, and Biebrich.

203. During the Class Period, Defendants made materially false and

misleading statements and omissions that were intended to, and throughout the

Class Period did, deceive the investing public regarding CVB's business and

operations, including but not limited to its underwriting and credit quality, and the

intrinsic value of CVB common stock; and enable CVB insiders to sell shares of

their privately held CVB stock while in possession of material adverse non-public

information about the Bank. Defendants, jointly and individually (and each of

them), took the actions set forth herein.

204. Defendants CVB, Myers, and Biebrich: (a) employed devices,

schemes, and artifices to defraud; (b) made untrue statements of material fact or

omitted to state material facts necessary to make the statements not misleading;

and (c) engaged in acts, practices, and a course of business which operated as a

fraud and deceit upon the purchasers of the Bank's common stock in an effort to

maintain artificially high market prices for CVB's common stock in violation of

Section 10(b) of the Exchange Act and Rule lOb-S. All Defendants are legally

responsible as primary participants in the wrongful and illegal conduct charged


Case No. lO-cv-06256-MMM (PJWx)

1

2

3

4

5

6

7

II

10

11

12

13

14

15

16

17

18

191

20

21

22

23

24

25

26

27

28



1 herein, and the Individual Defendants are also legally responsible as controlling

2 persons as set forth in Count II below.

3

205. Defendants CVB, Myers, and Biebrich, individually and in concert,

4 directly and indirectly, by the use, means, or instrumentalities of interstate

5 commerce and/or mail, engaged and participated in a continuous course of conduct

6 to conceal adverse material information about the business, operations and future

7 prospects of CVB as specified herein.

8

206. Defendants employed devices, schemes, and artifices to defraud,

9 while in possession of material adverse non-public information and engaged in

10 acts, practices, and a course of conduct as alleged herein in an effort to assure

11 investors of CVB's value and performance, and continued credit risk management,

12 which included the making of, or the participation in the making of, untrue

13 statements of material facts and omitting to state material facts necessary in order

14 to make the statements made about CVB, in the light of the circumstances under

15 which they were made, not misleading, as set forth more particularly herein, and

16 engaged in transactions, practices, and a course of business which operated as a

17 fraud and deceit upon the purchasers of CVB common stock during the Class

18 Period.

19

207. The Defendants had actual knowledge of the misrepresentations and

20 omissions of material facts set forth herein, or recklessly disregarded the truth in

21 that they failed to ascertain and to disclose such facts. Such Defendants' material

22 misrepresentations and omissions were done knowingly or with deliberate

23 disregard for the purpose and effect of concealing CVB's financial results and

24 deteriorating credit quality from the investing public and supporting the artificially

25 inflated price of its common stock. As demonstrated by Defendants'

26 overstatements and misstatements of the Bank's business, operations, and earnings

27 throughout the Class Period, Defendants, if they did not have actual knowledge of

28 the misrepresentations and omissions alleged, were reckless in failing to obtain such FIRST AMENDED CONSOLIDATED



1 knowledge by recklessly refraining from taking those steps necessary to discover

2 whether those statements were false or misleading.

3

208. As a result of the dissemination of the materially false and misleading

4 I information and failure to disclose material facts, as set forth above, the market

5 price of CVB common stock was artificially inflated during the Class Period. In

6 ignorance of the fact that market prices of CVB's publicly traded common stock

7 were artificially inflated, and relying directly or indirectly on the false and

8 misleading statements made by Defendants, or upon the integrity of the market in

9 which the securities trade, and/or on the absence of material adverse information

10 that was known to or recklessly disregarded by Defendants but not disclosed in

11 public statements by Defendants during the Class Period, Lead Plaintiff and the

12 other members of the Class acquired CVB common stock during the Class Period

13 at artificially high prices and were damaged thereby.

14

209. At the time of said misrepresentations and omissions, Lead Plaintiff

15 and other members of the Class were ignorant of their falsity, and believed them to

16 be true. Had Lead Plaintiff and the other members of the Class and the

17 marketplace known the truth regarding CVB, which was not disclosed by

18 Defendants, Lead Plaintiff and other members of the Class would not have

19 purchased or otherwise acquired their CVB common stock, or, if they had acquired

20 such common stock during the Class Period, they would not have done so at the

21 artificially inflated prices which they paid.

22

210. By virtue of the foregoing, Defendants have violated Section 10(b) of

23 the Exchange Act, and Rule 1 Ob-5 promulgated thereunder.

24

211. As a direct and proximate result of Defendants' wrongful conduct,

25 Lead Plaintiff and the other members of the Class suffered damages in connection

26 with their respective purchases and sales of the Bank's common stock during the

27 Class Period.


-86- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MIVllVI (PJWx)


COUNT II

For Violation Of20(a) Of The Exchange Act Against Myers And Biebrich

212. Lead Plaintiff repeats and re-alleges each and every allegation

contained above as if fully set forth herein.

213. Defendants Myers and Biebrich acted as controlling persons of CVB

within the meaning of Section 20(a) of the Exchange Act as alleged herein. By

virtue of their high-level positions, their ownership and contractual rights,

participation in and awareness of the Bank's operations, and intimate knowledge of

the fraudulent scheme and the false financial statements filed by the Bank with the

SEC and disseminated to the investing public, Myers and Biebrich had the power

to influence and control, and did influence and control, directly or indirectly, the

decision-making of the Bank, including the content and dissemination of the

various statements which Lead Plaintiff contends are false and misleading.

Defendants Myers and Biebrich were provided with, or had unlimited access to,

copies of the Bank's reports, press releases, public filings, and other statements

alleged by Lead Plaintiff to be misleading prior to and shortly after these

statements were issued and had the ability to prevent the issuance of the statements

or cause the statements to be corrected.

214. In particular, each of these Individual Defendants had direct and

supervisory involvement in the day-to-day operations of the Bank and, therefore, is

presumed to have had the power to control or influence the particular transactions

giving rise to the securities violations as alleged herein, and exercised the same.

For example, the Individual Defendants were able to and did control the content of

the various SEC filings, press releases, investor presentations, and other public

statements pertaining to the Bank during the Class Period. The Individual

Defendants had access to the adverse undisclosed information about CVB's

business, operations, products, trends, financial statements, markets, and present


Case No. 10-cv-06256-MMtVI (PJWx)

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se 2:10-cv-06256-MMM -PJW


1 and future business prospects via access to internal control documents (including

2 but not limited to the Bank's Problem Loan Reports); conversations and

3 connections with other corporate officers, employees, and borrowers; participation

4 at management and Board of Directors meetings and committees thereof (including

5 the Bank's monthly Loan Committee meetings); and reports and other information

6 provided to them in connection therewith.

7

215. The Individual Defendants both participated in the drafting,

8 preparation, and/or approval of the various public, shareholder, and investor reports

9 and presentations, as well as other communications alleged herein. CVB's SEC

10 filings document the Individual Defendants' direct involvement in the Bank's day-

11 to-day operations. For example, in its Form 10-Q for first quarter 2010, CVB

12 reported that the Individual Defendants reviewed and analyzed loans on a quarterly

13 basis, including the character of the loan portfolio, current economic conditions,

14 past credit loss experience, and such other factors that deserved current recognition

15 in estimating inherent credit losses. Indeed, CW9 confirmed that Myers personally

16 met with Garrett regarding the status of loans and negotiated modifications. In

17 addition, CW 1 confirmed that Defendant Myers closely monitored the Garrett

18 loans. CW1 also confirmed that the Individual Defendants both regularly

19 participated in monthly Loan Committee meetings. During these meetings, they

20 discussed branch information, loans approved the prior month, "loans of interest"

21 (including the Garrett loans), delinquencies, and merchant card information. CW2

22 also corroborated that the Individual Defendants knew about the status of troubled

23 loans. Defendants Myers and Biebrich also regularly monitored the Credit

24 Department in general.

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216. As set forth above, CVB and the Individual Defendants each violated

26 Section 10(b) and Rule lOb-5 by their acts and omissions as alleged in this

27 Complaint. By virtue of their positions as controlling persons, the Individual

28 Defendants are liable pursuant to Section 20(a) of the Exchange Act. As a direct FIRST AMENDED CONSOLIDATED

-88- CLASS ACTION COMPLAINT Case No. 1O-cv-06256-MMN'I (PJWx)

Case 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 92 of 96 Page ID #:1214 I

and proximate result of Defendants' wrongful conduct, Lead Plaintiff and other

I members of the Class suffered damages in connection with their purchases of the

Bank's common stock during the Class Period.

XIII. PRAYER FOR RELIEF

WHEREFORE, Lead Plaintiff prays for judgment as follows:

A. Determining that this action is a proper class action pursuant to

I Rule 23 of the Federal Rules of Civil Procedure and certifying Lead Plaintiff as

class representative and Lead Counsel as Class Counsel;

B. Awarding compensatory damages in favor of Lead Plaintiff and the

other Class members against all Defendants, jointly and severally, for all damages

sustained as a result of Defendants' wrongdoing, in an amount to be proven at trial,

I including interest thereon;

C. Awarding Lead Plaintiff and the Class their reasonable costs and

I expenses incurred in this action, including counsel fees and expert fees; and

D. Awarding such other and further relief as the Court may deem just and

proper.

XIV. JURY DEMAND

Lead Plaintiff demands a trial by jury.

BLAIR A. NICHOLAS (Bar No. 178428) blairnblbglaw.com) LIMO FHY A. DeLANGE (Bar No. 190768) (timothydblbglaw.com ) NIKI L. MENDOZA (Bar No. 214646 (nikiVblbglaw.com) JON ORM (Bar No. 248260) (jonwblbglaw.com )


Case No. IO-cv-06256-MMM (PJWx)

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I Dated: February 27, 2012

Respectfully submitted,

BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP

I TIMOTHY A. DeLANGE


D #:1215

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JOSEPH GOODMAN (Bar No. 230161) a oseph.goodmanblbglaw.com) PAUL M. JONNA (Bar No. 2653 89)

[email protected]) 81 High Bluff Drive, Suite 300

San Diego, CA 92130 Tel: (858) 793-0070 Fax: (858) 793-0323

-and- GERALD H. SILK

Wry(blbglaw.com) 1TJOSEFSON

(aviblbglaw.com) 128 Avenue of the Americas, 38th Floor New York, NY 10019 Tel: (212) 554-1400 Fax: (212) 554-1444

Counselfor Lead PlainffJacksonville Police & Fire Pension And and Lead Counsel for the Class


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#:1216

DECLARATION OF SERVICE

I, the undersigned, declare:

That declarant is and was, at all times herein mentioned, a citizen of the United States and a resident of the County of San Diego, over the age of 18 years, and not a party to or interested in the within action; that declarant's business address is 12481 High Bluff Drive, Suite 300, San Diego, California 92130.

That on February 27, 2012, declarant caused to be served the following documents:

. FIRST AMENDED CONSOLIDATED CLASS ACTION

COMPLAINT

SEE ATTACHED SERVICE LIST

0 (BY U.S. MAIL) I am personally and readily familiar with the business practice of Bernstein Litôwitz Berger & Grossmann LLP for collecting and processing of corresj,ondence for mailing with the United States Postal Service, and S? caused such envelope(s) with postage thereon fully prepaid to be placed in the United States Postal Service at San Diego, Cahforma.

0 (BY EMAIL) I am personally and readily familiar with the business practice of Bernstein Litowitz Berger & Grossmann LLP for collection and processing of document(s) to be transmitted by electronic mail and I caused such document(s) on this date to be transmitted by electronic mail to the offices of electronic mail addressee(s) listed below.

?l (BY OVERNIGHT MAIL) I am personally and readily familiar with the business practice of Bernstein Litowitz Berger & Grossmann LLP for collection and processing of correspondence for overnight delivery, and I caused such document(s) described herein to be deposited for delivery to a facility regularly maintained by Federal Express for overnight delivery.

Executed on February 27, 2012, at San

Cuccurullo, C.P. d Paralegal

DECLARATION OF SERVICE Case No. 1O-cv-06256.MIvIM (PJWx)

28

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SERVICE LIST

Lewis S. Kahn Kahn Swick & Foti LLC 206 Covington Street Madisonville, LA 70447 Tel: 504-455-1400 Fax: 504-455-1498 [email protected]

Attorneys for Plaintff Barry R. Lloyd

Michael D. Braun Braun Law Group PC 10680 West Pico Blvd., Suite 280 Los Angeles, CA 90064 Tel: 310-836-6000 Fax: 310-836-6010 servicebrauniawgroup.com

I Attorneys for Plaint iff Barry R. Lloyd

Darren J. Robbins Catherine J. Kowalewski David C. Walton Jonah H. Goldstein Robbins Geller Rudman& Dowd LLP 655 W. Broadway, Suite 1900 San Diego, CA 92101-3301 Tel: 619-231-1058 Fax: 619-231-7423 E_ file _sdrgrd1aw.corn [email protected] davewrgrdlaw.corn [email protected]

Attorneys for Plaintiff Barry R. Lloyd

DECLARATION OF SERVICE Case No. 10-cv-06256-MMM (PJWx)


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Scott Vick Vick Law Group 800 W. Sixth Street, Suite 1220 Los Angeles, CA 90017 Tel: 310-598-7044 Fax: 310-784-6226 scottvicklawgroup.com

Attorneys for Defendant CVB Financial Corp., Christopher D. Myers and Edward J. Biebrich, Jr.

Wayne M. Carlin Jeffrey D. Hoschander Warren R. Stern David M. Murphy Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019 Tel: 212-403-1272 Fax: 212-403-2324 [email protected] [email protected] [email protected] DMMurphywlrk.com

Attorneys for Defendant CVB Financial Corp., Christopher D. Myers and Edward J. Biebrich, Jr.

DECLARATION OF SERVICE Case No. I0-cv-06256-MMM (PJWx)

Documents

Barry R. Lloyd v. CVB Financial Corp. 10-CV-06256-First ...securities.stanford.edu/filings-documents/1045/... · Ca 2:10-cv-06256-MMM -PJW Document 61 Filed 02/27/12 Page 5 of 96