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EXCLUSIVE: EagleBank Counsel Denies Insider Loan Accusation, Says It's Under Attack

Bethesda-based Eagle Bancorp, the parent company of EagleBank, pushed back Monday against claims it engaged in an insider loan scheme involving its CEO that sent its stock plunging Friday afternoon.  

EagleBank's Rosslyn branch

EagleBank General Counsel Laurence Bensignor, in an exclusive interview with Bisnow on Monday, said he does not expect the initial allegations, made Friday in a report from short-selling research firm Aurelius Value, to be the end of the effort. At least two law firms that specialize in class-action suits have already announced investigations into the bank, with calls for investors to provide information.  

“I expect this to be a multipronged attack with a purpose of making money on the drop in stock,” Bensignor said.

Aurelius’ website does not provide details into the company or its ownership, and it includes a litany of disclaimers for its readers. It said it is short-selling the bank's stock because of the practices it says it discovered. Its report includes allegations that EagleBank loans were used as “cheap debt for equity” in D.C.-area companies in which its CEO, Ron Paul, personally invests, and were used to finance real estate projects on which Paul’s development company is a partner.  

“Our research has uncovered a pattern of conduct that we believe is hauntingly similar to the characteristics that have preceded previous bank failures,” the Aurelius report said.  

Before reading the Aurelius report, readers must agree to a terms of service page that says to assume anyone affiliated with the website has a short position in all stocks it covers, and that they will not update the website if it changes its position on the stock. The disclaimer also says its reports are analysis and opinion, and it makes no representation as to the accuracy of the information.

Aurelius did not respond to a request for comment.  

“This is pursuant to a playbook in which they identify a bank that’s had a strong increase in stock price, and they create a concerted effort to drop the price as much as they can and make money on the drop,” Bensignor said.  

The market responded in a big way following Friday’s report. Eagle Bancorp’s shares began Friday trading at $66.15, but began to fall early Friday afternoon and by market close had plunged to $49.95. With Friday’s drop, the company's market capitalization decreased from $2.26B to $1.7B.  

Eagle Bancorp issued a release Friday after markets closed strongly denying the allegations and saying the Aurelius report is full of falsehoods and misleading claims. It followed with a second release Sunday night further defending its practices as legal and calling on the government to investigate Aurelius for manipulating the market with false rumors.

The stock bounced back upon the market’s opening Monday to a high of $56 per share, before falling again late morning into the early afternoon. At 3:06 p.m. EST, Eagle Bancorp shares were trading for $54.90.  

While the number of investors trading the bank’s stock Friday and Monday came in well above its average volume, Bensignor said those selling the bank’s stock still represented a fraction of total investors. He said he spoke with the bank’s longtime institutional investors, which stand with the bank and were retaining their positions, he said.  

An independent analyst who covers EagleBank, FIG Partners Senior Equity Analyst David Bishop, said he is comfortable with the bank’s response and believes all of its loans have been legal and properly vetted.  

“I took the allegations very seriously, but after speaking with the company at length Friday night and this weekend, we kept our buy rating,” Bishop said. “We’re making no change to our estimates and no change to our $76 target price. They walked me, piece by piece, through the report, pointing out inconsistencies and factual errors. I’m very comforted by their response.”  

Bishop called Aurelius “piranhas” who intended to do maximum damage to the bank’s stock with the Friday release. He believes the stock will eventually bounce back to where it was before Friday, saying sellers are still trading on emotion rather than the bank’s fundamentals, which he said remain strong.  

An investor rights-focused law firm announced Monday it is preparing a class-action lawsuit against Eagle Bancorp. At 10:58 a.m. EST, Rosen Law Firm said it is investigating claims from Aurelius that the bank may have issued misleading public statements to the investing public, and is preparing a class-action suit to recover losses suffered by investors. Also on Monday, New York-based litigation firm Bronstein, Gewirtz & Grossman announced its own investigation.

Bensignor said this was a predictable move that he believes is part of the attack against the bank.  

“It is Plaintiffs 101 procedure to announce an investigation as a way to troll for plaintiffs to see who comes out of the woodwork,” Bensignor said.

EagleBank CEO Ron Paul at a 2016 Bisnow event

EagleBank is one of the largest regional banks and commercial real estate lenders in the Washington region with 21 branch offices throughout D.C., Maryland and Virginia. In 2016, Eagle Bancorp reported $285M in total revenue, and its revenue was up 8% through the first three quarters of 2017.

Paul, in addition to leading EagleBank, runs his own development company and makes personal investments in companies. He is also a philanthropist focusing his efforts on kidney disease, which he was diagnosed with at age 26, and his foundation donated $2.5M to open a kidney center at George Washington University hospital. He was recently given the Urban Land Institute Lifetime Achievement Award, given for lifelong impact on the D.C. built environment.

The founders of two companies Paul invests in, co-working company MakeOffices and restaurant chain Matchbox, have filed lawsuits this year against Paul.

MakeOffices, founded in 2011 as UberOffices, raised $7M in funding in 2014 from developer MRP Realty and a company affiliated with Paul. EagleBank in 2015 agreed to loan the company $10M, according to court documents. In August 2016, the investors, having gained a controlling stake in the company, voted to remove MakeOffices founder Raymond Rahbar and replace him with MRP's Zach Wade. MakeOffices previously had aggressive growth plans that have been scaled back since the leadership change. 

The investors then sued Rahbar in January, claiming he misappropriated millions of dollars of company funds. Rahbar followed with a countersuit claiming the investors conspired to oust him from the company. He said Paul used his position as CEO of EagleBank to offer "cheap debt for equity," meaning the bank would provide loans on favorable terms that would otherwise not be available in exchange for Paul personally buying stake in MakeOffices at a lower price. Rahbar alleges that Paul later threatened to cancel EagleBank's loan to MakeOffices if he did not sign documents confirming that the debt-for-equity deal did not take place.

“This phrase ‘cheap equity’ is not supported by the facts,” Bensignor said. “[Paul’s] equity was paid for in hard cash, pro rata, no special treatment, no cheap equity. It was what it was, the same as anybody else who became an investor.”

In summer 2016, Paul led an $8.85M funding round for D.C.-based Matchbox Food Group, the parent company of the Matchbox restaurant chain with 10 locations. EagleBank had been Matchbox's main lender for at least a decade, and the company owed the bank $25M in early 2016. Then in December 2016, three of its co-founders — Ty Neal, Mark Neal and Drew Kim — who no longer owned controlling stake in the company, were removed from their leadership roles. The shake-up also coincided with a strategy shift to slow the company's ambitious growth plans. 

The Neal brothers filed suit in August against Paul and EagleBank. The suit alleged a similar conspiracy to Rahbar's, claiming Paul plotted to remove them from the company. They allege he used his position at EagleBank as leverage, threatening to cut off the bank's credit to the company if they refused to sell him additional equity, according to Aurelius. 

“Matchbox had a lending and banking relationship with EagleBank for years before Matchbox went to Ron and asked if Ron would put together a group to be an investor,” Bensignor said. “It is not a question of Ron being an investor and bringing them to the bank. They were bank customers first. The only loan that occured after Ron got involved in the board of managers at Matchbox, Ron expressly abstained from.”  

Eagle Bancorp, which is a party in the Matchbox suit, has moved to dismiss it and objected to the way Aurelius used the court documents.  

"It is utterly frivolous," the bank said Friday in a statement. "While it may further Aurelius' financial purpose to selectively quote from these lawsuits and omit material information that investors would surely consider important, such behavior is both disturbing and misleading." 

Ron Paul (left), Mayor Muriel Bowser (center), and the Akridge development team at the groundbreaking of 1701 Rhode Island

The Aurelius report also claims, using screenshots of public documents as evidence, that EagleBank has loaned more than $180M to projects that Paul's development company, Ronald D. Paul Cos., is partnering on.

These projects include Akridge's redevelopment of a former YMCA building at 1701 Rhode Island Ave. NW. EagleBank has publicized that it provided financing for the project. Documents Aurelius included show the size of that loan was $63M. Ronald D. Paul Cos. lists the development on its website and says it is a joint venture with Akridge. Paul held a shovel at the project's groundbreaking

A Federal Deposit Insurance Corp. attorney Aurelius consulted for its report said EagleBank providing a loan to a project Paul's company partnered on violates Regulation O, a federal law prohibiting banks from loaning money to executive officers. Eagle Bancorp denied violating the regulation. 

Given its status as a community bank, Bensignor said it is common for its board of directors to be successful entrepreneurs who have investments in local companies. Bensignor said EagleBank has fully complied with Regulation O in any loans it has made to entities associated with its directors.

“It’s not only not surprising that the bank may be making loans to entities in which the director has an interest, it’s frankly encouraged because that’s how you build a community bank,” Bensignor said.  

Bensignor said that while Ronald D. Paul Cos. bears Paul’s name, the CEO is not personally the owner of every company associated with a project it has invested in, so loans made to the projects are not being made directly to Paul.  

“If you take 1701 Rhode Island, the old YMCA building, a family trust that Ron is not a trustee of, and not a beneficiary of, owns a fraction of a fraction of the interest in that building,” Bensignor said. “It’s totally allowed. It’s disclosed to the extent required. It received all necessary approvals.”  

Akridge CEO Chip Akridge told the Washington Business Journal he does not believe the Aurelius report is accurate and defended Paul's integrity. 

"These guys are top drawer," Akridge told the WBJ. "They are by-the-numbers guys, and I can't believe they would do any of the things they were accused of doing." 

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