Bank of Internet USA made a name for itself by being the foremost branchless bank in America. Photo: BofI.

Think you had a tough time last week? Try being an investor at BofI Holdings (NYSE:AX), better known as The Bank of the Internet.

Following the filing of a whistleblower lawsuit by a former auditor on Wednesday, the stock fell 30%. The company held a conference call that night to address the situation, and the stock jumped 20% on Thursday. On Friday, however, the bears once again ruled, with the stock trading down another 15%.

Just last month, I talked about why I was taking a pass on BofI stock; In a nutshell, there was just too much potential for hidden risk to wipe out the stock's gains. Though last week's price moves don't conclusively prove my thesis correct, they do highlight the types of risks investors take when they invest with this management team.

Below, I'll go through the individual complaints lobbed at the company by the former auditor, Matt Erhart, and how the company responded to them. I'll finish with a summary of what I plan to do with this new information.

A litany of complaints
Technically, the complaint filed by Erhart's lawyer in California has to do with retaliation and wrongful termination of employment for someone with whistleblower status. The meat of the story, however, isn't the wrongful termination, but the information that Erhart said that he dug up during his time at BofI as a junior auditor.

To get a clear picture for where all of the allegations stand, I've compiled a list of the complaints that management spent time refuting on the company's conference call .



Actual Complaint



The company committed fraud by falsifying financial reports

"Senior bank management...may be falsifying the company's financials."

"The bank has never misstated its financials"


The board of directors never approved any strategic plan.

"The board did not actually approve the Fiscal 2015 Strategic Plan."

"The Bank presented the 2015 business plan to the Board of Directors in July 2014 for approval, at which time it was ...approved."


There were huge risks being ignored.

"Four customers accounted for...25% of total deposits, and nine customers accounted for...40%."

"The top four customers and top nine customers represent approximately 3% and 5% of total deposits"


The company lied to regulators about having Tax ID numbers (TINs) for all customers

"The plaintiff saw a spreadsheet...disclosing 150-200 accounts where the borrower does not have a TIN"

"That folder was prepared for and delivered to the OCC in response to the [different] catch-all request for BSA information."


The bank was doing business with serious criminals

"The plaintiff was able to readily uncover information that many of the borrowers were criminals, even notorious criminals."

"There were a couple of borrowers, maybe three, that subsequent to the time that we made the loan, had some involvement in either an investigation of some kind or some sort of criminal inquiry."


The bank wasn't adequately holding enough cash to account and cover potential loan losses

"The bank recently calculated Allowances for Loan and Lease Losses (ALLL) to exclude unfunded commitments for lines of credit."

"He did not understand which of the Bank's loan types had unfunded commitments...A review by the Bank's external auditors and examiners conclude that there are no significant findings."


Management outlawed emails to reduce the possibility of a paper trail

"[Audit Department employees] would no longer be permitted to use Microsoft Outlook to communicate."

"All Bank staff...has full and unfettered access to Microsoft Outlook."


CEO Greg Garrabrants was laundering money

"Garrabrants was depositing third-party checks for structured settlement annuity payments into a personal account."

"You can clearly see a Form 4 filed with that information."

Sources: Complaint filed in California, and accessed via Slideshare, company SEC filings of conference call.

I find that the company's response for most of these complaints make sense (though I don't think the point about money laundering was adequately rebutted). But there's a larger problem that I am beginning to sense, and it has to do with the culture of opacity at the company.

It's important to note that while the company clearly had access to the complaint prior to the conference call , there were many complaints that they did not address, nor were they asked about during the conference call.

Among these alleged wrongdoings:

  • California state law was broken when BofI representatives called lottery winners about a financial product, but didn't relay that the call was being recorded. When Erhart brought this up, he was told to "remove evidence of the violation ." Further, he was told to mark his report as "Attorney Client Privileged" so as to avoid it being discoverable in litigation.
  • The company "had not been making timely deposits to employees' 401K accounts."
  • Various regulatory agencies asked for information about subpoenas BofI had received or was aware of, and the company did not turn over all relevant information.
  • Senior Vice President John Tolla "had repeatedly changed the findings on numerous reports required under the Bank Secrecy Act's Quality Control requirements." 
  • The company did not turn over all relevant information to the OCC about the company's decision to terminate its Global Cash Cards program. Additionally, "Tolla repeatedly instructed staff not to inform the OCC about why the relationship was terminated." 

It is not the individual accusations of wrongdoing that concern me here—accidents happen at any bank. Instead, it is the alleged response of management to essentially cover this information up that gives me pause.

Already cleared by regulators
In the end, BofI bulls have a strong argument sitting in their back pocket. Over the past year, BofI was under scrutiny by federal agencies looking to approve an acquisition that BofI was making from H&R Block. Erhart has been clear that he shared these concerns with regulators. In the end, the transaction was approved, and BofI was cleared.

There's no way to know, however, if regulators simply missed something, or weren't given the correct information. Indeed, Erhart wasn't the only auditor to leave the company during the past year. His direct boss, John Ball, also left the company.

In the complaint, Erhart claims that Ball, "resigned abruptly after refusing an order from CEO Garrabrants to engage in what Mr. Ball reasonably viewed to be unlawful conduct to cover up the bank's wrongdoing ."

Garrabrants had a difficult time explaining the circumstances surrounding Ball's departure on the conference call. The vague picture that he painted was that Ball had grown tired of overseeing Erhart, and was frustrated when the company refused to fire Erhart at Ball's urging.

On Thursday, however, The New York Times offered a very different view of the situation. The paper said that a person close to the situation who wished to remain anonymous "said [Ball] left Bank of Internet because of concerns about how the bank was responding to regulators...Ball believed Mr. Erhart's audit work to be excellent." 

What this all comes down to
Without evidence of a smoking gun, what this really comes down to is a "he said, he said" type argument. I have a feeling that Erhart filed the suit not because he wants compensatory damages, but that he wants to force the company's executives to testify under oath.

Sans that taking place, the question that investors are left to ask is simple: Who do you trust?

If you trust management, then the stock is a pretty good buy at today's prices. If, however, you think Erhart is providing an account that's far too detailed not to have at least some truth to it, the stock's price could well continue to fall.

In the end, I'm not sure if Erhart is totally believable, but I do know that I have absolutely no interest in investing money with Garrabrants. I've found him to be combative and belligerent over the past year.

  • When asked on an earlier conference call if the company had to adjust its practices because of regulatory review, he responded by saying: "[My dad] used to say... when you get a question, like, 'Have you stopped beating your wife?' you always have to step back and say, 'Wait a minute. What was that -- just question? '" 
  • When The New York Times printed an earlier story on BofI, Garrabrants stated that short-sellers would be running into an "earning juggernaut."
  • On the most recent conference call, he boasted loudly about the results for the upcoming quarter, and said he'd "absolutely" be buying shares if allowed to. Remember that BofI was selling at around $100 per share just this June, and Garrabrants showed no open market purchases during this time. Nor has he had any in the past two years.
  • Describing how he viewed the company's short-sellers and what he planned to do to them on the most recent conference call, Garrabrants said: "I will guarantee you in my the time we are done, we will find a coordinated effort with the media, with short-sellers, and with Mr. Erhart to provide a variety of material non-public information to individuals who ultimately have been worried about the dollar sign. But they are going to have to remove the [S]. So instead they can be worried about tiny bars.

I find all of these statements to be very unbecoming of a CEO of a publicly traded company, with the last one being a particularly odd attempt at visual humor. If the bank truly is an "earnings juggernaut," then let the results speak for themselves, instead of hyping up investors' interest and then stating that they'll have to wait until the end of the month before getting actual numbers to review.

But this type of behavior matches up well with the reviews that the company gets from its own employees on

Here's generally how the company fares:


These are very low scores across the board, with less than half of all employees having a favorable outlook for the company, being willing to recommend the company to a friend, or approving of the job that Garrabrants is doing.

Again, there's no smoking gun here -- BofI could be completely faultless. But when all of the individual puzzle pieces are put together, I simply think that there's too much uncertainty and opacity for this to be a wise investment with my own money.

Obviously, every investor needs to make the best decision for him/herself. Hopefully, this information will help you make an informed one.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.