Zions, Western Alliance Banks Disclose Bad Loans Tied to Alleged Fraud

(Bloomberg) — Shares of two regional U.S. banks tumbled Thursday after the companies said they were victims of fraud in loans made to funds that invest in distressed commercial mortgages, raising concerns that more cracks are emerging in credit markets.

Zions Bancorp tumbled 12% after it said it took a $50 million write-off on a loan underwritten by California Bank & Trust, its wholly owned subsidiary in San Diego. Western Alliance Bancorp, on the other hand, lost almost 11% of its value after it announced that it was providing loans to the same borrowers.

The biggest decliners in the KBW Bank Index, which recorded the sharpest decline in six months, were Zions and Western Alliance.

The disclosures add to other recent credit booms, including subprime auto lender Tricolor Holdings, which filed for bankruptcy last month, triggering a near-complete write-off of some debts. This was followed by the bankruptcy of auto parts supplier First Brands Group. JPMorgan Chase & Co. and Fifth Third Bancorp disclosed losses totaling hundreds of millions of dollars tied to Tricolor, while Jefferies Financial Group Inc. disclosed exposure to First Brands.

While those hits could easily be absorbed by the largest U.S. banks, the totals are more alarming for regional lenders.

“If JPMorgan has a credit issue with Tricolor, it’s very slim,” analyst Mike Mayo of Wells Fargo & Co. said in an interview. “But if smaller banks run into trouble with these loans, it takes a bigger hit.”

Zions said in a lawsuit that California Bank & Trust owed money from two investment funds affiliated with Andrew Stupin and Gerald Marcil, among other parties.

According to the lawsuit, California Bank & Trust provided borrowers with two revolving credit facilities totaling more than $60 million in 2016 and 2017 to finance their purchases of distressed commercial mortgage loans. The terms gave the bank a “first priority, perfect security interest” in all collateral, including any mortgage loans purchased by investment funds.

However, after an investigation, the lender found that most of the notes and underlying properties had been transferred to other entities. And, according to the lawsuit, these properties were already foreclosed or about to be foreclosed.

Brandon Tran, an attorney representing Stupin and Marcil, declined to comment. A representative for Western Alliance also declined to comment, while Zions and California Bank & Trust did not respond to requests for comment.

Zions said Zions’ investigation stemmed from a lawsuit the Western Alliance filed against the same group in August.

Western Alliance also lent money to the same group of investors to originate or purchase mortgage loans, according to the lawsuit filed by the bank in August. The outstanding balance of this loan is $98.6 million.

Western Alliance found that the collateral should be backed by a first priority mortgage, but this was not the case. He alleged that the debtor created false title policies, bypassing the mortgage liens.

The debtor also withdrew funds from accounts that served as additional collateral, according to the lawsuit. According to the lawsuit, as of Aug. 18, the debtor had just over $1,000 in his bank account at Western Alliance; The required monthly average was $2 million.

Western Alliance, which also has a relationship with First Brands, said it did not expect the issue to change its 2025 outlook.

“There were a number of ‘one-off’ credit events that several banks had anticipated going into the quarter,” Terry McEvoy, an analyst with Stephens Inc., said in an interview. “They did not go unnoticed by bank investors.”

–With help from Georgie McKay.

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