The alleged ‘sweeping betrayal of trust’ that rocked Zions bank and spooked Wall Street

Zions Bancorporation lost $1 billion from its valuation in a single day Thursday after announcing a $60 million loan that is unlikely to be repaid.

What led to this point was a messy and complex credit network. zions While the collateral was effectively eliminated, it was secretly put on the back burner by the debtors, he said.

Shares of regional banks fell on Thursday as fears grew about the health of their lending businesses. Zions’ 13% share decline sparked concerns about possible broader problems with lending to the regional bank sector and rattled the entire U.S. stock market on Thursday, with the Dow Jones Industrial average finishing 300 points lower.

Zions subsidiary California Bank & Trust, along with partners Deba Shyam, are suing Andrew Stupin and Gerald Marcil, heretofore unknown managers of various funds using the name “Cantor Group.”

The lawsuit, filed in Los Angeles County on Wednesday, alleges “a gross betrayal of trust by savvy financial borrowers who abused CB&T’s trust, manipulated loan structures for their own enrichment, and systematically eliminated the collateral protections that were supposed to secure the bank’s loans.”

Zions and an attorney representing the defendants did not respond to multiple requests from CNBC seeking comment. The relationship stemmed from Zions CB&T’s approximately $60 million in financing in 2016 and 2017 into two related investment vehicles, Cantor Group II and Cantor Group IV.

The credit facilities were to be used by the funds to purchase distressed residential and commercial mortgage loans.

Zions said they have a written agreement that guarantees them first priority interest, meaning the bank’s security claim trumps other creditors’ claims in the event of default.

But in the lawsuit, Zions said the deeds that were supposed to secure the loans were ultimately transferred without CB&T’s knowledge.

Zions claimed that these underlying properties were transferred to other entities or seized, meaning the collateral was “irretrievably lost.”

The new senior lenders that replaced CB&T were the same executives of the Cantor funds or individuals affiliated with the group, according to the lawsuit. “In effect, CB&T’s losses became Defendants’ gains,” Zions said in the lawsuit. “The debtors and guarantors, acting through a network of affiliated companies, orchestrated a scheme that enriched themselves while stripping CB&T of its collateral, while keeping the bank in the dark for years about the true status of its security interests….”

Zions found out about this only after the related Cantor fund, run by the same leadership, was sued for fraud. Western Alliance.

This led CB&T to launch its own investigation. Zions later filed an 8-K on Wednesday, saying “based on information currently available,” it decided to make provisions for $60 million in outstanding loans and deduct $50 million; This will be reflected in the company’s third-quarter earnings, which it reports on Monday.

In a separate 8-K following Zion’s lawsuit, Western Alliance said it filed its own lawsuit against Cantor, alleging fraud because of the borrower’s “failure to secure collateral loans in the original position, among other claims.” However, Western Alliance said it believed existing coverage covered the liability and confirmed its guidance. Western Alliance reports earnings on Tuesday.