By Francisco Alvarado, FloridaBulldog.org
U.S. Century Bank, founded by big-name Miami developers and businessmen, has a turbulent history. Now it appears headed for even more turmoil.
On Nov. 26, Miami-Dade Circuit Court Judge Beatrice Butchko granted a temporary injunction on behalf of some of those founding members to stop U.S. Century Bank’s six-member board of directors from implementing a $65-million recapitalization plan. The judge determined the plan would unfairly dilute the value of the bank’s existing stock.
U.S. Century is a five-star-rated depository institution by Bauer Financial, an independent bank analyst, with approximately $822 million in deposits and $114 million in equity.
Two weeks before Butchko’s order, a group of shareholders filed suit accusing the board of trying to slash their share of the profits should U.S. Century be sold or go to a public offering. Those shareholders include such prominent names as Sedano’s grocery chain founder Agustin Herran, Miami Super Bowl host committee chairman Rodney Barreto, corporate lawyer Ramon Rasco and TV media executive Jose Cancela.
The complaint, which seeks a permanent injunction, claims the board’s proposal is designed to improperly benefit Priam Capital and Patriot Financial Partners, two Northeast private-equity firms that saved the bank three years ago by investing $41 million in it. The local shareholders also allege that two board members who are principals in Priam and Patriot have a conflict of interest they failed to disclose in an Oct. 12 proxy statement.
“The puppet corporate board members are only servicing the needs of the carpetbagger owners,” said Bernie Navarro, a local shareholder and immediate past president of the Latin Builders Association who is not a plaintiff in the lawsuit. “To change the rules of the game for greed is inappropriate. The board is not aligned with the shareholders in the interests of the bank.”
According to the proxy statement describing the recapitalization plan, the plaintiffs now hold nonconvertible preferred stock. The bank wants to increase the number of shares of common stock and convert existing shares held by the local shareholders into voting and nonvoting common shares – a move plaintiffs contend would erode the value of their shares and plunder their investments.
“You have legacy shareholders that are a who’s who of the Cuban-American business community,” said Mark Raymond, the plaintiffs’ lawyer. “They made agreements with the private equity bankers that came in and they expect the agreements to be lived up to. Instead of inviting them to sit at the table for negotiations, they were excluded.”
A partner with Nelson Mullins, Raymond said Butchko, in granting the injunction, recognized that the board’s recapitalization plan is unfair and inequitable. “It clearly puts money into [the private equity firms’] pockets and takes money from the legacy shareholders without any consideration,” Raymond said. “It is overreaching and grossly inappropriate.”
Raoul Cantero, a former Florida Supreme Court justice who is now a partner with White and Case, represents U.S. Century and the board. He disputed the allegations and Raymond’s characterizations. He said the recapitalization is necessary for the bank to grow.
“U.S. Century Bank is currently in the process of seeking approvals to simplify its overall capital structure to better position itself for potential corporate opportunities, such as expanding through acquisitions or going public,” Cantero said. “Such opportunities are, practically speaking, impossible under the bank’s current capital structure.”
This isn’t the first time U.S. Century’s shareholders were embroiled in a nasty fight over the bank’s assets. In 2009, when it received the largest taxpayer bailout of any Florida bank at $50.2 million, U.S. Century had insider loans totaling $111.9 million. Two years later, the Federal Deposit Insurance Corporation (FDIC) ordered U.S. Century to agree to reforms to block more insider deals. At the time, the bank reported $134 million in losses.
The insider deals sparked a lawsuit in 2012 by minority shareholders, among them real estate developer Masoud Shojaee, to recoup more than $10 million in losses. Shojaee and the other plaintiffs accused some of the bank’s more prominent shareholders — including Barreto and builder Sergio Pino — of “promoting an incestuous culture of insider-lending.”
Among the allegations: Then-chairman and high-profile Cuban-American lawyer Ramon Rasco steered the board to approve lease deals with Pino to open branch locations in properties he owned. Pino allegedly collected more than $11 million from U.S. Century. And the board approved a modification to a $17.5 million loan Barreto took out at a lower interest rate. The Super Bowl committee chairman was a bank board member at the time.
That lawsuit was settled in 2013 for $4.5 million in stock to the plaintiffs despite objections from the FDIC that the arrangement would violate the terms of its enforcement action. The regulatory agency claimed the settlement would deplete U.S. Century’s capital levels. Miami-Dade Judge John Thornton dismissed the FDIC’s concerns as unreasonable and ruled the settlement was not in violation of the enforcement action, according to press reports.
Two years later, U.S. Century struck a deal with Philadelphia-based Patriot and New York-based Priam, with each firm contributing $41 million to inject capital into the bank. Local shareholders contributed $24 million. Of the total $65 million infusion, $12.3 million was used to repay part of the $50.2 million U.S. Century received from the Troubled Asset Relief Program.
Now that the bank is doing better, the current board of directors is being accused of shady dealings by a group of shareholders that includes former board members who were accused of wrongdoing six years ago.
According to the current lawsuit and Butchko’s injunction order, the deal among Patriot, Priam and the local owners gave the bank’s original shareholders a majority interest in U.S. Century’s voting common stock. The local shareholders controlled 50 percent of the voting interests and retained 38 percent equity ownership in U.S. Century. Patriot’s managing partner W. Kirk Wycoff and Priam’s founder Howard Feinglass each got a seat on U.S. Century’s board — a fact that was not disclosed in the proxy statement, the lawsuit alleges. Both men did not respond to phone messages seeking comment.
On Oct. 19, Rasco sent a letter to the board objecting to the proxy statement and the bank recapitalization, the court documents state. Under the terms of the 2015 deal, Priam and Patriot would receive $114 million in the event the bank is sold with the remaining proceeds divvied up between preferred stockholders, who would receive 63 percent, and common stockholders, who would get 37 percent.
Rasco and his fellow local shareholders claim the plan proposed by the board would give Priam and Patriot 87.5 percent of the bank’s total common stock, voting and non-voting. With the bank’s equity set to jump from $115 million to $142 million by the end of the year, Priam and Patriot stand to substantially benefit from the valuation of U.S. Century in any future sale or merger, Butchko concluded.
“If U.S. Century were to sell for twice the $142 Million book value, or $284 million, the legacy shareholders would be entitled to $62.9 Million,” Butchko wrote. “As a result of the proposed bank recapitalization, the legacy shareholders would receive approximately 12 1⁄2 percent of the entire $284 million, or roughly $35.5 Million, which is about $27.9 Million less than under the formula agreed to in the original transaction.”
As a result of the lawsuit and injunction, U.S. Century has been forced to call off a shareholders meeting on the recapitalization plan four times. “We have extended the vote on numerous occasions in an attempt to work with shareholders, and we will continue to be open to their concerns,” Cantero, U.S. Century’s lawyer, said. “The simplification of the capital structure will position the bank to pursue strategies that will accelerate growth and profitability for the benefit of all shareholders. And as is the case now, no individual shareholder would have more than a 9.9 percent voting share of the Bank.”
Cantero also noted that U.S. Century reported six years of consecutive losses totaling approximately $200 million when Priam and Patriot stepped in with $41 million. “The shares of the dissident shareholders bringing this action were nearly worthless prior to recapitalization and the efforts of the new management team and board, which have brought real value to these shareholders,” he said.
Raymond said his clients are proud of the positive direction U.S. Century is headed in, but they are not going to be frozen out of its prosperity. “They are entitled to be a part of the increased profitability of the bank,” Raymond said. “It is disappointing that bank management decided this was the best way to go without involving the legacy shareholders. They had to know there would be an objection.”