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The War Between an Analyst and a Bank

Richard X. Bove is a bank analyst who likes to take what he calls “extreme positions.” He occasionally moves the stock market, which has earned him a certain amount of prestige and notoriety — but has also gotten him fired several times.

One recent Tuesday morning, for instance, Mr. Bove opined from his bright-orange home office, in this town just north of Tampa, that new government rules would curb mortgage profits and, therefore, bank profits, too.

It wasn’t a particularly extreme pronouncement, by Bove standards. Yet shares of Wells Fargo , the nation’s largest mortgage lender, started to drop, and his phone lighted up.

“That’s what makes the game fun, right?” he says.

But for the last two years, Mr. Bove has been engaged in a lonely legal battle to retain his ability to say whatever he likes, an ordeal that he says has been anything but fun. BankAtlantic, a Florida bank, sued him, accusing him of defamation after he wrote a report about the banking industry in July 2008, just as the financial crisis was starting to boil over. The bank contended that the report falsely suggested that the institution was in trouble.

The case was settled three months ago, and Mr. Bove didn’t pay a dime to BankAtlantic. Still, it was hardly a resounding victory for Mr. Bove or, for that matter, freedom of speech on Wall Street, where some say the need for independent, probing voices has never been more apparent.

Although Mr. Bove is among the best-known analysts on Wall Street, most of his colleagues deserted him after BankAtlantic filed its suit. None of the professional associations that represent analysts or the securities industry rallied to his side, and his employer ultimately abandoned him. And Mr. Bove, 69, is stuck with nearly $800,000 in legal fees.

“Even though from a legal standing I won, from a real-world point of view I lost big,” he says.

The Bove report that led to the lawsuit, titled “Who Is Next?,” ranked 107 bank companies from riskiest to least risky, using two financial ratios as benchmarks on two lists. BankAtlantic Bancorp , the publicly traded holding company that controls BankAtlantic, was ranked 10th on one list, 12th on the other.

Alan B. Levan, the chairman and C.E.O. of BankAtlantic Bancorp, has often clashed with disgruntled investors and critics in his 40-year career in Florida real estate and banking. He says he filed his suit against Mr. Bove to protect his bank’s reputation.

“In the last three years, every business in America has been under extreme pressure because of the economy,” says Mr. Levan, 65. “In that kind of a scenario, when rumors begin that are inaccurate or portray a business in a light that is not true, then, in times of stress, companies need to correct those misconceptions immediately because otherwise it can become quite dangerous.”

As it turns out, however, Mr. Bove’s rankings have proved to be largely correct. On the first set of rankings, 8 out of the 20 companies he said were most at risk have failed, and most of the others’ stock prices have spiraled downward and remain low. On the second list of rankings, 9 of the top 20 banks are gone.

BankAtlantic Bancorp’s stock trades at just under $1, down from its record high of $100 at the end of 2004. The company continues to struggle under the weight of its huge Florida real estate holdings, and some analysts say tighter banking regulations will only add to financial pressure at the company.

Maclovio Pina, a banking analyst at Morningstar, says BankAtlantic is likely to continue to struggle. “It’s a murky future, in our view,” he says.

While it is not unusual for bank executives to grumble about analysts, it’s highly unusual for them to sue. For one thing, many lawyers believe that it is hard to successfully sue someone over his or her opinions. It’s also a challenge to prove that a report from a single analyst actually hurt a company’s business.

But the BankAtlantic suit, closely watched in the banking industry, seemed to capture the angst that many bank leaders felt in 2008, when even some of the most venerable institutions faced the precipice.

Mr. Levan was not the only bank executive to blame others as his company’s stock tanked. A chorus of banking chiefs at the likes of Lehman Brothers and Morgan Stanley publicly blamed skeptics and investors betting against them as the reason their shares fell.

Few banking executives, however, have pushed their complaints as far as Mr. Levan.

IF Mr. Levan is sensitive about his bank, it may be because he built it from a sleepy savings and loan into Florida’s second-largest bank, behind BankUnited. He controls the bank and the holding company along with a small group of associates, including his son, Jarett Levan, who was named chief executive of the bank in 2007.

The ownership structure is complex: Alan Levan and his associates control a company called BFC Financial, which owns shares in BankAtlantic Bancorp, the company that, in turn, owns BankAtlantic. Mr. Levan and his associates control BFC and BankAtlantic through special classes of voting shares.

More lawsuits

“We don’t like different classes of shares,” says Paul Hodgson, senior research associate at the Corporate Library, which monitors corporate governance practices. “We don’t think they are good for public shareholders, and our reasoning behind that is that it’s too easy for the controlling shareholder to run the company for their financial benefit rather than the benefit of public shareholders.”

Mr. Levan says that he doesn’t agree with such criticisms. His company’s stock structure has allowed him to remain independent while many other Florida banks have been absorbed by out-of-state banks or gone out of business. He notes that the stock structure is similar to that of The New York Times Company.

Mr. Levan moved to Florida after a brief stint on Wall Street and started in the real estate business. In the mid-1980s, he entered banking by buying up shares of BankAtlantic, then the Atlantic Federal Savings and Loan Bank. By 1987, he was running the place.

As C.E.O., Mr. Levan oversaw 20 years of expansion. He rebranded BankAtlantic as “Florida’s most convenient bank,” keeping branches open on weekends. The bank’s strong branch network is one of the company’s best assets, analysts say, providing it with a stable source of funding.

Along the way, Mr. Levan has often gone to great lengths to protect his bank’s fortunes and his own reputation.

In the 1980s, for example, after several quarters of losses, BankAtlantic was in such dire straits that Mr. Levan had to scramble financially to keep it afloat, according to court documents.

Mr. Levan, who was running partnerships that invested in Florida real estate, persuaded thousands of small investors in his deals to swap their stakes for debt in BFC. He then turned around and sold that real estate, giving him money to bolster BankAtlantic’s finances, court records show.

Some of the investors later sued Mr. Levan, arguing that they had been cheated. A judge in a related case supported that view, writing that the transactions were a deal that “a person even mildly familiar with investments would conclude was unfair.”

ABC News broadcast a critical report on Mr. Levan’s real estate deals, and he sued the network, accusing it of slander. ABC ultimately won, after the Supreme Court declined to hear the case.

More recently, as BankAtlantic’s loan portfolio was battered in the recession, Mr. Levan took several steps to shore up the bank’s finances and to appease regulators, including an announcement this month that the bank was seeking to raise $125 million in capital.

He has also shifted troubled assets from BankAtlantic to its holding company. Because regulators don’t require the holding company to be as financially sound as BankAtlantic, the maneuver appeased regulators while shifting the burden to the holding company.

In 2008, Mr. Levan sold $101.5 million of distressed commercial loans from the bank to the holding company for 93.5 cents on the dollar. Since then, the loans have lost half their value, but the transfer prevented that downturn from more seriously undermining BankAtlantic.

Legislators and regulators, as part of the recent financial overhaul, are planning new regulations that would require holding companies, as well as their subsidiaries, to be more financially sound.

As his career ascended, Mr. Levan was in the news over a personal matter. In 1988, three gun-toting thieves broke into his Coral Gables home, kidnapped his first wife and their daughter and demanded nearly a quarter of a million dollars in ransom. Mr. Levan paid the kidnappers, and his family was later found unharmed in the trunk of their Mercedes-Benz, according to The Miami Herald.

A former colleague at BankAtlantic says that while Mr. Levan has a friendly, slow-talking demeanor, he is fast to size up situations and always ready to jump into combat. He doesn’t respond well to criticism and has a tendency to continue battles for too long, says this person, who requested anonymity because he didn’t want to alienate Mr. Levan.

Mr. Levan disputes that observation. “If anything has become clear from recent events, it is that we have encouraged and tolerated dissenting views almost to a fault,” he says. “We survived the last banking crisis, when giants failed, by being flexible in our approach to complex issues and ahead of the curve.”

The powder keg

Mr. Bove, who grew up in New York City, is a bit of an anomaly among bank analysts. He is twice as old as many of his competitors and relishes talking to the news media; many others aren’t allowed to make such appearances or do so only grudgingly. And he works out of his home for a small securities firm, with grandchildren and dogs cavorting outside his door, rather than at a big bank in Manhattan.

He has been covering banking for about three decades, even as many of his contemporaries have moved on to careers in money management and other more lucrative work. “For some reason I really like what I do, and I just don’t want to do anything else,” he says.

Even in the midst of the BankAtlantic litigation, Mr. Bove continued to crank out at least one report a day and sometimes as many as five. He says he tries to capture the big picture rather than focus on the granular financial details found in earnings statements.

“What’s the reason to pay me to be the 14th guy to tell you what is going to happen in the second quarter at Citigroup?” he says. “There’s just no utility for a guy at a boutique that operates pretty much on his own to replicate the work of other analysts.”

A high point in Mr. Bove’s career came in 2005. That August, he issued an eight-page report titled “This Powder Keg Is Going to Blow.” He argued that loose lending standards had created the housing bubble and that it was going to come to an abrupt and painful end.

“When I wrote that, people thought I was nuts,” he recalls. “Now if I would have stayed with that until 2008, I’d be America’s hero.”

After correctly parsing the looming banking crisis, Mr. Bove felt that by the spring of 2008, the worst had passed. He made a major blunder by encouraging investors to buy up bank stocks at the time and remained bullish through the summer, when he released “Who Is Next?” Bank shares collapsed months later, before rallying again in 2009.

Even as he has bounced from one firm to another, he has maintained a healthy list of clients. Banks and mutual funds are his biggest clients, followed by hedge funds, he says.

Some bank executives who have known Mr. Bove over the years hold him in high regard.

“We certainly haven’t always agreed with his assessments,” says John A. Allison IV, the former chief executive of BB&T, the major regional bank based in Winston-Salem, N.C. “My experience was that he gave a very thoughtful overview. I would rate him highly.”

Mr. Bove has his share of detractors, too, who criticize him for ubiquitous media appearances and a predilection for changing his views too quickly. Several suggest that Mr. Bove is inconsistent, making a brilliant insight one week, a mediocre one the next.

But Andy Kessler, a former Wall Street analyst, says it’s common for analysts to change their style to cater to their clients. “If your clients are mostly hedge funds, you’re going to give lots of short-term analysis,” he says.

Mr. Bove moved with his wife, Christel, who is blind from multiple sclerosis, and their seven children to Florida from New York in 1994. It was after that when he says he encountered Mr. Levan, in a series of meetings in the late 1990s. Mr. Bove recalls Mr. Levan being upbeat about BankAtlantic’s prospects.

“I don’t remember ever having a contentious or negative meeting with BankAtlantic,” says Mr. Bove. As for Mr. Levan: “He was a very personable individual. He was friendly. He was open. I thought he answered the questions in a very frank manner.”

THE oddity of the BankAtlantic lawsuit, Mr. Bove says, is that he was actually trying to show that he was more bullish on banks than other analysts, which turned out to be a mistake, given the financial crisis that followed. The subtitle of “Who Is Next?,” in fact, is “Not as Many Candidates as One Would Think.”

After the report was filed, it took just eight days for BankAtlantic to file its lawsuit. Mr. Levan said in a statement at the time: “If there is anyone who knows ‘Who Is Next?,’ it would be the folks at the F.D.I.C., with mountains of detailed financial information about every institution enjoying deposit insurance. They, however, keep what they know to themselves — for good reason.”

Free and robust debate

The bank wanted Mr. Bove to correct his report, which had ranked the holding company, not BankAtlantic itself. Mr. Levan argues that the media misinterpreted the report and reported that the bank, rather than the holding company, was in trouble. The distinction is important, he said, because the bank has remained well capitalized. Those capital levels kept regulators happy, even as some analysts questioned the health of the holding company.

To a certain extent, Mr. Levan is simply splitting hairs: it’s the holding company that is publicly traded, and its assets are almost entirely made up of BankAtlantic assets, so the fortunes of the two entities are tightly linked.

Mr. Bove said that if he hadn’t fought the lawsuit, he and other analysts would find their work and careers undermined by constant flurries of suits.

“I’m trying to protect my ability to do my job,” he says. “Any company could direct my research if I had allowed this to go through.”

Still, other than a few pundits, no one stepped forward to help him, Mr. Bove says. Several associations that represent stock analysts or the securities industry declined Mr. Bove’s requests to help him pay his legal bills, he says. Those groups — the Securities Industry and Financial Markets Association; the New York Society of Security Analysts; and the CFA Institute — declined to comment.

Mr. Bove’s former employer, the investment bank Ladenburg Thalmann, chose to settle its end of the case by paying BankAtlantic $350,000, without admitting to any wrongdoing, and leaving Mr. Bove to defend himself; he said he quit the firm in February because of disagreements over the lawsuit. He now works for Rochdale Securities.

The Financial Industry Regulatory Authority, an independent securities watchdog, started an investigation of Mr. Bove in 2008, demanding his records on BankAtlantic and questioning him for half a day. He was never penalized.

Ladenburg declined comment, as did the authority, which also declined to say why it began its investigation of him.

John C. Coffee Jr., a law professor at Columbia University, likens Mr. Bove to a news reporter who is sued over an article. But, he says, the press typically rallies around reporters whose First Amendment rights are challenged, while securities analysts are a much less cohesive group.

Nonetheless, Mr. Coffee says the stakes in the Bove case were high because a negative outcome could “chill free and robust debate.”

“Anyone who is forced to settle in a case like that increases the chances that a combative C.E.O. will sue the next analyst who challenges him,” Mr. Coffee adds.

As part of his lawsuit against Mr. Bove, Mr. Levan maintained that BankAtlantic was financially healthy. While it is true that BankAtlantic has met its regulator’s financial requirements, the holding company, which has absorbed a large chunk of BankAtlantic’s troubled assets, has lost money for the last 12 quarters. And it was the holding company that Mr. Bove was ranking, not the bank subsidiary housed inside of it.

"Anyone who is forced to settle in a case like that increases the chances that a combative C.E.O. will sue the next analyst who challenges him." -Law Professor at Columbia University, John C. Coffee Jr.

Although Mr. Levan said in an interview that his bank didn’t apply for federal bailout money during the financial crisis, the bank’s own financial filings show that it did apply. Asked about this, Mr. Levan sent an e-mail clarifying the matter: “We filed an application to keep our options open but withdrew it prior to the time it was acted upon. At no time did we ever make a determination to accept federal monies.”

In February this year, Mr. Levan approached some of BankAtlantic’s debt holders and asked them to sell their securities back to the bank for 20 cents on the dollar. Investors balked, led by a New York hedge fund called Hildene Capital Management.

“In light of BankAtlantic’s protests of any criticism of its performance, its current proposal seems out of step with its fanatical defense of its financial condition,” wrote John Scannell, chief operating officer of Hildene, in a February letter. “For example, BankAtlantic seemed so concerned with any implication that it was experiencing distress, it sued noted banking analyst Dick Bove in 2008.”

Instead of asking the debt holders to accept a discount, Mr. Scannell says he suggested that Mr. Levan and his son take big pay cuts. Mr. Levan says he doesn’t recall details of his conversations with Hildene, but says the firm didn’t influence his decision to ultimately give up on the debt exchange offer.

Last month, a federal judge in a shareholder lawsuit against BankAtlantic’s holding company questioned Mr. Levan’s integrity, ruling that Mr. Levan had made false statements in 2007 about the extent of bad loans. The plaintiffs argue that Mr. Levan did so intentionally in order to artificially bolster the stock price.

Mr. Levan denies that accusation and doesn’t agree with the judge’s assessment, either, but on Thursday the judge turned down Mr. Levan’s request to reconsider the matter. The case is pending.

Mr. Levan, meanwhile, is dueling with investors of other companies in which his company owns stakes — Benihana, the restaurant chain, and Woodbridge Holdings, formerly known as the Levitt Corporation, the home builder famous for building Levittown on Long Island.

BankAtlantic entered into settlement talks with Mr. Bove in his case in March. In the case, Mr. Levan said Mr. Bove’s report had damaged the bank’s reputation.

But “at the end of the day, that may not have been a strong case for them,” says Thomas F. Holt Jr., a lawyer for Mr. Bove. If the case had gone to court, Mr. Holt said, he planned to counter BankAtlantic’s argument by putting the bank’s reputation on trial.

Mr. Levan disagrees with that assessment. “There was nothing Mr. Holt said he was going to say or do that had any bearing on our view of the case against Mr. Bove,” he says.

MR. LEVAN says he and BankAtlantic got exactly what they wanted out of the lawsuit against Mr. Bove. As part of the settlement, Mr. Bove issued a statement reiterating that his rankings didn’t include BankAtlantic. (But they did include its holding company.)

Yet Mr. Levan may not have won everything he sought. For one, he said the bank did not sue Mr. Bove for money; however, e-mails from BankAtlantic’s lawyer show that the company sought as much as $650,000 from the analyst. In addition, BankAtlantic had sought a much more strongly worded statement than Mr. Bove ultimately issued, the e-mails show.

Regardless, Mr. Levan remains upbeat about his bank. He and his son rang the bell at the New York Stock Exchange last month, and Mr. Levan contends that his company is “a fantastic banking story of a bank that really did extremely well in this recession.”

Mr. Bove, meanwhile, says his feud with Mr. Levan was mostly dispiriting. He’s particularly frustrated with government regulators, whom he believes ignored red flags at BankAtlantic for years.

As he continues to churn out opinions about bank stocks, Mr. Bove says he has no intention of opining on BankAtlantic Bancorp again. Nothing personal, he says, but the banking company is simply too small to interest his clients.

“It’s a purely economic decision,” he says.

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