ROLLUPS BY BANKATLANTIC FINANCIAL CORP. WEDNESDAY, JULY 10, 1991 HOUSE OF REPRESENTATIVES, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC. The_subcommittee met, pursuant to notice, at 10 a.m., in room 2322, Rayburn House Office Building, Hon. John D. Dingell (chairman) presiding. Mr. DINGELL. The subcommittee will come to order. The solution to the current banking crisis suggested by the administration is not a demand for more competent bank management or more effective regulation. Rather, the administration is proposing legislation to allow banks to diversify into other lines of business such as insurance, investment banking and real estate. Today, the subcommittee will examine the consequences of a group of tangled fiduciary responsibilities involving one Alan Levan, a Florida banker and general partner of a real estate investment trust and other things. Today, Mr. Levan will appear before us. Ten years ago Mr. Levan was peddling stakes in limited partnerships in real estate investments. Today, he is swapping junk bonds in his Florida savings and loan holding company for the real estate bought by the investors. Today, we will inquire as to how well the investors are doing under his kind and benign management of their affairs. Mr. Levan is still the general and managing partner in a series of limited partnerships. However, since selling real estate partnerships he has also become the Chairman and Chief Executive Officer of a Bank Holding Company, BankAtlantic Financial Corporation. He also holds a position as Chairman and Chief Executive Officer and is the owner of at least a 70 percent equity interest of a large savings bank, BankAtlantic in Fort Lauderdale, Florida. BankAtlantic is a $2 billion operation. When the bank experienced hardships such as cashflow and regulatory problems, Mr. Levan found some interesting things to do. He recently told the staff of this subcommittee a Florida Bank in 1988 and 1989 could not get a loan anywhere. He found innovative solutions. One of his solutions was to turn to his other financial entities such as real estate limited partnerships for the required cash infusion for the bank. He proceeded then with a novel rollup scheme of the various limited partnerships. He combined several of the partnerships. Apparently, large underlying real estate holdings were siphoned off from the benefit of the investors. In exchange the investors or limited (1) partners received subordinated debentures in the bank holding company, whose only real asset was a troubled bank. The best real estate was then immediately sold off. Some $17 million was netted. This was then used as a cash infusion to help the bank. The views of the limited partnerships and the real estate investors had not been fully explored, but I think that they would be interesting and perhaps different than the views that would be expressed by Mr. Levan or the bank about the virtues of this arrangement. As a result, the limited partners exchanged their real estate for $30 million-and I quote now-"in junior junk bonds." One knows what junk bonds are. We will inquire as to what junior junk bonds might be. Those junior junk bonds were in a troubled bank. The bonds have a face value of $30 million. They are, however, currently worth only $6 million. Six million dollars worth of junk bonds have been exchanged for $17 million in cash from real estate sales on which the general partner, we gather, had some fiduciary relationship and some duty to hold for the benefit of the other part ners. In addition, Mr. Levan continues to hold, we are told personally, some eight other properties worth between $5 to $15 million. It appears that Mr. Levan and the bank have done splendidly. Some of the limited partners, we gather, will have an opportunity to express a widely held but significantly different view. Questions: Did the limited partners get fleeced by their general partners? Was their best interest preserved and protected? We gather that today they will make an argument that they got fleeced. Did the bank and the bank holding company where Mr. Levan had his large personal financial interest benefit from the deal? It appears they did. What was Mr. Levan's fiduciary duty as general partner? Did he have a responsibility to protect the interests of the limited partners? It would appear that he did. The question then is, did he do so and, if so, how? Mr. Levan has admitted to the subcommittee staff that he wore many fiduciary hats. In other words, that he had a tangled and competing web of fiduciary duties to the limited partners, to the bank holding company and to the bank, and also to Mr. Levan. He was faced with an obvious conflict of interest. How he resolved this conflict of interest and how he carried forward his competing duties makes interesting listening, and I am sure the committee will enjoy hearing it today. Moreover, the competing fiduciary duties only occurred after the real estate investors were locked into the partnerships. The Chair notes parenthetically, that it is interesting that while the limited. partners lost 80 percent of their investment-and that appears to be the figure-and while the bank and the bank holding company continue to lose money, Mr. Levan has been paying himself about $1 million in annual salary. We must observe this is probably because of his exemplary management both of the affairs of the bank, the holding company and, of course, of the limited partners. It can be noted that the limited partners probably have a different view on these matters. We will find with interest that the Federal Government was doing certain things while this was going on. The Securities and Exchange Commission reviewed Mr. Levan's 340 page prospectus which was sent to small investors involved in the limited partnerships explaining the benefits of rolling up the partnerships and exchanging the underlying real estate for subordinated debentures in the bank. The SEC, after its review, made a declaration. It "declared effective" Mr. Levan's disclosure of the deal. The SEC, however, has assured the subcommittee that they make no judgment on the merits of the deal for limited partners, only on the adequacy of the disclosure. It is unfortunate that it appears here that Federal law does not afford sufficient protection for small investors in middle America but rather, that they are expected to read and digest the nuances of a deal that takes the document of the size of a city phone book to explain. It also has to be observed that this document is enormously complex, usually reviewed by busy people of limited experience in these areas, and often times reviewed under time pressures and under conditions where very limited opportunity to really object to the process is afforded them. It should be noted that evaluation even by professionals is difficult and it takes time. It shall be noted that the SEC has been investigating various reports and various aspects of Mr. Levan's rollups. The Federal Home Loan Bank Board, the predecessor to the Office of Thrift Supervision, reviewed Mr. Levan's proposed rollups and determined that they were a good deal for the bank. That was the only concern of the Office of Thrift Supervision. We will have them before us to discuss in greater detail their views, and just who it is that that Agency wants to protect. Whether it is fair for the limited partners is not a concern to OTS. More recently OTS has entered into a supervisory agreement with Mr. Levan and BankAtlantic over continuing problems with the bank. The major concern, of course, is allowing banks to diversify into other fields. It must be observed that we will be inquiring into how the assets of the bank will be used to prop up other financial interests or how other financial interests will be used to prop up the bank and the bank officers. In this case, it appears that the assets of the limited partners were used to prop up the bank. It doesn't appear that they are particularly grateful for the privilege of propping up the bank. As a matter of fact, it is not clear that they had much say in whether or not they were going to prop up the bank or not. It is very clear that they have suffered a small benefit, if any, from their kindness-voluntary or otherwise-in propping up the bank. It is clear that the tangled fiduciary responsibilities and financial interests lead to curious economic decisions and behavior from the standpoint at least of those who put their money at risk. The committee is not suggesting Mr. Levan did anything illegal. We will be looking with some diligence to see whether or not that is the case. It is possible that the entire scheme may have been perfectly legal, which makes it far worse from the standpoint of public policy. The question I think that we are going to have to look at here today is should the Federal Government loosen regulatory controls on banks and allow them to enter into financial fields like real estate, investment banking and insurance, and allow officers and owners to have and to enjoy the benefits of tangled, conflicting fiduciary duties; those duties which, because of the entanglement, permit them to serve their own interests best and second the best interest of the banks. Last, perhaps maybe, to serve the interests of the investors. It would appear at this time that the best and simplest answer is no. We will, however, look for the benefit and the guidance of anyone who will want to suggest to us that the answer might be yes. The Chair recognizes my good friend from Virginia. Mr. BLILEY. Thank you, Mr. Chairman. I commend you for calling this hearing today, to examine the rollup of real estate limited partnerships by a bank holding company, the BankAtlantic Financial Corporation and the activities of its CEO and largest shareholder, Mr. Alan Levan. Mr. Levan wears a number of hats in the various transactions and relationships we are examining today. As I mentioned, he is the Chief Executive Officer and largest shareholder of BankAtlantic Financial Corporation, a holding company. He is also CEO and the largest shareholder in its subsidiary, BankAtlantic, a Federal Savings Bank. Finally, he is managing and general partner of the real estate investment that did the rollup and the proposed rollups that are the subject of this hearing. Obviously, the potential for conflicts of interest in such intertwining roles is great. This potential conflict, combined with the various fiduciary duties imposed by each role, makes it imperative that we set out what the groundrules are in these type of transactions. Once we establish that, we can begin to look at what changes might be made to make such transactions more fair to all involved. There appears to be only one winner here, Alan Levan. As general partner of the real estate investment, he has seemingly been able to keep his various enterprises alive by employing the rollup tactic. It is clear that the limited partners, the real estate investors, have not benefitted nor are they likely to. The issues raised are troubling, and I look forward to the testimony. Thank you, Mr. Chairman. Mr. DINGELL. The Chair wants to make one quick observation. That is that the inquiry into which the subcommittee is engaged is one that has been handled with the full cooperation of both the subcommittee staff, the minority staff and of the members and the Chair on both sides of the aisle. The first panel of witnesses are members of both staff of the subcommittee on the majority and on the minority side of the committee. They have done a superb job for which the subcommittee thanks them. They are Mr. Bruce Chafin, Special Assistant to the subcommittee; Mr. Thomas C. Montgomery, Esquire, Minority Counsel to the subcommittee; Mr. Richard Hynes, also a Special Assistant to the subcommittee. Mr. Hynes, Mr. Montgomery and Mr. Chafin, we thank you for being here to assist the committee in its business. You gentlemen are well familiar with the rules and practices of the committee, but in order to comply fully with the process you gentlemen are aware that copies of the Rules of the subcommittee, the full committee and of the House are available to you there to |