Dive Brief:

• Western Alliance has sued investment bank Jefferies, accusing the firm of breach of contract and fraud related to unpaid debt connected to bankrupt auto parts supplier First Brands, the lender said Friday. 
• On a conference call Friday, Western Alliance CEO Ken Vecchione said he was “very surprised” when Jefferies informed the bank that $126.4 million it owed to Western Alliance this quarter would not be paid. “To me, it was quite shocking,” Vecchione said.
• Litigation was not Western Alliance’s preferred path, Vecchione said, adding that he met with Jefferies CEO Rich Handler on March 1, to emphasize that collaboration was preferable. “Yet litigation is the path that Jefferies left us with, and the path we must pursue to serve our stakeholders’ interest,” Vecchione said.

Dive Insight:

Last October, Jefferies disclosed a $715 million exposure to First Brands through Point Bonita Capital, a subsidiary of Jefferies’ Leucadia Asset Management. 

Phoenix, Arizona-based Western Alliance extended a loan to Point Bonita, which was secured by receivables that Leucadia’s LAM trade finance group had purchased from First Brands, Vecchione said. Western Alliance’s complaint was filed in New York Supreme Court against Jefferies, Leucadia and affiliates.

Jefferies issued its own statement Friday on the lawsuit, which the company believes is “without merit” and “will be defended vigorously.” 

The loan “was on market terms, was non-recourse, was diligenced by the Bank and entitled the Bank to conduct audits of the underlying receivables and other matters,” Jefferies said. “The Point Bonita fund acted in good faith and with goodwill toward the Bank at all times.”

“Unfortunately, First Brands and its leadership perpetrated a wide-ranging and well-concealed fraud that impacted Point Bonita and the Bank,” Jefferies said in the statement. “We regret that the Bank, as well as a range of lenders to and around First Brands, will suffer losses as a result of this fraud.”

Vecchione said he regretted the need for Friday’s call. “Integrity, honesty, consistency, dependability and adherence to contractual obligations are not aspirational values at Western Alliance Bank; they are foundational requirements. And Jefferies has breached these requirements,” he said. 

The “unforeseen” action by Jefferies “represents a highly unusual breach of contract by counterparties with the capacity to perform,” Vecchione said.

“In my entire banking career, I have never witnessed a breach of contract that so deliberately places the reputation and operating integrity of a counterparty at risk, forcing future banks, clients and counterparties to seriously re-evaluate the dependability of that organization's commitment,” Vecchione said during the call.

Since an October forbearance agreement, Jefferies had been making payments “bringing down the loan in an accelerated fashion,” from $337 million to $126 million, Vecchione said. The bank most recently received payment in mid-January, for $42.125 million, and was set to receive two more payments in the first quarter.

A week before the bank was to receive its next payment, Jefferies’ general counsel informed Western Alliance’s management team that the payment wouldn’t be made, as Jefferies had directed Leucadia to stop making payments on the remaining balance. 

“West Alliance entered into this agreement based on our working history and explicit assurances from Jefferies and Leucadia Asset Management that all Point Bonita debt would be repaid in full,” Vecchione said. 

Although the $126 million – about 25% of the bank’s reserves – “is manageable, it is unwelcome,” Vecchione said. “We are deeply disappointed by Jefferies’ conduct.”  

Western Alliance is charging off the $126 million and re-establishing its provision in the same amount, seeking to offset that through $50 million in securities sales and $50 million in expense reductions this year, Vecchione said. 

The latter won’t impair growth, he pledged; some of that includes pushing out large financial institution readiness programs, given indications regulatory asset thresholds will increase, he said.   

The bank is evaluating “other pathways” to address the remaining $26 million, Vecchione said, adding that more discussion would come during the bank’s first-quarter earnings call in April. 

Jessica Jarvi, Western Alliance’s chief legal officer, said the bank is exploring other claims and may amend the complaint.

When reporting third-quarter earnings last October, Western Alliance said it had earmarked $30 million for possible losses tied to a $98 million loan extended to the Cantor Group, CNBC reported. The bank filed a lawsuit last August, “alleging fraud by the borrower in failing to provide collateral loans in first position,” according to a securities filing from October. 

With the Jefferies development, “the loss is still a black eye” for a bank already facing sizable valuation discounts “for perceptions of complexity and credit risk,” Truist Securities analyst David Smith wrote Friday.

J.P. Morgan Securities analyst Anthony Elian, in a Friday note, called the development “disappointing” for Western Alliance and said he “will be watching very closely that any … actions the company plans to take do not hinder, restrict, or pull back on the company’s growth trajectory for this year.”