Community Central Bank Corp. was shut down by state and federal regulators in April 2011.
But the fallout continues with the filing of a lawsuit in U.S. District Court in Detroit on Feb. 9 seeking damages from the bank's former directors and officers -- and the estate of deceased President and CEO David Widlak -- over the private placement of $2.4 million of stock in 2009.
The suit alleges fraud, violations of the Federal Securities Act of 1933 and the Securities Exchange Act of 1934, violation of the Michigan Uniform Securities Act and breach of fiduciary duty.
The suit was filed by the Grosse Pointe Park law firm of Boyle Burdett PC, which was recruited to file the suit by Troy-based Leonard and Co. Under terms of the offering, Leonard had been paid a 6 percent fee to broker the sale of the stock to its clients.
Boyle Burdette represents most of the individual and institutional investors in the offering, with its clients having bought $1.4 million of Series B convertible stock in the Mt. Clemens-based bank. The firm does not represent the largest investor, a dentist named Timothy Mayer, who bought $700,000 worth of stock.
Mayer is the father-in-law of high-profile attorney Norman Yatooma, who said he expects to file a second suit in federal court soon against the bank's former directors and officers.
Dan French, Leonard's president and CEO, said he and brokers at his firm were deceived over the stock sale by exaggerated claims by bank officials of the bank's financial health, and that he wanted to initiate a suit on behalf of his clients. Leonard is not a party to the suit.
"The true facts were not made known at the time of the offering, and if the facts had been known, participation in the offering would not have occurred," said French. "There were facts that were not shared with us."
He said Leonard and Co. was not party to the suit because it didn't suffer damages. "The investors were the ones suffered damages."
"There's smoke all over this private placement and the stock my clients bought. It's unreasonable to think there's no fire," said Boyle Burdett partner Eugene Boyle Jr.
"At the time the bank closed on the private placement and took the proceeds, it is almost inconceivable that the bank's officers and directors didn't realize the bank was in serious trouble. The Titanic had already hit the iceberg and was taking on water, and the money they took from my clients represented a coffee can to bail out the water."
Boyle Burdett is suing former board members John Stroh III, Dean Petitpren, Gabe Anton, Salvatore Cottone, Celestina Giles, Joseph Jeannette, James Mestadagh, David Weber, Joseph Catenacci and Bobby Hill, and former bank officers Ray Colonius and Lisa Medlock. Colonius was the bank's CFO until Widlak's disappearance and then acting president and CEO. Medlock was corporate secretary.
Steven Ribiat, a partner in Birmingham-based Brooks Wilkins Sharkey & Turco PLLC, which represents all of the defendants except Catenacci, declined comment. "I'm going to let my brief do my talking," he said.
His brief, which was filed Friday, asked Judge Bernard Friedman to dismiss the suit. It claimed that the Federal Securities Act only applies to public offerings and that this was a private placement, and that the offering memorandum was clear about the risks involved in investing in the bank.
"Investors were expressly cautioned, in bold print, that 'continued deterioration of the economy and real estate market in Michigan could hurt our business. ... Changes in economic conditions or interest rates may negatively affect our earnings, capital and liquidity,' " read the brief, in part, quoting from the offering memorandum.
"There are so many deficiencies with plaintiffs' complaint that it is difficult to know where to begin," Ribiat wrote.
Stroh, when asked for a comment the day before Ribiat's brief was filed, said: "I can't say anything about pending litigation, for which I apologize. Whatever Steve Ribiat wants to say, he'll say."
The Series B offering let investors buy one share of convertible preferred stock for $1,000, which could be converted to 125 shares of common stock at any time. Each share of Series B stock also included a 10-year warrant that allowed holders to purchase 20 shares of common stock for $5 a share.
Holders of Series B shares also were to receive annual dividends of 5 percent, paid quarterly.
On Jan. 7, 2010, the day the bank announced the private placement, its stock opened at $1.47 a share, down from a pre-recession high of $13.45.
As Community Central was floating its stock sale, it was well into a fatal downward spiral. After eking out very narrow profits in each of the first three quarters of 2008, the bank had a net loss of $2.58 million in the fourth quarter.
It would have only one more profitable quarter until it went out of business, and the story behind that profit tells another tale of an offering by the bank that went bad.
In July 2010, Community Central trumpeted the good news in a press release that after six consecutive quarters in the red -- and after massive losses for a small bank of its size of $15 million in the fourth quarter of 2009 and $8.8 million in the first quarter of 2010 -- it had returned to profitability, posting net income of $1.2 million. It was one of only two local publicly traded banks to turn a profit that quarter.
A footnote at the back of the quarterly earnings report told a different story. An accounting quirk based on the bank reneging on promised interest payments was what had turned an operating loss of $4.8 million into a gain.
In February 2007, Community Central had issued $18 million in trust preferred securities, which were to pay annual interest of 6.7 percent and be redeemable by the company in 2037.
On May 14, 2010, the bank suspended and deferred interest payments, causing the value of the securities to plummet. Based on mark-to-market accounting rules to reflect the fallen value of the securities, the bank was able to sharply reduce the amount it was carrying on its books for future payments, resulting in a gain of $6 million for the quarter.
Boyle said he will use the timing of the announcement in May that the bank was suspending interest payments as proof that board directors should have known just a few months earlier that the $2.4 million stock deal was riskier than anyone was letting on.
Instead of collecting interest, the buyers of the stock watched the bank collapse. Its $476 million in assets were eventually bought by Troy-based Talmer Bancorp Inc.
The bank's demise was accelerated by the mysterious disappearance of Widlak in September 2010.
The disappearance came as he was preparing a presentation for a would-be stock sale of $20 million to keep the bank afloat.
Widlak's body was found a month later, face down in the water near a boat launch on Lake St. Clair. He died of a bullet wound to the head in what was determined by police and the Macomb County medical examiner to be a likely suicide.
The current lawsuit is the latest against Widlak's estate. Last year, the estate settled two lawsuits that sought more than $500,000 in combined damages connected to his work as an attorney before he left the bank.
Terms were not disclosed.
Tom Henderson: (313) 446-0337, [email protected] Twitter: @tomhenderson2
