Sonoma Valley Bank convictions recall early success, and downfall

For dozens of Sonoma Valley residents, the news that three men on trial in the failure of Sonoma Valley Bank were convicted this week of multiple charges of fraud, conspiracy and money laundering was met with mixed reactions.

On the one hand many were glad that a resolution and convictions had been reached. But for many others, for whom the locally-owned independent bank was for years a beacon of good works and sound judgment, it was the “bittersweet” ending of what was at one time a true feel-good story for Sonoma Valley.

“It’s probably the end of the road, and the ending is bittersweet,” said Gary Nelson, a major investor and for a number of years a board ?member who, he admits, stayed in too long.

The bank was formed in 1988 as an entirely local savings and loan institution, with a local board and staff, focused on local business. For many years it lived up to its promise as a community bank, based in and for Sonoma Valley. It took part in community fundraisers, loaned money to 4-H kids to buy feed for their swine based (on collateral of bikes and radios), gave the Valley of the Moon Water District a better loan rate than they could get from bonds to repair obsolete pipes.

Board members, at one time or another, included some names still familiar to Sonomans: Robert Nicholas of Nicholas Turkey Breeding Farm, Suzanne Brangham of the General’s Daughter and MacArthur Place, winegrower Angelo Sangiacomo, Dale Downing of Sonoma Market, assistant city attorney Valerie Pistole, Steve Page of Sonoma Raceway, as well as Nelson, Jerry Marino and others.

“Our idea of a foreign loan was Schellville,” said Marino.

Year after year its books showed strong financials, according to press accounts of the day. It ranked for 15 years as a super-premier performing bank in its class, and in 2005 it was chosen as the number-one bank in California for its size by the industry journal Findley Reports. It was chosen by the Sonoma Valley Chamber of Commerce as “Business of the Year” for 2005-06.

It had a long-standing branch in Glen Ellen, at the Glen Ellen Market. In 2004 it opened a branch in Boyes Hot Springs, to cater to the Latino community – and named it Banco de Sonoma.

In 2006, longtime executive officer Mel Switzer announced he would retire in 2009, and a search for his replacement settled on Sean Cutting, a local resident and an Sonoma Valley High School graduate. He also had substantial financial experience – an investment consultant with Citicorp and Liberty Financial, and Bank of Montreal in Los Angeles and Dutch-owned ABN AMRO in San Francisco.

Cutting proved to be a popular choice, well-known and well-liked around town. “He was the commencement speaker at my son’s Sonoma Valley High School graduation, I think it was 2009,” said George Thompson, a local landscaper. “He was pretty inspirational.”

“It was our bank, the town bank,” said Marino. “Banking is like a doctor, very seldom do you change doctors unless you have a bad rapport.”

He added, “It was an excellent bank, ‘til some guys blew it apart.”

A 2008 Press Democrat article stated, “The company posted assets of $298 million as of Dec. 31, 2007, up 7.3 percent from $278 million a year ago. Deposits grew to $236 million and loans reached $247 million, up $30 million or 14.1 percent from the year ending 2006.”

That was the apex, and the fall was swift. Despite weathering economic downturns in the late 1990s and 2003, Sonoma Valley Bank was not alone in being buffeted by the sub-prime mortgage crisis of 2008, though it apparently never directly took part in that market.

“Not all banks are the same,” said Cutting in the midst of that financial crisis. “Our business model is much different than banks like IndyMac. We take a much more conservative approach to lending and have built our success on long-term relationships and sound banking principles.”

But less than a year later, Sonoma Valley Bank was lined up to apply TARP funds, for the Troubled Asset Relief Program in the $700 billion financial bailout in October 2008. The bank ended up taking $8.7 million in TARP funds, which Marino saw then and now as a turning point in the bank’s fortunes.

By involving the federal government, it put the government in the position of receivership for the bank’s assets, which gave them the legal right to take over Sonoma Valley Bank. Some banks started to return TARP money, to avoid such control and regulation.

The bank, which recorded $357 million in assets in 2008, was forced to revise its balance sheets after being reviewed by federal regulators who required it to write down millions of dollars in loans and set aside an additional $22 million for loan provisions for potentially bad debts.

The revision devastated the bank’s balance sheets, according to analysts, and resulted in a third quarter loss of $19 million. “They appear to be in serious trouble,” said a senior banking analyst.

Rumors of the bank’s weakness began to spread, and some people withdrew their funds, like Thompson. “I pulled out my funds before it got raided by the feds, thank god.”

By April of that year, banking regulators said the bank would either have to raise $15 million to $20 million from investors in 30 days, or find another bank to acquire it. They negotiated a stay with the Federal Deposit Insurance Corporation (FDIC) until August.

On Friday, Aug. 20, Cutting called a staff meeting at the Sonoma branch where federal government agents told them they were seizing the bank. It became one of the 157 banks that failed nationally in 2010 during the aftermath of the 2008 banking crisis, its $337 million in assets seized by FDIC.

The assets were eventually sold to WestAmerica Bank – which now has local offices at the bank’s former 202 W. Napa St. location.

“In a nutshell,” said Marino, “the board and the loan committee did not do their due diligence, did not do what they should have.”

“Others had a stronger belief in the management than we did,” said Nelson succinctly.

This past Monday, the chickens came home to roost. Convicted of at least 25 different counts, including conspiracy to commit bank fraud and money laundering, were former executive officer Cutting, loan officer Brian Melland, and Santa Rosa attorney John Lonich.

Almost all of the case against them focused on the bank’s multiple loans to Bijan Madjlessi, Lonich’s client. Madjlessi had been indicted on the same federal charges prior to his death in a 2014 car crash.

According to the official trial summary from the U.S. Department of Justice, “between 2004 and 2010, Sonoma Valley Bank loaned Madjlessi and the persons and entities he controlled in excess of $35 million, approximately $24.7 million more than the legal lending limit set by the bank’s regulators.”

“With one phone call they would have known what a bad apple Madjlessi was,” said Marino. “What he did with Sean (Cutting) and Melvin (Switzer) I don’t know, but he had to have done something... A lot of crooks are smooth talkers.”

“I don’t know why I believed them, in retrospect,” said Nelson. “I held it until it was gone.” He said he lost all his equity, about $150,000, but recognizes that many others lost everything they had. “I wish there was some remediation for those who lost all their money… for people who lost their life savings and suffered so much.”

Following the verdict, former board member Brangham called the bank’s closure “one of the most painful experiences of my 30 year residency in the Valley… Its loss is still being felt, seven years later.”

Several other former board members did not respond to requests for comment.

While Page, who came on the SVB board in 2007, would not comment on the case or the charges, he singled out Sean Cutting’s conviction. “I consider this a tragic result. His conviction has no positive effect and serves only to punish an honorable man whose every action was aimed at preserving a cherished local institution and protecting the investment of the bank’s community shareholders.”

Jerry Marino was less generous. “They shouldn’t stop there,” he said of the three convictions. “I’d say the whole board had to know what was going on.”

Said Nelson, “There’s enough blame to go around.”

Contact Christian at christian.kallen@sonomanews.com.