Advertisement

City National, ‘Bank to the Stars,’ aided a Ponzi scheme, lawsuit says

City National Bank collage
(Los Angeles Times)
Share

When Blake Whitmore pays his mortgage every month on his Marin County home, he winces.

The elevator mechanic and father of two young children can barely afford the $3,400 he must pay his lender. His wife has gone back to work, and he flipped a house with a buddy to help pay the bills.

The hefty mortgage payment is a painful reminder of a $200,000 investment he made in 2019 in a business recommended by a friend. The venture promised big returns from acquiring film rights and selling them to Netflix and other platforms in Latin America, but Whitmore lost all of his money, forcing him to refinance his home to pay off the debt.

“I tried to get my money back any way I could,” recalled Whitmore, 38.

Whitmore says he is among the casualties of a Ponzi scheme allegedly involving one of L.A.’s best-known local financial institutions: City National Bank.

Subscriber Only Content

Subscribers get exclusive access to this story

We’re offering L.A. Times subscribers special access to our best journalism. Thank you for your support.

Explore more Subscriber Exclusive content.

A recent federal lawsuit alleges that the bank helped to bankroll convicted felon Zachary Horwitz, 37, who perpetrated a scheme that fleeced hundreds of investors.

Advertisement

The lawsuit, filed in L.A. by the court-appointed receiver of Horwitz’s defunct investment company, seeks at least $770 million in damages to compensate Whitmore and other investors. It accuses the bank of “aiding and abetting fraud” by extending Horwitz millions in credit and handling more than $1 billion in transactions, ignoring “glaring red flags” along the way.

“I just shake my head in disbelief. It’s just an incredible lack of accounting controls,” said bank analyst Bert Ely, who reviewed the 154-page lawsuit for The Times. “I’m almost at a loss for words because this is such basic stuff. There’s nothing sophisticated about what was going on.”

A spokesperson for City National Bank declined to comment on the lawsuit, citing the pending litigation.

The financial scandal is just the latest controversy to roil the city’s largest locally based bank, which has deep ties to Hollywood and has long been known as the “Bank to the Stars.”

Actor Zachary Horwitz collected $690 million from investors for movie deals the FBI says were fictitious.

April 23, 2021

The bank’s reputation took a hit in January 2023 when it reached a record settlement with the U.S. Department of Justice to resolve allegations of redlining in Los Angeles County. Later in the year, City National disclosed that it had received a nearly $3-billion bailout from its Canadian owner in the wake of the banking crisis that led to the failure of Silicon Valley Bank.

And, in January, federal regulators hit City National with a $65-million penalty for violating bank regulations intended to prevent money laundering and the kinds of transactions that led to Horwitz’s conviction.

Advertisement

Interviews with former bank employees and industry analysts and a review of regulatory filings and court records suggest that at least some of City National’s problems can be traced to pressure by its parent company — Royal Bank of Canada — to aggressively grow the financial institution after it was acquired in 2015 for $5 billion. Under RBC, City National has nearly tripled its assets to $92.4 billion as of March 31.

After the latest, risk-control penalty in January, RBC said it was “focused on remediating City National’s existing issues following outsized volume growth over the years.” City National has also pledged to make more home loans in underserved communities.

The Toronto bank declined a request for an interview with Chief Executive David McKay, who engineered the acquisition of City National. In a February conference call with analysts, though, he acknowledged mistakes were made at the subsidiary, which lost $1.58 billion last calendar year after the bailout, according to a regulatory filing.

“I think our growth outstripped our operational capability,” McKay said. “It was a tough year last year, I admit.”

A ‘Bank to the Stars’

City National was founded in 1954 by Jewish entrepreneurs who frequented the Hillcrest Country Club, at a time when the L.A. business establishment wasn’t welcoming.

The bank, then in Beverly Hills, had a remarkable ascendancy, building a lucrative business by serving professionals, smaller businesses and the booming city’s builders.

Advertisement

It also developed its Hollywood connections, largely through founder Alfred Hart, a Columbia Pictures director. City National famously lent $240,000 to client Frank Sinatra so he could pay ransom for his son, who was kidnapped in 1963.

Paul Newman and Robert Redford were among the star clients, who also included wealthy lawyers, accountants and other entertainment industry insiders. City National became a major financier of Hollywood and Broadway productions and now serves Nashville too.

City National grew to become L.A.’s biggest bank, with $32.3 billion in assets in 2014 and a gleaming presence among downtown’s office towers.

When it was acquired in 2015, City National was in an expansion mode, having acquired a series of wealth managers and opened branches across the country.

The deal married a Canadian bank with some 340,000 U.S. wealth management clients and operations in major film industry hubs — Toronto and Vancouver — with a U.S. bank also serving wealthy clients and the entertainment industry.

A Hollywood Ponzi scheme

For Horwitz, City National’s deep Hollywood ties were alluring.

The small-time actor, who had appeared in a few films under the stage name Zach Avery, was looking for investors to pour vast sums of money into his film rights licensing company, 1inMM Capital.

Advertisement

The pitch: Horwitz told investors that he had “strategic partnerships” to license the foreign distribution rights to dozens of films, including the 2012 horror movie “The Lords of Salem” and the 1989 action film “Kickboxer,” starring Jean-Claude Van Damme. The investors were promised returns as high as 45% within a year.

In fact, the licensing deals were fictitious, authorities said. Horwitz had forged contracts to dupe investors and used their money to pay for a six-bedroom home in Beverlywood, expensive trips to Vegas and other personal benefits, according to the FBI and court filings.

City National “substantially assisted” Horwitz by “adding an air of legitimacy” to the scheme, according to the receiver’s lawsuit. The complaint, filed in February, further alleges that City National was aware that Horwitz “touted his relationship” with the bank in marketing materials and in documents he circulated to investors.

Horwitz’s ties to City National date back to 2013, when the bank agreed to give him a $1.14-million credit line using his mother’s brokerage account as collateral. City National would go on to give him 456 extensions of credit totaling $64.2 million through December 2019, the lawsuit says.

Investor deposits started coming to the bank in 2013 at a relative trickle — $465,000 — and accelerated while City National was under RBC’s ownership, ballooning to a high of $349 million in 2019, when by the end of that year Horwitz started having trouble raising money.

Driven by a desire to earn interest on the line of credit and sell Horwitz other bank services, the lawsuit alleges, bank employees made only cursory inquiries about the transactions and accepted “incomprehensible explanations” about his use of the money, while they also “bent the rules.”

Advertisement

One example: After a bank employee flagged two suspicious wires in September 2017, Horwitz complained to his account manager, who assured him the inquiry was “just a courtesy” and would not be a regular occurrence, according to emails cited in the lawsuit. “Great — you’re the best,” Horwitz responded. “My pleasure. Glad to be of service,” his account manager said.

The Securities and Exchange Commission froze Horwitz’s accounts in 2021 and the actor pleaded guilty to one count of securities fraud months later. He was sentenced in 2022 to 20 years in prison, owing $230 million to more than 250 victims.

Allegations of redlining

After the Horwitz debacle, City National faced more scrutiny over its lending practices.

The bank reached a $31-million settlement in January 2023 with the U.S. Justice Department over allegations it violated federal housing and banking discrimination laws by avoiding making loans to home buyers in majority Black or Latino L.A. County neighborhoods from 2017 to 2020. The department said it was the largest redlining penalty in its history.

City National had just three of its 37 branches in the underserved neighborhoods at the time, and other banks serving the county received far more loan applications from them, the department said. City National denied breaking discrimination laws but agreed to settle the case to avoid prolonged litigation.

Former executives at the bank who spoke to The Times and asked to remain anonymous traced the trouble to RBC’s desire to grow City National’s mortgage business, which traditionally was focused on existing clients who might be in need of a home loan. After the merger, City National was pressured to rev up the business, including making loans to RBC’s wealth clients, which drew more scrutiny from regulators.

As part of its settlement, the bank agreed to open a branch in a census tract where most residents are Black or Latino, ramp up its inclusive advertising and start a small-business loan program for underserved small-business owners. The bank “is dedicated to ensuring that all consumers have an equal opportunity to apply for and obtain credit,” spokesperson Diana Rodriguez said in an email.

Advertisement

A year later, City National faced another regulatory action, this time from the Office of the Comptroller of the Currency. The agency levied a $65-million fine, saying the bank failed to maintain proper risk management and internal controls, including those requiring a bank to “know your customer” to prevent money laundering and other illicit activity. City National did not admit or deny the allegations, but agreed to strengthen its compliance efforts.

Amid the regulatory scrutiny, financial pressures mounted. After the Federal Reserve began sharply hiking interest rates to combat inflation, there was a March run last year on Silicon Valley Bank, a tech-oriented Santa Clara lender that got stuck holding billions in low-interest-rate securities. The Fed’s monetary policy left the securities worth far less, spooking depositors.

Silicon Valley Bank, Signature Bank in New York and several other regional lenders fell and were taken over by the Federal Deposit Insurance Corp., with their deposits and assets assumed by banks in better financial condition. Locally, PacWest Bancorp teetered but survived and was later acquired by Banc of California, now based in L.A.

The spike in interest rates put the squeeze on City National, which also was buffeted by actors’ and writers’ strikes last summer. The bank was stuck holding billions in low-interest-rate debt securities but received financial assistance from its far larger parent, which acquired them in an inter-company transaction. It reported receiving a $2.95-billion capital infusion from RBC, according to a regulatory filing.

“That is a big number, you don’t see that very often. Usually, banks don’t have losses, unless they fail,” Ely said. “They don’t need huge capital injections like that from their parent holding company.”

Then came a management shake-up.

In November, Howard Hammond, an executive at Cincinnati-based lender Fifth Third, was made chief executive, replacing Kelly Coffey, a former JPMorgan Chase executive, who was demoted and now runs the wealth management and entertainment businesses. She did not respond to requests for comment.

Advertisement

“At the end of the day, there were problems that occurred at City National, and someone had to pay the price,” said John Aiken, an analyst at Jeffries.

In brief remarks to The Times about the bailout, Hammond called RBC’s decision to acquire the low-interest-rate securities held by City National a “really good long term decision” that did not affect the parent bank’s “bottom line.” He also praised Coffey, saying the bank continued to “benefit from her leadership.”

During the February conference call that touched on City National’s travails, RBC chief McKay said that “we think we’re well-positioned to continue to grow our U.S. franchise from a scale and profitability perspective.” The following month, City National reported net income of $164 million for the quarter that ended March 31.

Meanwhile, investors in the Ponzi scheme are unsure whether they will ever recoup their losses.

Tom Lochtefeld had a long career on Wall Street, where he managed risk for JPMorgan Chase. The 61-year-old Connecticut resident heard about Horwitz’s business from a friend.

He was skeptical, until he got a “beautifully presented” 197-page private placement memorandum full of market research on the film-rights business.

Advertisement

Out of his retirement funds, Lochtefeld wrote two checks in 2019 totaling $150,000.

“I sort of crossed my fingers,” he said. “I’m embarrassed, because I never thought I’d find myself associated with a Ponzi scheme.”

Former Times staff writer Michael Finnegan contributed to this report.

Advertisement
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news
news