Stockholder Sues Horry County State Bank for Illegal Insider Trading
By Paul Gable
Robert Shelley of Myrtle Beach, a shareholder in Horry County State Bank, recently filed a lawsuit against Horry County State Bank and its holding corporation HCSB Financial Corporation.
In the lawsuit, Shelley alleges he was contacted by employees of the bank in September 2009, a teller and later a bank officer, offering to sell him shares in the bank. Shelley further alleges that he was not provided a prospectus, as required by state law, and was not informed that the bank was in severe financial distress due to a large portfolio of defaulting real estate loans.
Shelley first became a shareholder in HCSB several years prior to 2009 after having been a bank customer for a number of years.
“I inquired several times about purchasing stock, but none was available,” Shelley said. “I knew the bank was making money and the stock was doing well early in the decade.”
Finally some stock became available and Shelley purchased his first shares, in 2007, at $26 per share.
HCSB is a small, closely held corporation. Its stock is not traded publicly on an exchange, but is offered through a transfer agent when a current stockholder decides to sell some of his shares.
According to online records of stock transactions for HCSB, bank stock began 2007 at $41 per share. In February 2007, the bank was doing well and the stock split two for one in February 2007. By the second half of 2007, the stock price was a stable $26 per share.
Still believing the bank to be growing and doing well in 2009, Shelley thought he was getting a deal when he was offered 1,000 shares at $24 per share in July 2009 and 2,192 shares at $18 per share in October 2009.
Shelley said he was first contacted by a teller and later by a bank officer about purchasing the available stock. He inquired who was selling the stock but was told ‘they didn’t know.’
The lawsuit alleges the stock was being sold by officers and directors of the bank who knew the difficult financial situation the bank faced. The suit alleges not only Shelley, but also other shareholders, were contacted by bank employees and offered stock from bank officers and directors.
Shortly after Shelley’s purchase, the bank’s stock began a long decline as news of the bank’s financial difficulties began to leak out. According to bank records, the last sale of stock occurred in April 2012 when 855 shares were sold for $0.25 (25 cents) per share.
Shelley and the other shareholders of HCSB now hold essentially worthless stock. However, it is the knowledge and belief that insiders aware of the bank’s precarious financial situation (officers and directors) were dumping their personal stock holdings to avoid huge financial loss. If these allegations are true, they represent insider trading in its purest form, which is totally illegal under state and federal law. The officers of Enron did exactly the same thing in the months before the company was exposed as worthless.
Since his lawsuit was filed last month, Shelley said his attorney, Gene Connell of Kelaher, Connell and Connor, PC, was contacted by agents from the U.S. Department of the Treasury. Shelley said he and Connell met with Treasury agents recently.
According to sources familiar with the bank, HCSB received $12.5 million from the U.S. Government in bank bailout funds in 2009. It is this transaction combined with the allegations of insider trading by bank officers and directors that has stirred the interest of Treasury agents.
Shelley is the named plaintiff in the lawsuit both individually and as the class representative for a class action lawsuit. Any HCSB shareholders who wish to join the class action may contact attorney Gene Connell by e-mailing [email protected] or by calling his Surfside Beach office at 843-238-5648.
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