The Crook, the Tycoon, and the Short Seller

FOIAengine: LA’s Steven Sugarman Goes After Carson Block and Muddy Waters

Jason Galanis is Inmate 80739-198, currently locked up in a federal prison in Montgomery, Alabama.   Galanis is a member of a notorious crime family, a recidivist white-collar criminal doing serious time.  He’s 53 years old and due to be released from prison in five years. 

Steven A. Sugarman, 48, is the founder and CEO of Anaheim, California-based The Change Company.  He  currently lives in comparative splendor in a mansion near the ocean in Pacific Palisades, California. 

Galanis, the crook, and Sugarman, the esteemed businessman, are central characters in our story this week.  The supporting cast is a rogue’s gallery, all said to be conspiring to take down Sugarman in a shadowy group Sugarman refers to as the “Aurelius Enterprise.” 

Sugarman is a Yale Law graduate and a pillar of the Los Angeles business community, a local guy who made good.  The hometown newspaper loved him.  “Started three companies and worked for two more before becoming the CEO of fast-growing lender Banc of California — all before he turned 40,” the Los Angeles Times wrote glowingly in 2016.  “Impeccable academic credentials,” the story went on.  “A mile-long resume that preceded his assumption of the bank’s top post.” 

Six months later, Sugarman abruptly resigned.  A longer history now follows him.    

At the heart of the Aurelius conspiracy – if the allegations in a blizzard of lawsuits filed in various courts by Sugarman are true – is someone who’s already familiar to our readers:  short seller Carson Block.

A few months back, we wrote about Block.  He’s an aggressive short seller, the most reviled guy in any room full of corporate executives.  Block popularized activist short selling, targeting companies whose stock he believes to be drastically overvalued, then leading a short-selling frenzy that punishes the stock and, if it goes as planned, enriches Block and his many followers  — including 236,000 on X, the social-media site formerly known as Twitter.  Block launches his short-selling attacks by posting detailed reports on the website of his company, Muddy Waters Research.  They’re all right here, well over a hundred in all, going back to 2010.    

In our previous story, we noted that Block was using a San Francisco law firm, Davis Wright Tremaine, to make Freedom of Information Act requests to the Securities and Exchange Commission about meetings and communications SEC officials might have had with short-selling opponents. 

Block certainly has a motive to find out more.  He is one of many short-sellers under scrutiny by federal criminal prosecutors investigating stock-market manipulation.  A FOIA request might smoke out valuable intelligence, ahead of any charges.  Five months ago, a top Justice Department official called the criminal investigation into short sellers a priority, and said actions would be coming soon. 

In the months since, the Davis Wright law firm made more requests to the SEC that showed up in PoliScio’s FOIAengine database, a competitive-intelligence tool that tracks requests in as close to real-time as their availability allows.  When we found previously unreported FOIA requests from Carson Block’s law firm, we wondered whether there were more short-selling dots to connect.  That led us to this week’s story, which illustrates how a seemingly random FOIA request can be a signal of important events occurring elsewhere. 

On June 7, Davis Wright made a blanket FOIA request for emails between anyone at the SEC and Sugarman or others at The Change Company, the California lender that Sugarman started soon after he left Banc of California.  The Change Company focuses on minority borrowers underserved by traditional banks.  Presuming that Davis Wright was acting on behalf of short-seller Block, we checked to see if Muddy Waters was making a short-selling attack on Change. 

So far, apparently not.   There’s nothing on the Muddy Waters website to indicate that.

What we discovered, instead, was an epic legal battle between the two men that dates to Sugarman’s departure almost seven years ago from high-flying Banc of California.  It’s a struggle that underscores the risks that short sellers take, and the costs of getting even.

Sugarman blames Block and the short-selling conspiracy that Block allegedly was part of – the “Aurelius Group” – for spreading anonymous lies intended to destroy Sugarman’s reputation and enrich the short sellers.  And Sugarman is vowing to strike back, no matter the time or expense.      

Sugarman abruptly resigned from Banc of California on January 23, 2017 in a messy shake-up.  His departure came the same day an SEC investigation into the bank was revealed – and three months after anonymous postings on a website for short sellers claimed that crime-family-member Jason Galanis secretly controlled the bank.  The post’s author was the pseudonymous “Aurelius.”  The SEC got interested and issued subpoenas.  The bank’s stock was hammered.  You can see where this is going.

The anonymous “Aurelius” posts only added to other problems that Banc of California already was dealing with:  an activist shareholder’s class action in federal court; concerns about corporate governance expressed by some of its biggest shareholders, including the California State Teachers Retirement System; and conflict-of-interest allegations about the bank’s involvement with Sugarman’s brother, Jason.  The bank had paid a reported $100 million in a stadium-naming-rights deal for the Los Angeles Football Club, of which Jason was part owner.  Banc of California called in a law firm to conduct an independent investigation; it turned out that the law firm had an undisclosed conflict, too.  More problems; more bad press. 

Steven Sugarman wasn’t charged in that SEC case, and, in the years prior or since, he hasn’t otherwise been accused of wrongdoing.  Sugarman’s spokesman told us this week that he “committed no wrongdoing at Banc of California, no court has ever found any wrongdoing, and no regulatory agency has ever alleged any wrongdoing against Mr. Sugarman.  In fact, he received an official written no-action letter from the SEC.” 

Within months, Sugarman was back in the CEO chair at his new company, aptly named Change. 

Steven’s brother, Jason, wasn’t so fortunate.  The SEC later filed fraud charges against Jason Sugarman, alleging that he conspired with his “business partner,” Jason Galanis – yes, that Jason, the one currently in prison – to defraud unwitting pension funds and a Native American tribe out of as much as $100 million. 

The SEC called Jason Sugarman “the biggest winner from the fraud.”  According to the SEC’s complaint, others who were in on the scheme called the Sugarman/Galanis duo “the two Jasons.” 

The SEC’s case against Jason Sugarman, filed in 2019, was finally settled in February 2023.  Jason Sugarman didn’t admit wrongdoing.  He was barred from the securities industry and agreed to pay a disgorgement penalty of $10.3 million.  The SEC has him on a payment schedule.  A commission spokesman declined to say whether Jason Sugarman was keeping up with the payments.  

A month after the SEC filed the fraud suit against his older brother, Steven Sugarman struck back.  He filed a $65 million racketeering, fraud, and defamation suit against the group he styled as the Aurelius Enterprise  — comprised of the alleged short sellers Carson Block, Muddy Waters, and a raft of others.  The Aurelius defendants included Jason Galanis, who was, by then, cooling his heels in a California federal penitentiary.  (The Bureau of Prisons has since moved him.)  According to Sugarman’s lawsuit, Galanis was the person behind the scurrilous Aurelius rumors, and it was Block and a cohort of short sellers who then benefitted.  Galanis’ alleged motive:  to get back at Steven Sugarman for providing information that helped send Galanis to prison.

Sugarman’s lawsuit, which has been filed and refiled in multiple state and federal jurisdictions in the years since, has been slowly making its way through the courts.  Hundreds of docket entries have piled up.  The federal judge in San Francisco who originally had the case sent it to a federal judge in Los Angeles; Galanis’ prison address determined that venue change.  The Los Angeles federal judge dismissed the racketeering counts and told Sugarman’s lawyers to refile the remaining claims in state court. 

Sugarman’s lawyers immediately did so.  They filed in Minnesota, where one of the defendants then was situated.  That defendant, a $54 million hedge fund called Castalian Partners, currently lists a headquarters in Tennessee.  The trial judge in Minnesota also dismissed the case, only to have the state appeals court send it back.  There it sits

There have been other setbacks for Steven Sugarman.  A deal to sell part or all of Change to a group including former NFL star Colin Kaepernick fell through at the end of 2021, according to the Wall Street Journal.  The Journal’s reporting indicated Sugarman was seeking to cash out, and named multiple high-profile investors and celebrities who also looked at the offering documents and passed. 

In June of this year, Change’s former chief of staff, Adam Levine, filed a whistleblower lawsuit against the company in California Superior Court.  Among the allegations:  that Sugarman’s “conduct in the civil litigation with noted short-seller Carson Block was unethical, defamatory, and possibly illegal, as Mr. Sugarman instructed Plaintiff to leak confidential documents to a journalist doing a profile on Mr. Block.”  The suit also accused Change of securities fraud and lying to the government and bondholders.  Sugarman isn’t personally named as a defendant.  

On August 28, Change posted a statement and photos on its website about what it said were Levine’s alleged threats, misconduct, and “extortionate demands.”  The posting included photos that the company said showed Levine being placed under arrest a few days earlier for impersonating a police officer. 

Coincidentally or not, also on August 28, Bloomberg reported that the SEC had opened its own investigation of Sugarman and his company.  At the time that news broke, the bank said in a statement that it wasn’t aware of the investigation. 

A spokesman for Sugarman had much more to say this week.  The whistleblower lawsuit, the spokesman said, “came into existence after [Levine] attempted to get a $10 million payment in exchange for stopping the publication of a negative story about Change in Barrons for which he was a primary source of to begin with.  He claimed he could have the reporter ‘stand down’ if we paid him millions of dollars.”

And what about Carson Block?

“Muddy Waters’ illicit behavior is widely acknowledged.  Litigation often takes considerable time, but Mr. Sugarman will continue his efforts, regardless of time and resources, until Carson Block and his associates are held accountable.”

Carson Block didn’t reply to a request for comment.     

Next:  Hedge fund FOIA requests add up.

John A. Jenkins, co-creator of FOIAengine, is a Washington journalist and publisher whose work has appeared in The New York Times Magazine, GQ, and elsewhere.  He is a four-time recipient of the American Bar Association’s Gavel Award Certificate of Merit for his legal reporting and analysis.  His most recent book is The Partisan: The Life of William Rehnquist.  Jenkins founded Law Street Media in 2013.  Prior to that, he was President of CQ Press, the textbook and reference publishing enterprise of Congressional Quarterly.  FOIAengine is a product of PoliScio Analytics (, a new venture specializing in U.S. political and governmental research, co-founded by Jenkins and Washington lawyer Randy Miller.  Learn more about FOIAengine here.  To review FOIA requests mentioned in this article, subscribe to FOIAengine.    

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