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Westsound Bank subjectto possible Class Action Lawsuit

The law firm of Hagens Berman Sobol Shapiro , which has offices in Seattle, Los Angeles, San Francisco, Phoenix, Chicago and Boston, has filed a proposed class-action lawsuit against WSB Financial Group Inc. the Bremerton-based holding company of Westsound Bank.

The suit, which names President and CEO, Dave Johnson and CFO Mark Freeman, as well as directors Dick Christopherson, Lou Weir, Pat Tucker, Jim Lamb, Brian McLellan, Dean Reynolds, Larry Westfall and Brett Green, alleges the company misled investors in its registration statement when filing for the company’s IPO last year.

Freeman recently left the bank to take a leave of absence for health reasons. Green, who headed up Westsound’s mortgage lending operation, left the bank to form his own mortgage company. His departure was one of 33 terminations that occurred when the bank shut down mortgage lending last month.

The mortgage lending practices of the bank are at the root of many of its problems, and have prompted investigations from both the Federal Deposit Insurance Corp. and the Washington State Department of Financial Institutions .

In the bank’s recently filed 8K Statement, the FDIC said the bank was “…cooperating in an investigation by the regulators pertaining to certain past activities involving former employees and third parties, including possible fraud, misconduct and other violations with respect to the application, processing and approval of certain loans previously made.”

The bank released a preliminary earnings report for the third quarter on Oct. 24, and is scheduled to release final numbers on Nov. 14. According to the bank’s preliminary numbers, it had $4.4 million in non-performing assets with another $3.8 million in loans 30 to 89 days past due.

On Oct. 26, a conference call for investors took place, and while the media was specifically barred from participating in that call, the Business Journal did have the opportunity to listen in. Johnson tried to but the best face on the situation, but it was clear from the questions and comments, that most of the questioners were highly skeptical of his answers.

During that call, among Johnson’s revelations were that in reviewing its mortgage lending portfolio, the bank had made 146 loans to 130 borrowers for an average of $900,000 each, totaling upwards to $90 million. Of those, although funding had been disbursed, construction was in various stages of completion on some, while it hadn’t commenced on others. He also revealed that Countrywide Funding, to whom Westsound had sold many of its questionable loans, had withdrawn from continuing to do business with the bank, and would be seeking recovery of non-performing loans it had acquired from Westsound. Johnson also stated that the bank looked at 126 other loans and identified serious problems with some of those as well.

Westsound Bank went public Dec. 31, 2006 and after a series of company announcements and investigations in late 2007 the stock price has plummeted to $4.73 after trading at a high of $21.

In documents filed with the SEC the company revealed that federal and state examiners told management the company has “violated certain banking laws and regulations which are primarily related to the origination, administration and monitoring of construction and mortgage loans.”

If you have purchased WSB stock from Dec. 31, 2006 until the present, you may be eligible to join this suit. Contact HBSS at wsb [at] hbsslaw [dot] com or call 510-725-3000 for more information.

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