B of A Loss Tied to Default by Local Company

A default on mortgage loans last June by an Orange County firm apparently set off the chain of events that forced Bank of America to reduce its earnings by $37 million.

The FBI said Tuesday that it has begun a criminal investigation into aspects of the situation but declined to disclose details.

Two persons convicted of felony charges were top officers of firms involved in the default and its consequences, according to public records. One of them was Kent Rogers, who had been convicted of bankruptcy fraud in 1982 and is now appealing a six-month sentence in that case.

Rogers at the time controlled West Pac Corp. of Orange, the firm that defaulted on $27 million in mortgages on apartment complexes in Houston and condominiums in Palm Springs. The mortgages had been packaged by National Mortgage Equity Corp. of Palos Verdes Estates and used to back securities that were sold to investors. The securities were insured by Pacific American Insurance Co.

Delaware insurance regulators alleged in U.S. District Court here last October that Rogers himself controlled Pacific American. The civil suit further accused Rogers of manipulating Pacific American as part of a “fraudulent plan” to enrich himself.

The former president of National Mortgage, David A. Feldman, is also an associate of Rogers. Feldman is serving an 18-month federal prison term for a 1982 fraud conviction in Illinois.

Bank of America acted as escrow agent on the sale of the securities and, as it disclosed Tuesday in response to questions, also “acted as custodian of the pooled loan documents and exercised oversight for the investors.”

Thus, when West Pac defaulted, Bank of America turned to Pacific American for repayment. But Pacific American refused to pay, according to a suit filed on behalf of the bank last August in federal court in Salt Lake City.

The suit, seeking repayment of the $27 million and $50 million in damages, alleges that Pacific American failed to fulfill its obligation as guarantor of the mortgage loans. It said the loans were made between August, 1983, and January, 1984, and alleged that West Pac failed to make a $385,552 loan payment due last June 1.

The $37-million non-recurring loss reported by the bank when it reported its fourth-quarter 1984 financial figures is the amount that the bank estimates that it will cost to repay the institutions that invested in the pooled mortgage loans. There was no explanation why the bank’s estimate exceeded the amount of the West Pac default by $10 million.

Pacific American was taken over by Delaware insurance regulators last fall. They said it was insolvent.

Delaware Insurance Commissioner David Levinson was quoted by the Associated Press on Tuesday as saying that total losses in the collapse of the insurance firm could run as high as $200 million. He said apartment projects were insured for far more than their value and the mortgages packaged and sold to investors.

Catherine Mulholland, Delaware deputy attorney general, said Tuesday that banks had informed her that Pacific American had issued financial guarantee bonds of between $100 million and $200 million on mortgages, mostly condominiums in Southern California and Texas.

George Ash, another Rogers associate who is now running National Mortgage, told The Times on Tuesday that “any differences” between the firm and Bank of America “have been put on the shelf” in the interests of “the investors.”

Sources said the investors include a New York bank--Irving Trust Co.--and a number of Eastern savings associations, including Seamen’s Bank for Savings of New York and Liberty Federal Savings & Loan Assn. of Philadelphia.

Meanwhile, Ronald Mahaffey, agent in charge of the FBI office in Garden City, Long Island, N.Y., said Tuesday that his office began an investigation into the entire matter about six weeks ago. He declined to specify the targets.

Later, a Bank of America spokesman said the bank is cooperating with the FBI probe.

“To our knowledge,” the bank spokesman said, “it (the FBI) is not investigating any allegations against the Bank of America.”

The investigation into the bank’s loss, he added, “is aimed at people outside the bank whose activities might have caused these losses.”

However, the bank has also said that it is has suspended some of its own employees, on full pay, while it investigates their conduct in the case.

When Bank of America reported fourth-quarter earnings Jan. 21, it said a $37-million non-recurring pretax operating loss had reduced its net profit to $73 million.

It did not state any details until Monday, when it attributed the loss to settlements with investors in “faulty” mortgage-loan packages.

Even then the bank did not link the matter to its litigation with Pacific American that emerged in the federal courts here last October.

In one proceeding here, a judge ordered the seizure of assets of Rogers, West Pac and three Rogers associates named as trustees of a Rogers family trust, K. R. Trust II. West Pac and the trusts together held more than 80% of Pacific American’s stock, according to Delaware officials who sought the order.

The three Rogers associates were Ash, of Santa Ana, who was identified as president of West Pac Financial Inc.; Floyd C. Anglin, also of Santa Ana, who was identified as a former president of Pacific American and who has served as a West Pac director, and Vern J. Bish of Atlanta, head of Century Leasing, a West Pac affiliate.

Rogers was convicted in February, 1982, of attempting to hide his ownership of the 2,900-acre Whiting Ranch, north of El Toro in Orange County, during bankruptcy proceedings involving his Tustin-based Global Western Development Corp.

The U.S. 9th Circuit Court of Appeals upheld his convictions and that of his former attorney, Jacob N. Peilte , on Dec. 28, 1983.

Rogers later was sentenced to six months in prison but he is free pending further appeals.

Peilte already served his sentence of two months and is on five years’ probation.

Times staff writer Gary Jarlson also contributed to this article.