Officials Accused of ‘Corporate Raping’ : Receiver Sees Huge Fraud at ESM

Officials of ESM Group, the Florida securities firm that collapsed last month and sparked a run on Ohio savings and loans, committed “the most abusive corporate raping that I have ever seen,” a court-appointed receiver said Tuesday.

Receiver Thomas Tew of Miami also told a House Energy and Commerce subcommittee that there were close ties between ESM officials and Marvin Warner, the chairman of Cincinnati-based Home State Savings Bank, which was forced to close as a result of ESM’s collapse.

Home State remains closed but Ohio Gov. Richard F. Celeste announced Tuesday that an unidentified buyer had been found for the closed savings bank. Celeste said the offer, which is contingent upon legislative approval of a state financial guarantee of undetermined size, would assure depositors full protection of their money.

‘Massive Fraud’

Tew released a lengthy report describing ESM’s “massive fraud.” He said Warner-controlled banks became a “cash cow” for ESM, investing $265 million in the company.

The investment amounted to an unsecured loan to ESM because Warner’s banks never protected their collateral or took possession of the securities ESM was allegedly buying, Tew said.

Tew said that Warner and his associates “abandoned Home State” to keep ESM afloat even though ESM went hundreds of millions of dollars in debt. Because of Warner’s large investments in ESM, Tew said “it appears” that Warner was calling the shots at ESM.

In March, 1983, Tew said, Home State’s board of directors voted to pull its $80-million investment out of ESM by June. Warner not only forced Home State to continue its association with ESM, Tew said, but invested another $70 million, bringing Home State’s total to $150 million.

Tew testified that ESM officials paid themselves six-figure salaries and million-dollar bonuses annually although the company was heavily in debt. ESM officials also “borrowed from the company and never repaid” roughly $36 million since 1976, Tew said.

Lived First Class

ESM officials lived first class, bought themselves expensive homes, cars and yachts and one even bought a $78,000 dog, Tew said. “They had every toy known to the rich,” he said.

Tew described their actions as “the most abusive corporate raping that I had ever seen.” He said his report illustrated “the magnitude and grossness of their acts.”

Asked by one congressman if Warner and ESM officials “started out as crooks,” Tew said: “I think these people started out wheeling and dealing, lost $80 million--which is easy to do in the numbers (of securities) that they were trading--and then started trying to cover up the mess.”

As ESM continued to lose money, Tew said, the officials “lost all conscience because they just started stripping millions out of the company” while they “continued to perpetuate the fraud.”

ESM’s scheme went undetected for several years, Tew said, because the independent auditor hired to monitor the company’s accounts was being paid off by ESM. Auditor Jose Gomez, former head of the Miami office of the accounting firm Alexander Grant & Co., declined to testify Tuesday on advice of counsel, Chairman John Dingell (D-Mich.) said.

Tew said officials of ESM wired $125,000 to Gomez, but he suspects that there were additional payments. “I think it’s suspicious that he (Gomez) would have held up a $120-million fraud for only $125,000,” Tew said.