Tangled Anatomy of Massive Fraud Case : ‘Investment Program’ May Cost B of A, Several Others More Than $500 Million

For a mere $5,000, the pitch went, you too could get a piece of the action in Sun Belt real estate. Act now. Opportunities are limited.

The “Share the Wealth Real Estate Program,” designed by a small group of Los Angeles area businessmen, was supposed to attract 3,000 individual investors looking for quick profits and big tax write-offs from Southern California and Texas properties.

Instead, participants and investigators allege in court documents and interviews, the 1981 offering was prelude to a massive fraud that ultimately may cost Bank of America and dozens of smaller institutions more than $500 million and is emerging as one of the biggest financial scandals in U.S. history.

The collapse of the investment program last year and B of A’s pained admission that it lost $95 million in the deal raised the curtain on a drama that authorities say features three convicted felons, money laundering and offshore havens, Las Vegas connections, “inducements” to bank employees, a Runyonesque character selling diamond rings out of his pocket at a birthday party and an insurance agent who may or may not be dead.

As in many frauds, the victims are themselves partly to blame. Those who lost money were not unsophisticated dupes, but rather bankers and investors who apparently overreached in efforts to further their careers or show dramatic return on investments. They trusted the wrong people, neglected to inspect collateral, ignored warnings and got burned in the volatile California and Texas real estate markets.

Many Banks Affected

The Bank of America and related cases already have touched more than three dozen banks and thrifts across the country, spawned at least 20 lawsuits and led to the creation of an investigative task force composed of the FBI and federal, state and local prosecutors. Sources say they are months away from untangling the elaborate web of alleged conspiracy and presenting a case to a federal grand jury.

The case bears some notable similarities to the recent scandal that rocked the Ohio savings and loan industry when ESM Group Inc., a Florida government securities firm, went into bankruptcy, taking Home State Savings Bank, a big Cincinnati thrift, down with it. In both cases, analysts say, financial institutions seeking high yields invested millions of dollars through distant brokers without adequate scrutiny of the principals and the collateral involved.

Bank of America, the nation’s largest bank, took the biggest loss in the mortgage deal when it discovered that several employees had committed the bank to the role of trustee and escrow agent for funds that other banks had invested in pools of residential mortgages. When the pools turned out to be based on grossly overvalued properties and backed by worthless insurance bonds, the bank said, it repaid the investors $133 million for interests in property worth no more than $38 million.

Promise of Secrecy

In exchange for the repayment, B of A extracted from the investors a promise of secrecy and a release from future legal liability.

Court suits filed by Bank of America and other victims of the alleged fraud say the losses resulted from an intricate set of transactions involving inflated appraisals, false loans among related parties, multiple loans on single pieces of property, mortgage-guarantee bonds written by companies without the ability to pay and ultimate default on the loans and the bonds. Bank of America described the deals as a “massive fraud” and an attorney representing several thrifts that stand to lose $9.4 million called it a “classic pyramid scheme.”

But the alleged fraud extends far beyond the big San Francisco-based bank, investigators say. They are tracing hundreds of millions of dollars in apparently fraudulent mortgage and mortgage-insurance paper and poring over truckloads of documents seized from interrelated companies that did business under dozens of assumed names.

“Bank of America has already taken its earnings hit, but clearly this goes beyond Bank of America,” said Derrald Johnson, head of an internal bank investigative team that has numbered as many as 100 persons.

“If it were only the $95 million the bank reserved for its own loss exposure, this wouldn’t be one of the biggest financial frauds of all time, but other institutions have also been impacted. The question is just how much bigger it is.”

In its 1984 annual report, the bank apologized to shareholders for the losses, calling its participation in the alleged fraud “painful and embarrassing.”

The bank last month fired five employees, accusing them in state court of gross negligence for the way they handled the investment funds. It also is seeking $385 million from three firms that it claims conspired to cheat it through violations of federal securities, fraud and racketeering laws.

Most of the other banks and thrifts that swallowed big losses were from the East and Midwest, slow-growth areas with slack loan demand. The institutions’ coffers were overflowing with deposits lured by high interest yields; aggressive investment managers began casting about for high-return instruments.

“We had a lot of capital and had to grow our assets,” said Robert Garver, chief executive of Neworld Bank for Savings in Boston, which reserved $5.8 million against anticipated losses from a mortgage-participation deal related to the B of A case. “There weren’t enough deals here.”

So Garver and other small bank and thrift executives turned to loan brokers, who led them into the $168-billion-a-year secondary mortgage market. The bankers were looking for deals and found themselves in Southern California.

Deal Appeared OK

“It was a long way from here, but it appeared OK based on private mortgage insurance,” said a rueful Garver after learning that the insurer was associated with the suspected conspirators. “There turned out to be a lot of fraud. I guess the lesson is you don’t go out of your own backyard unless you’re willing to take the risk.”

That was one of many lessons learned by investors. Others will emerge as investigators piece together exactly what happened. One theory being pursued is that the some of the companies used the mortgage deals to launder fraudulently obtained funds. The key question today is how much money disappeared and where it went. Once they know that, investigators say, they’ll understand the whole enterprise.

Here, based on dozens of interviews, court filings and investigative task force documents obtained by The Times, is what is known so far about how the scheme operated.

In 1981, Orange County businessman Kent B. Rogers and several associates began putting together a real estate investment program through Rogers’ West Pac Corp. and a large “family” of related companies, including a savings and loan, insurance companies, a venture capital business and a property management firm. In its brochures, Orange-based West Pac claimed to be endorsed by top California law firms and banks.

Rogers called his investment plan the “Share the Wealth Real Estate Program” and in speeches and flyers touted West Pac’s “creative financing program” by which investors of $5,000 could realize immediate tax savings of up to $25,000 and double their principal in a year.

Claimed Many Participants

Rogers told prospective investors that he had 3,000 wealthy clients already participating in the program and thousands of choice properties under development.

Rogers, a handsome and powerfully built Detroit native, is described by associates as a likeable and convincing salesman. He owns a oceanfront condominium in Huntington Beach, a large powerboat and a stable of cars including a Rolls Royce, a $40,000 customized Corvette and a pickup truck.

In September, 1981, in an unrelated affair, Rogers was indicted by a federal grand jury on charges of bankruptcy fraud and conspiracy for concealing his ownership of the 2,769-acre Whiting Ranch, a prime development parcel in the Orange County foothills above El Toro. Court documents showed that he transferred title to the ranch from one company he controlled to another an hour before declaring the first firm bankrupt.

Rogers was convicted the following February, fined $20,000 and sentenced to six months in federal prison, a term he began serving in February at the federal prison compound at Lompoc.

Rogers declined numerous requests to be interviewed for this story. An associate said Rogers risked losing prison privileges if he made phone calls to the press.

Earlier this year, he denied any wrongdoing in the B of A and related cases. “I never burned anybody,” he told one interviewer.

At the same time that Rogers was putting together his program, Chicagoans David A. Feldman and Leslie W. Michael, Feldman’s cousin, were devising a plan by which institutional investors could purchase shares in pools of high-yield residential mortgages without the bother and risk of investigating and underwriting dozens of individual borrowers.

Details of Setup

The investors--who turned out to be primarily small banks and thrifts in the East and Midwest--would buy shares in certificates backed by hundreds of loans of no more than $500,000 each. No loan was to exceed 80% of appraised value and each was to be backed by third-party private mortgage insurance, which would repay investors in the event of default by the borrower. Trust and escrow arrangements would be handled by major financial institutions.

The investor institutions would be paid interest at a “pass-through” rate, regardless of the differing interest rates of the underlying mortgages, some of which were as high as 21%. The pass-through rate on most of the certificates appears to have been in the 13% to 16% range. The difference was to be the organizers’ profit.

Feldman, a former broker at Merrill Lynch, Pierce, Fenner & Smith Inc. in Chicago and Los Angeles, was two-thirds owner of the venture, named National Mortgage Equity Corp., with offices in Palos Verdes Estates. Michael, a partner in the prestigious Chicago law firm of Lord, Bissell & Brook, owned a one-third share in NMEC (pronounced NEE-mec). The law firm also served as legal adviser for the mortgage program.

Acquaintances describe Feldman as “a banker type,” low-key and knowledgeable. Unlike the more free-wheeling Rogers, he always wore a coat and tie and traveled to appointments in a chauffeur-driven Cadillac stretch limousine.

Didn’t Disclose Conviction

In separate lawsuits, Bank of America and several thrift investors have alleged that NMEC’s original offering circulars did not reveal Feldman’s February, 1982, federal felony conviction in Illinois. He was found guilty of 19 counts of mail fraud and nine counts of wire fraud in connection with a scheme to defraud Merrill Lynch by using phony bank guarantee letters to meet collateral requirements for stock options trading.

Texas insurance regulators allege in a lawsuit that the proceeds from that fraud were used as seed money for the mortgage-pool deal.

Feldman served 12 months of an 18-month sentence in the case and was released from the federal prison camp at Boron, Calif., late in February. Through his attorney, Charles Wehner of Beverly Hills, Feldman declined to speak with The Times. Michael also refused comment.

In answers to two lawsuits filed last year against West Pac and NMEC relating to the mortgage program, the firms issued general denials of all the charges.

A spokesman for Lord, Bissell & Brook said he was confident that the law firm would be shown to have properly carried out its duties as counsel for NMEC. Michael is still a partner in the firm, but sold his share in NMEC last year, the spokesman said.

The NMEC program required pre-written loans for inclusion in the pools, but few were available back East. So Feldman, using long-time friend J. Robert Meceda of San Francisco as broker, began looking for loans in California. Another friend of Feldman’s, George Ash, financed the first loans that NMEC pooled through a newly formed Southern California firm, Heritage Funding, according to Floyd (Cal) Anglin, who was associated with Ash in numerous business ventures. Ash and Meceda ran NMEC while Feldman was in prison.

Ash did not return numerous phone calls. Meceda said, “There are tons of folks down there (in Los Angeles) who certainly have more direct and ongoing involvement than I do. I suggest you talk to (Bank of America), they’re the folks who’ve got most of the information.”

Guarantee Bonds

Wells Fargo Bank served as trustee and B of A as escrow agent for the first NMEC pools, which attracted $18 million in investor funds from four Eastern thrifts. The loans were backed by financial guarantee bonds written by Glacier General Assurance Co., a little-known Montana-based insurer specializing in medical malpractice coverage. Glacier carried a top grade from Best’s, an insurance-rating firm.

Glacier, which is now under conservatorship in California and Montana, wrote $280 million worth of such guarantees in violation of California law, state insurance regulators say, despite having a net worth of less than $30 million. They add that it’s unlikely Glacier will be able to satisfy even a small fraction of the obligations.

Glacier’s California representative was John N. Wain, a mysterious figure who investigators describe as pivotal in the B of A and related deals. According to a death certificate on file in Los Angeles County, the British-born Wain died last Sept. 4, at Valley Presbyterian Medical Center in Van Nuys at the age of 55 from complications arising from a bleeding ulcer. He was cremated at the Grand View Crematory in Glendale a day later.

The FBI and other investigators, however, say they are suspicious about the rapid cremation and the lack of an autopsy. They say they suspect that Wain may still be alive and in hiding. They offer no proof to support their suspicions, however.

Medical Records Subpoenaed

Wain’s medical records have been subpoenaed, according to a secretary in the office of Dr. Gilbert S. Saliba, the Encino physician who signed Wain’s death certificate. She added, “It’s so weird. There’s no question in any of our minds that it was he” who died.

According to suits filed earlier this month against Feldman, Rogers and others by B of A, in late 1981 Feldman approached William T. Powers, manager of the bank’s Inglewood branch and described the mortgage-certificate program. Powers, without consulting his superiors, the suits say, agreed that the bank would serve as escrow agent for the pools--collecting documents, receiving funds from investors, disbursing funds for purchasing mortgages and repaying investors according to their share in the pools.

Mary R. Brown, who ran the branch’s escrow department, was given the responsibility for policing the agreement. According to a lawsuit filed by the state of Texas as receiver for Pacific American Insurance Co., which backed $27 million worth of properties in the NMEC pools, Brown was “compensated” by Feldman and others for her part in carrying out the scheme. The suit also says Feldman or his associates “induced” Shirley E. Stahlman of the bank’s Los Angeles district trust office to sign over the bank’s power of attorney to NMEC.

The Texas suit gives no details of the alleged inducements to Brown and Stahlman.

Bank Employees Fired

Powers, Brown, Stahlman and two other bank workers were fired and charged by B of A in state court with gross negligence and breach of fiduciary duty. A sixth employee was demoted and two additional employees, including a senior vice president, resigned in the wake of the scandal.

Bank officials said, however, that they have no evidence of fraud or bribery on the part of any B of A employees.

Brown’s attorney, Laurie Belger, said his client “did nothing wrong. She was at the low end of the totem pole, just doing the paper pushing. They’re punishing the soldiers and promoting the generals.”

The other B of A workers either could not be reached or declined comment.

The bank’s involvement was seen as an endorsement of the investment program, thrift executives said later. Bank of America says in its lawsuits, however, that it was only the unwitting “front” for a fraudulent scheme to steal investment funds using phony loans and worthless insurance as bait. “The beauty of this fraud--whoever concocted it--was that money used for investments in the later pools pays the interest on earlier pools through insurance companies,” said Arthur Shartsis, a San Francisco attorney representing three thrifts which lost $9.4 million in these early NMEC pools. He said Glacier received as much as $10 million in premiums for backing loans in the NMEC pools and used part of that income to pay interest to investors.

Elements of Scam

“All the elements you want in a confidence scam are here: Nationally known financial institutions, third-party guarantees, a Best’s-rated insurance company. The insurance premiums were converted into interest payments, Ponzi-scheme style.”

In a Ponzi scheme, original investors are paid from funds received from later investors. As long as the pyramid keeps growing, the plan holds up.

For the time being, the NMEC pools appeared successful. But troublesome warning signs began to appear. B of A officials said one branch manager, hearing that the Inglewood branch had become involved with Feldman, warned Powers that she had reason to suspect Feldman wasn’t straight. The warnings were ignored. The employee who issued the warning was later demoted and reassigned for failing to take her doubts to higher officers.

More substantially, on Dec. 17, 1982, Advance Mortgage Corp., a respected mortgage-servicing firm handling the original NMEC pools, wrote to Wells Fargo Bank to express “grave doubts about the soundness of the pools.” The firm said it was resigning as servicer of the mortgages.

Advance said independent appraisals that it had conducted showed property values 25% to 50% less than advertised. It warned of an “inordinate” number of defaults on first or second payments as well as unacceptable delinquency rates. It said too many of the loans were in too few hands.

‘Treasure Map to Fraud’

Bank of America, in a federal fraud and racketeering suit filed this month against NMEC, West Pac and Lord, Bissell & Brook, called the Advance Mortgage letter “a virtual treasure map to the NMEC fraud.”

Wells Fargo, however, consulted its lawyers in the matter--Lord, Bissell & Brook--and decided not to inform the investor institutions of the reasons for Advance Mortgage’s resignation. Instead, it named NMEC servicer of the pools.

Wells Fargo last month filed suit against the four thrift investors, NMEC, the law firm and others, claiming that it is not liable for the investors’ $9.4 million in losses. A spokeswoman said, “We believe we carried out our responsibilities as trustee appropriately.”

By late 1982, NMEC had amassed close to $100 million from about two dozen Eastern investors and was searching for borrowers. Wain, the Glacier agent, and Ash, then president of Energy Resources Financial Inc., introduced Feldman to Rogers.

In a search warrant affidavit, law enforcement officials say Energy Resources, incorporated in California and Nevada, was one of a number of companies controlled by Wain, his sons and businessman Marvin Weiss. It shared offices in Covina with the California headquarters of Glacier General Assurance, Financial Commerce Corp., Statewide Deed Service and Jay-Mar Development, all controlled by Wain and Weiss, the affidavit states.

Sold Rings at Party

Weiss was “a real flashy guy, a Damon Runyon type of character. If you wanted a watch, he probably had three on his arm,” said, an associate of Rogers. He met Weiss at a birthday party for George Ash, where he said Weiss was selling men’s diamond rings out of his pocket to the guests.

An investigative task force document obtained by The Times says Wain and Weiss used Energy Resources to take in funds from the NMEC escrow pools. Investigators are trying to determine what happened to these funds.

Wain and Weiss also were directors of Raysure Insurance, Chatsworth, which served as broker for all or part of Glacier’s financial guarantee bond business. State insurance regulators say Glacier wrote $280 million worth of such bonds in violation of their California license. The company is now insolvent and under conservatorship in California and Montana.

Weiss, through an attorney, declined comment. Hayden said, “You’re asking me to try lawsuits in the press. I’m not going to put out anything at this time.”

According to Anglin, a former West Pac officer and director who described himself today as a consultant to the firm, Feldman, Wain and Ash were looking for a borrower to take out short-term loans on several million dollars worth of properties in California that had gone into default. Most of the properties originally were owned by Sierra Realty & Investments, an Orange-based development firm headed by Daniel Bailey that went into bankruptcy in January, 1983.

The original lender on the Bailey properties was Energy Resources and Glacier General had bonded the loans.

Loans Were ‘Stacked’

Rogers and West Pac agreed to buy the properties, with Energy Resources as the lender, using funds from the NMEC pools. The West Pac loans were then sold back into the NMEC pools. All the mortgages were backed by Glacier guarantees. B of A says in its suit that these loans were made at inflated values and that multiple loans were “stacked” on individual properties.

At this point, the relationships among the various parties become extremely complex. Court documents and articles of incorporation of various entities show the following interconnections that appear to contradict West Pac and NMEC’s contentions that their transactions all were conducted at “arm’s length”:

- Rogers and Feldman are listed as the sole officers of a Nevada corporation, Consolidated Equities Inc. Feldman’s attorney said the firm opened a $7,000 bank account but never did any business.

- Ash was president for at least six months of Nevada Western Pacific Financial Corp., a subsidiary of Rogers’ West Pac and housed in the same building. Before Ash went to work for Rogers, he worked with Wain and Weiss at Energy Resources. After he left Nevada Western, he became president of Feldman’s NMEC.

- Anglin, a West Pac employee and director, and Ash were on the board of directors of Delta Savings & Loan Assn., part of the West Pac “family.”

- Anglin and Ash also were trustees of KR Trust II, a Rogers family trust.

- Anglin and Ash put together a consumer finance company, but never made any loans, according to Anglin.

- Anglin’s son Bruce works for Glacier, the insurer Wain represented. Anglin said his son has been with the firm only since the end of last year and found the job through a newspaper ad.

Beginning in early 1983, West Pac and NMEC began putting together deals. West Pac borrowed funds from NMEC’s pools through Nevada Western and bought property in Santa Ana, San Bernardino, Oceanside and Palm Springs. All the notes were backed by Glacier bonds and put into the pools, for which B of A now was acting as both escrow agent and trustee.

By June, the relationship was cemented and the two firms undertook a broader program. Anglin, who claimed to be knowledgeable about Texas real estate, found three run-down Houston apartment complexes that West Pac wanted to buy and convert to condominiums. NMEC provided the funds to Nevada Western, which wrote hundreds of loans on individual condominium units. The loans ranged from about $27,000 to more than $90,000 each, totaling $27 million.

For the first time, the loans were bonded by Pacific American Insurance Co., incorporated in Delaware but with its principal offices in Salt Lake City. Delaware insurance authorities say in court filings that the firm wrote as much as $200 million in such mortgage guarantees, many on non-existent or grossly overvalued properties.

‘Self-Dealing’ Transactions

According to suits filed by Texas officials and by B of A, the entire series of transactions was fraudulent “self-dealing among related entities.” The NMEC loans, funnelled through Nevada Western to West Pac, were based on greatly inflated appraisals done by a Rogers associate, the suits say. The difference between the purchase price and the loan values--$14 million for the three Houston properties alone--was supposed to be used to convert the units to condominiums but was diverted to the personal use of Rogers, Anglin, Feldman and others, the suits charge.

Most of the “loans” were merely paper transactions to create documents for inclusion in escrow files at B of A, the suits allege. Pacific American was under Rogers’ direct control and never had the financial resources to repay investors in the event of default by lenders, they say. Rogers denies that he ever controlled Pacific American.

The Texas suit further alleges that Rogers and the others stripped the properties of appliances and fell behind in utility payments. The empty buildings today look like a disaster area.

“In short,” the B of A suit says, “the NMEC transactions were a sham and a fraud designed to enrich the defendants at the expense of the investor institutions and the bank.”

In June, 1984, however, the program began to crumble. West Pac refused to make a $387,552 monthly loan payment, telling NMEC that it would not pay because of a “business dispute.” NMEC turned to Pacific American for repayment. Anglin at this point was president of the insurance firm, having been installed by Rogers, he said, in March after the company could not repay $3.8 million in loans. The insurer’s checks had been bouncing since December, regulators later found.

Refused to Pay

Pacific American, which Rogers said had been “essentially insolvent” for a year, refused to pay.

In early July, Rogers appeared at the Salt Lake City headquarters of Pacific American with two West Pac employees, Stephen Oswald and Richard A. Parker. According to an affidavit in a suit filed by the Delaware insurance commissioner, Rogers held a meeting of Pacific American officers at the firm’s Salt Lake City headquarters in which he said that he held the “money bag” for Pacific American and two subsidiaries and that if anyone objected to his actions, “the door is open.”

The affidavit, given by former Pacific American employee Rolando I. Galano, says Rogers put Parker, a convicted felon, in charge of company operations and began transferring the insurer’s assets to West Pac bank accounts one day before Delaware regulators barred such transfers. Rogers later told Delaware authorities that he took the actions because “the deal had gone sour,” apparently referring to the Texas real estate transactions.

Parker also was put in charge of Pacific American Group, the San Francisco-based parent of Pacific American and Dover Insurance Co. Ltd. of Bermuda, a Pacific American affiliate, Delaware authorities said.

Parker was convicted in California court in 1982 of grand theft and securities fraud involving a scheme to establish a Bahamian spa. Court files in the case state that the spa was billed as an outlet for a synthetic hormone with “rejuvenating” properties that “could cure human impotence.”

Associated With Shenker

He was associated with Las Vegas casino owner and financier Morris Shenker in a 1975 attempt to buy an Oklahoma insurance firm then controlled by the Teamsters’ Central States Pension Fund. Regulators killed the deal when Shenker’s involvement was discovered.

The distinguished-looking and soft-spoken Parker, 62, said in an interview that charges that he aided in the looting of Pacific American are “just wrong, that’s all. I had no authority whatsoever for the transfer of anything.”

He described his profession as international businessman and called Shenker a “business friend.” Today he is working out of Rogers’ former office and calls himself a “trouble-shooter” for West Pac.

Parker’s Vegas and Caribbean connections have aroused investigators’ suspicions that money was transferred from West Pac to offshore banks, a charge that Parker strongly denies.

“They dream up all that kind of stuff,” he said. “They’re playing cops and robbers.”

Although Rogers and Feldman did a number of big deals together, it remains unclear whether they were partners or merely married by convenience. NMEC last month filed a multimillion-dollar fraud and racketeering suit against West Pac, Rogers and Anglin, accusing them of conspiring to rip off Feldman.

Denies Allegations

Anglin, for his part, said Feldman and Ash masterminded the deal and failed to live up to their promises to West Pac. “I deny 100% all the allegations in their suit. I’d countersue for a lot of money, but I don’t think Feldman or NMEC has anything,” he said.

B of A, however, is convinced that Rogers and Feldman acted in concert to defraud the bank and the Eastern investors. It said in its lawsuit that the bank and the 19 smaller institutions had been “victimized by the massive fraud devised and implemented” by Rogers, Feldman, Michael and others.

It may be years before the extent of the losses and where the money went are fully understood. For today, however, there is more than enough blame and embarrassment to share.

Regulators, victims and industry sources say the deal required a broad breakdown of controls, from state regulatory oversight to B of A auditing. Banks and savings and loans that invested acknowledge that they failed in basic banking duties--knowing to whom they were lending, doing independent appraisals and inspecting collateral. Loan brokers failed their clients in the same way. Third-party promises took the place of sound underwriting. Warning signs were missed.

The scheme was furthered in part because B of A was too big to know what was going on in all of its branches and in part because dozens of other banks were too small to properly administer distant loans.

“That’s one of the morals of the story,” said James Thomason, president of the tiny Bank of Yellville in Arkansas, which wrote off its $100,000 piece of the action in one of the Orange County deals.

“We knew it was going for Southern California, but we’d never done it before. I guess maybe we learned that you should just be a little more careful.”