House Panel to Ask if Conflicts Contributed to Beverly S&L; Failure
A congressional panel plans to examine this week whether conflict of interest as well as risky real estate ventures contributed to the insolvency of Beverly Hills Savings & Loan Assn. and why federal banking regulators did not take early action to remove the thrift’s management.
As hearings resume today before the oversight subcommittee of the House Energy and Commerce Committee, congressmen plan to focus on Robert E. Newberry, the S&L;'s former executive vice president, and his personal ties to Southern California developer James D. Stout, with whom Beverly Hills Savings entered into millions of dollars worth of real estate transactions.
Report From Gray
Subcommittee investigators say they have learned that Newberry, while earning $183,000 as an officer of the firm in 1983, personally received an additional $200,000 in bonuses from Stout, whom they described as a non-investing partner with Beverly Hills in more than $400 million in apartment and commercial property deals that went sour. The subcommittee is seeking to determine if Newberry’s connections with Stout could be construed as a conflict of interest under banking laws and practices.
Subcommittee Chairman John D. Dingell (D-Mich.) has asked former Californian Edwin J. Gray, chairman of the Federal Home Loan Bank Board, to report later in the week why the board apparently failed to detect the risky investment practices of Beverly Hills Savings. The thrift was declared insolvent last April 24 and taken over by the bank board, under whose aegis it is now operating. Its name was changed to Beverly Hills Federal Savings & Loan.
The government’s seizure came several days after disclosures that the institution was preparing to report a loss of about $100 million for 1984. A bank board statement said the thrift’s $3 billion in assets were “characterized by speculative investments and poorly underwritten loans.”
Gray said through a spokesman that he cannot discuss the case until he and other bank board officials testify before the subcommittee.
Records obtained by the subcommittee show that Beverly Hills Savings, in partnership with Stout, invested in apartment properties valued at $177 million and commercial properties worth $267 million in 1982 and 1983. In almost every instance, the S&L; put up all the equity, with Stout agreeing to manage and rehabilitate the properties so that they could be sold.
Investigators said the joint ventures failed because many properties were substandard and over-appraised. Sales of the rehabilitated properties did not meet expectations, according to a subcommittee staff report.
“The problems appeared to stem from a large volume of non-earning assets,” the report said. On April 1, 1983, Beverly Hills Savings restructured its books so that its real estate investments became “loans” that the thrift claimed were accruing interest income. In fact, no one was paying either the principal or interest on these “loans,” which, on the Beverly Hills books, continued to grow larger, the report said.
Subcommittee investigators said the financial problems were compounded because the thrift’s books were “sloppy and in disarray.”
Newberry said in a telephone interview that “there isn’t any truth to charges about conflict of interest” in his ties to Stout, the developer.
Referring to the joint real estate ventures, he said: “This should have been the most successful program ever for Beverly Hills Savings. What went wrong? It wasn’t the market. The problem was the program was poorly managed after new management took over in 1984. Beverly Hills’ interests were not properly managed.”
Beverly Hills developer Paul Amir won control of the S&L; in 1984 after a bitter proxy fight with the former management. Newberry had announced even earlier, in October of the previous year, that he was leaving Beverly Hills Savings to take a full-time executive job with the Stout company, and House investigators said documents show that he continued to work on real estate matters for the S&L; for at least three more months.
Dingell staff members said they are also examining the dual role of an appraiser for Beverly Hills Savings who, besides being paid for his appraisal work, received fees for bringing in new loan business to the institution.
Under terms of the government takeover, Beverly Hills Savings has remained open, with regulators pledging $90 million in promissory notes to give it a positive net worth. The institution has a new five-member board of directors and a management team under contract from First Nationwide Savings in San Francisco. The bank board has said the arrangement will last until “a permanent solution is found.”
After Amir took over the S&L; in 1984, he filed a $100-million lawsuit in Los Angeles County Superior Court charging that Dennis M. Fitzpatrick, the former chairman, and four of his officers and director violated their fiduciary duties and diverted corporate assets during a “four-year financial joy ride.” Amir said he did not realize the true condition of the S&L; when he assumed its control.
His suit alleges that the institution holds investment interests in real estate worth “millions of dollars less than their purchase price” as well as “millions of dollars of bad loans"--two issues on which the congressional hearings could shed new light.
At the first subcommittee hearing last June 19, Fitzpatrick testified that “no one has put more effort” than he into trying to make the association a financial success. He conceded that he embarked on an aggressive growth program--increasing assets to $3 billion from $400 million in five years--but insisted it was necessary as the savings and loan industry faced considerable difficulties beginning in 1980.