Investigators throughout California are moving to stamp out an alleged auto-subleasing scheme that has spread into several major cities since getting its start in Anaheim, The Times has learned.
The Anaheim company--which folded last year--spawned at least two dozen imitators. And the operations of those companies have become the focus of stepped-up civil and criminal investigations in Orange, San Diego and several Bay Area counties.
Additionally, the Legal Aid Society of Orange County, representing a victim of the Anaheim firm's scheme, has filed a civil suit aimed at banning the so-far unregulated auto-subleasing business throughout the state.
Operators of such businesses claim they provide a service by taking over car and insurance payments from those who no longer can afford them--thus protecting the original owners' credit ratings--and subleasing the cars to those who cannot otherwise lease or buy automobiles because they've never established credit or have bad ratings.
It is a cash-rich business, but companies that are in it usually don't stay around for more than six months or so, investigators claim. And the payments that are supposed to be made to banks and other original lenders--who generally are not told that the car is being subleased--often are not made, according to a number of law enforcement officials and bankers.
The defunct Anaheim firm was National Security Financial Services, which opened three branches in Los Angeles and Orange counties in six months of operation and collected an estimated $400,000 in non-refundable service fees and monthly sublease payments--most made in cash. The disposition of the money--collected from about 400 customers--is one of the issues in the lawsuit brought by the county's Legal Aid Society.
With complaints about National's failure to pass car payments to the original lenders mounting and with more and more of its customers' cars being repossessed, the company closed its doors last April. Its president, James Trawick II, dropped out of sight.
But another executive, E.T. Strickland, started a similar operation in Los Angeles. And other former salesmen spread throughout the state to start their own subleasing firms.
"The difficulty is that if you can shut them down, you find that they open up down the street or in other states," said Marvin Benowitz, a Security Pacific National Bank vice president. "It seems to me that you've got to get on the record that it's inhospitable in California for this kind of business to exist."
That is exactly what the Legal Aid suit against National Security, Trawick, Strickland and other National employees is trying to do.
Might Seek Legislation
And the California Bankers Assn., which considers the suit to be the lead case in the state, might seek legislation to regulate or outlaw the subleasing business if the Orange County action doesn't succeed, according to Blair Reynolds, CBA's vice president and general counsel.
On March 10, Orange County Superior Court Judge Judith M. Ryan ruled that Trawick, Strickland and their agents can no longer sublease cars unless they first get the approval of banks and other lenders who hold the original leases or liens. The ruling is to remain in force until a trial is held on the merits of the Legal Aid suit.
And bankers say their lending officers are unlikely to give such operations permission to sublease the cars that they have financed, meaning National Security's imitators may soon have to find other lines of work.
Additionally, the San Diego district attorney's office is investigating two subleasing companies and a towing company in that county and reportedly may bring criminal charges against some of the principals by the end of next month. In the San Francisco Bay Area, the state Department of Motor Vehicles is looking into several subleasing operations.
"It's becoming more and more of a problem," said John Parino, a DMV supervising investigator in Sacramento.
The pitfalls for consumers are numerous, according to bankers, lawyers and government officials.
Responsible for Payments
Those who turn over their cars to subleasing companies remain on the hook for any missed payments to the original lender. And, as the registered owners, they could find themselves liable for parking tickets and even civil damages arising from car accidents when subleasing companies fail to get insurance.
They also could face lawsuits by their banks or leasing companies for breaching standard clauses in lease and loan contracts that forbid them from transferring possession of the cars.
Those who rent from the subleasing companies can find their cars repossessed if the subleasing company doesn't pass payments on to the original lender--as was the case with National Security. They also can lose "down payments" of $500 to $5,000 or more, which they paid to the subleasing companies just to get into the cars.
"It's a strange monster we're dealing with," Parino said. "A question has to be raised in the mind of anyone dealing with these people. Very few of them are actually business people; they're in it for the quick buck. Most of them operate out of suitcases in the trunks of their cars and insist on bringing the (subleased) car to you or meeting you at the corner grocery store."
Yet some operators claim there is a "clean" way to run the business. Former National Security salesman Michael S. Jacobs said that the Downey company he runs, Allied Auto Brokers, simply charges a finder's fee for putting a person who wants to get rid of a car together with a person who cannot get a car through conventional loans or leases. He does not take over any payments, leaving that to the customers to arrange for themselves.
'Far From Immoral'
"If it's done morally and with good conscience, and you do everything correct on the part of the (registered car) owner, it is certainly far from immoral," he said.
Jacobs and others acknowledged, though, that the "no-transfer" clause in loan and lease agreements remains a major obstacle. But Jacobs said that the clause does not apply to the subleasing company, just to the original borrower.
Joseph Angelo, a Newport Beach lawyer who represents a number of subleasing companies, claims the "no-transfer" clause is illegal, in the same way that outright bans on apartment subleasing are unenforceable.
Angelo is the lawyer for Trawick, Strickland, National Security and others in the Orange County suit brought on behalf of Farida Omari, 26, of San Juan Capistrano.
In November, 1984, Omari--a refugee from Afghanistan--paid National Security $1,300 as a non-refundable service fee and $200 as an insurance "binder" and agreed to pay $139.15 a month for 51 months for a used Honda Civic. She said she was told she could buy the car at the end of the lease period for another $2,000 or so.
But in May, the Honda was repossessed by the original lender for non-payment. And two other cars that the company gave her also were taken away by their original owners. Omari said in court papers and in an interview that she also ended up paying three additional monthly payments and $200 more in insurance for the Honda last April because Strickland told her he had no records that she had already made those payments. She said that he threatened to take the car back if she did not pay in two hours.
Angelo said Strickland, who now runs a Los Angeles company called Century Management, did not recall meeting Omari. Strickland did not return telephone calls and could not be reached for comment.
Denies Scam Operation
Angelo, however, denied that National Security operated as a scam. "As far as allegations of stealing money goes, I don't see it documented yet," he said.
The problem at National Security was "partially poor business management," he said. He also blamed the company's failure on its lack of capital and its inability to cover payments that sublessees missed.
But Robert J. Cohen, director of the Legal Aid Society of Orange County and the lawyer for Omari, charged that the company was fraudulently run.
He and investigator Jere Witter have amassed a voluminous file of business records and statements from more than three dozen customers and former salesmen. The statements allegedly reveal sloppy bookkeeping, cocaine use and cash payments stashed in Trawick's pockets.
"These auto-subleasing companies hurt poor people more because they are forced to deal with these companies," Cohen said.
He puts part of the blame on the banks. Most of the cars involved in subleases are cars leased from banks or other leasing agencies, he said, and the contracts are so restrictive that simply returning a car could put a borrower in bankruptcy. Most leases require a 12-month minimum payment and carry provisions for penalties for early cancellation of the lease, Security Pacific's Benowitz said.
"Banks created the problem with their practices as well as (with) their contracts," Cohen said. "If they could find some way to get cars to those with no credit, the subleasing business would dry up."
Meantime, though, the business is spreading.
Lease-1 Financial Services, a San Diego operation that recently closed its doors, was involved in a series of subleases that ended in alleged unauthorized sales to car buyers, mainly in San Diego but also in Arizona, Utah, Texas, Colorado and Minnesota, according to Robert J. Sullivan, the deputy district attorney investigating the case. The sales price generally was less that half of book value, he said.
Dealer Licenses Required
Leasing companies that also sell cars are required to have auto dealer licenses, the DMV's Parino said. Neither the San Diego company nor National Security had such licenses, prosecutors and lawyers said.
Sullivan said that he expects the investigation to last another month or so and to result in criminal charges being filed against the principals of Lease-1 and the towing firm it used, R&S; Towing--which also has gone out of business.
In the San Francisco Bay area, a number of auto-subleasing outfits have opened in the last six months or so, said Robert Friedland, a DMV supervising investigator in Vallejo.
"Right now, we're monitoring it," he said. "One company is in financial trouble. Because he's not licensed, we'll probably go after him for engaging in an unlicensed business activity."
According to Angelo and Cohen, the subleasing concept started out in Texas four or five years ago. A Texas court, however, has since issued an injunction against a Dallas company, and business has dwindled there.
The Ohio Bureau of Motor Vehicles also determined last year that an effort by an Ohio man to start a subleasing business in that state under a franchise agreement with Trawick was "possibly tainted by illegality."
Glen Oaks, now an Ohio insurance salesman, said in a telephone interview that he paid Trawick nearly $7,000 to be trained in the business and to be allowed handle all auto-subleasing operations in Ohio. But he said he never saw Trawick or his money again.
A California attorney whom Oaks hired to help find Trawick told him that "Trawick was probably in Florida under an assumed name," Oaks said.