The Gloves Come Off in S&L; Fight : How Deal Between Great Western and Citadel Fell Apart

The takeover fight that began last week between the parent companies of Great Western Savings and Fidelity Federal Savings is the culmination of more than a year of board room infighting.

It is a story of misunderstandings and accusations in the inner circles of California’s generally chummy savings and loan industry.

Though executives at each S&L; are not saying much, voluminous documents provide a look at how an amicable merger accord 11 months ago has turned into a nasty squabble today. The events are described in hundreds of pages of court papers spawned by pending litigation between the two financial institutions and in filings at the Securities and Exchange Commission.

The two S&L; companies originally agreed to merge last May, but the deal was canceled late in the summer at the insistence of Citadel Holding, Fidelity Federal’s parent, after dissident shareholder Alfred Roven and two associates won seats on Citadel’s board.

Began Tender Offer

Following a quiet period of several months, Great Western launched its tender offer as an attempt to enforce the terms of the original merger agreement. Great Western also has a suit pending against Citadel in Los Angeles County Superior Court.

Citadel retaliated last month by filing suit in federal court seeking to enjoin the tender offer, which is due to expire April 25. A hearing on the suit is scheduled for today.

Takeover battles are rare in the savings and loan industry, where fights for control have been largely internal affairs. Several in Southern California in recent years have pitted bank-oriented management against dissident directors who make their livings as real estate developers.

Wide-open battles between publicly traded S&Ls; have been virtually unheard of, in part because S&L; regulators must approve changes of control, a process that can take months. But some legal and financial experts believe that the equilibrium may be changing because today’s dramatically lower interest rates have made S&Ls; more attractive investments.

At the same time, the number of top-quality S&Ls; remains limited because only a minority of the industry is truly healthy, said Thomas Vartanian, a Washington attorney who was general counsel of the Federal Home Loan Bank Board in the early 1980s.

It may also be that the rough-and-rude takeover behavior witnessed in other segments of the economy in recent years may be spilling over to savings and loans, Vartanian suggested in a telephone interview.

“What interests me,” he said, “is that the gloves are really starting to come off for the first time. The rules of etiquette and gentlemanly behavior that have been in place are being thrown to the winds to take advantage of the situation.”

Gentlemanly behavior has not been much in evidence in the Great Western-Citadel confrontation, which has been marked by emotional clashes and bizarre twists.

For example, Citadel’s present board of directors is not only trying to fend off Great Western’s tender offer, it is trying to blame the Citadel directors, including Chief Executive Gerald Barrone, for approving the original merger 11 months ago.

According to a Citadel brief filed in superior court, “some or all of the directors” who approved the merger agreement “breached their fiduciary duties.” The accord included a controversial option that allowed Great Western to acquire up to $400 million of mortgages at below-market rates from Citadel if the deal fell through.

Barrone, in a court statement, declared that he voted for the merger because he was misled by his outside legal and financial advisers and did not know all of the facts.

A leading figure in S&L; circles, Barrone is chairman of the California League of Savings Institutions, an industry trade group. He has worked for Citadel and its affiliated companies since 1955.

40 Years at Fidelity

The Citadel board is also warring with Spencer Scott, the longtime Citadel chairman and chief executive who was forced to resign after Roven won his board seats in July.

Scott worked for Fidelity Federal Savings for 40 years, starting as a teller after World War II, when the S&L; had one branch office in Glendale. He eventually rose to chief executive in 1970, taking the additional job as chairman in 1974. Scott was ousted from both jobs in September and dismissed as a “consultant” in February.

Scott’s departure hit Fidelity employees hard and depressed morale, said Marjie Jo Scott, the former chairman’s daughter, who works for Fidelity Federal as a financial services officer.

“I can’t tell you the sadness and outrage among the Fidelity employees on Sept. 12 when my father’s resignation was announced,” she said in a letter to The Times last week. “His office doors were open on Sept. 30, his last day, and employees filed through in droves to say goodby to him and to express their feelings for him.”

Citadel now charges that Scott negotiated the merger with Great Western as a way of preserving his compensation package. Scott had a long-term employment contract and compensation package that called for a base salary of $291,000, plus cost-of-living increases, bonuses and other fringe benefits.

Under terms of the contract, payments were to continue if Scott left the company and could be paid all at once if he wanted. Citadel, according to its court briefs, calculated that the contract would have been worth $9 million last year if Scott had quit and wanted a lump-sum payment.

Suit Threatened

Citadel has now suspended the severance payments after banking regulators questioned its propriety. Scott feels that he is being made a scapegoat and says that he may sue if Citadel does not honor the contract.

“They’re trying to put all the blame (for the merger agreement) on me,” Scott complained in a recent telephone interview. “Anybody who knows anything knows you have a board of directors, lawyers, investment bankers. You just don’t do that by yourself.”

Then there was an unsubstantiated statement from Citadel Chairman James A. Taylor that Scott “had been falsifying his own expense accounts for several years.” Scott and Taylor had served together on Fidelity Federal’s board for years, with Taylor succeeding Scott as chairman last fall.

Taylor would not elaborate on his statement, which he made in a recent court declaration accompanying Citadel’s suit in federal court. Scott, in an interview, called the statement “libelous.”

Citadel’s court papers, including detailed declarations by Taylor and Barrone, tell of Citadel’s turbulent history since Roven and other large shareholders began buying Citadel’s stock.

Though he eventually lost out, Scott went to extraordinary lengths to fight Roven, the court papers show. At one point, Scott even switched director’s slots with Taylor so that Scott would not have to stand for reelection in 1985. Scott was worried that the Roven forces would defeat him if he did. So, at Scott’s behest, Taylor resigned as a director and Scott was elected to fill that post. Then Taylor was elected to fill Scott’s old position. The result: Scott did not have to run for reelection until 1986, but Taylor’s seat was up in 1985.

Among the most dramatic moments came during a special Sunday night board meeting on May 19, 1985, when Citadel was to vote on the original merger offer. The directors didn’t have much time to consider the complex offer because Great Western wanted to announce the deal before the start of stock market trading the next morning.

Scott pressed his case hard, telling the five other directors present that “the alternative to merging with Great Western would be to have Roven and his nominee as directors,” Taylor declared. “In fact, Scott stated several times during the meeting that it was either this deal with Great Western or Roven as a director.”

But some directors were skeptical because they did not think that offer was high enough. The offer called for an exchange of stock worth less than $35 a share at the time, below the $40 to $50 a share that the directors wanted.

(The offer is worth nearly $50 a share today because Great Western’s stock has gone up in price. Great Western is offering to exchange 1.2 shares of its stock for each share of Citadel.)

Insisted on Option

They were also unhappy about the option clause that allowed Great Western the right to purchase the adjustable-rate mortgages from Citadel if the deal fell through. Great Western had insisted on the option--which even Scott did not like--because it felt it would deter other potential buyers from starting a bidding war, court papers show.

One of those opposed was Citadel counsel Ernest Leff, a savings and loan attorney from Beverly Hills, according to court documents. (Leff confirmed in an interview that he opposed the deal.)

Leff warned that the option could expose directors to a “stockholders suit of massive proportions,” Taylor said in his declaration, because the directors were permitting the sale of “Fidelity’s ‘crown jewels.’ ”

Despite the warning, and with midnight at hand, the directors approved the deal by a vote of 4 to 1. Only director Ralph Prickett voted no, while Taylor abstained, pleading a conflict of interest because a subsidiary of Shearson Lehman Bros., for whom he works, was Great Western’s investment banker.

The discussions in that May 19 meeting have been a key in the subsequent litigation, because directors such as Taylor and Barrone now claim that they were misled, particularly about the financial impact of the mortgage option clause.

Salomon Bros., Citadel’s investment banker at the time, reportedly estimated that Citadel stood to lose $8 million in revenue if the deal fell through and if Great Western exercised its option, Taylor and Barrone said in their declarations. Citadel, however, later came up with its own estimate that put the potential loss at a minimum of $21 million, court papers show.

Explanation of Difference

Taylor, in his declaration, described the confusion at a meeting on July 18 when the directors asked Salomon Bros.’ Gerard Smith to explain the difference.

“Smith said that there are different ways to calculating the cost . . . and he denied that Salomon Bros.’ computation was inaccurate,” Taylor declared. “However, he did not explain his computations.”

Smith, reached by phone in New York, declined to elaborate because of the pending litigation in Superior Court in which Salomon Bros. is named as a defendant in the countersuit filed by Citadel.

Citadel also charged that one of its key legal advisers--the well known New York law firm of Skadden, Arps, Slate, Meagher & Flom--also had Great Western as a client. Skadden, Arps later withdrew its representation of Citadel because of the conflict but not before it told Citadel’s directors that they “did not risk personal liability for inadequate deliberation,” according to Barrone’s declaration.

Skadden, Arps attorneys disputed Barrone’s statements, calling them “ridiculous” and “totally absurd.” The law firm did have both S&Ls; as clients at one time but that was no secret and it was not representing both in connection with the merger, Michael Diamond, a partner in Skadden, Arps’ Los Angeles office, said in a phone interview.

Meanwhile, Great Western has taken after Roven.

In a brief filed in federal court, the financial institution called him a “corporate insurgent with a background of bankruptcies.” His background also includes “consent judgments to complaints charging securities fraud and check kiting,” the brief said. (Check kiting is the practice of writing checks against accounts with insufficient funds, with the intention of covering the funds by the time the checks clear.)

Citadel’s proxy statement confirms that the SEC twice cited Roven for securities law violations in 1982, but he settled the cases without admitting or denying the charges.

The proxy also shows that two of Roven’s investment companies filed for Chapter 11 bankruptcy protection in recent years. But both firms have since emerged from court protection, Roven told The Times.

Roven has kept a low silhouette throughout the fight. He had little to say at Citadel’s recent annual meeting and was visibly uncomfortable talking to a reporter afterward. His attorney could not be reached for comment.

Great Western is headed by James Montgomery, who is not making public comments either. But close associates say he launched the tender offer because he is angered by what he believes is Citadel’s attempt to renege on a legal merger agreement.

If the tender offer succeeds, Great Western will probably get the bragging rights as the biggest savings and loan company in the nation. The combined assets of Great Western and Citadel totaled $28.6 billion at year’s end, more than $1 billion higher than the nearest rival.

‘Arbs’ Control Destiny

If Citadel is to fend off Great Western, it must convince the professional stockholders, known as arbitrageurs, that it has something better to offer. As much as two-thirds of Citadel’s outstanding shares are owned by the “arbs,” and they want their profits now, said Jerome Baron, an analyst for First Boston Corp. in New York.

Even if another suitor is willing to better Great Western’s price, it would take it six to nine months to obtain approval for the merger from the Federal Home Loan Bank Board, Baron added.

The bank board approved the Great Western offer several months ago, although it did invalidate the option clause on the adjustable-rate mortgages.

But Citadel is clearly hinting that more lucrative offers are over the horizon. In a letter to shareholders last week, Taylor said a “rejection (of the tender offer) may help pave the way for possible alternative purchases to offer you a fair and adequate price for your Citadel shares.”

In addition, both Roven and director James J. Cotter, who each control more than 9% of Citadel stock through separate investment groups, have asked the bank board for permission to increase their holdings to as much as 24.9%.

If they succeed before the tender offer expires, Great Western could be defeated, Taylor said.

CITADEL AT A GLANCE Holding company for Glendale-based Fidelity Federal Savings & Loan Assn. Data as of Dec. 31, 1985: Assets: $3.14 billion Deposits: $2.19 billion Stockholders’ equity: $119 million As a percentage of assets: 3.8% No. of shareholders: 406 Employees: 668 Branches: 29 GREAT WESTERN FINANCIAL AT A GLANCE Holding company for Beverly Hills-based Great Western Savings Data as of Dec 31, 1985 Assets: $25.5 billion Deposits: $17.6 billion Stockholders’ equity: $1.2 billion As a percentage of assets: 4.7% No. of Shareholders: 24,115 Employees: 8,644 Branches: 680