FBI Checks BSD Official’s Role in 2 Loans
The FBI is investigating whether BSD Bancorp Chairman James S. Brown’s involvement in two real estate loans by a BSD subsidiary may have violated any criminal laws, company officials and federal sources confirmed Tuesday.
A development company owned by Brown purchased two adjacent pieces of property in Santee from people who had originally secured loans from Bank of San Diego, BSD’s largest subsidiary.
The FBI is examining whether the original loans were “straw man” transactions, with Brown as the intended but undisclosed beneficiary of the loans, according to sources familiar with the investigation.
Federal authorities opened their investigation of Brown after a routine examination last year by the Federal Deposit Insurance Corp. Auditors from the FDIC referred the case to the FBI, sources said.
Brown could not be reached for comment. However, S. Alan Rosen, BSD’s attorney, denied any wrongdoing by either Brown, BSD or the Bank of San Diego.
Brown has not yet been questioned by the FBI, said Rosen. However, two high-ranking Bank of San Diego executives--President E. Lynn Caswell and Executive Vice President Louis Cumming--have been interviewed by the FBI, he said.
BSD Bancorp directors were officially informed of the FBI investigation at a board meeting Tuesday night, according to company sources.
“To the best of our knowledge, we believe the FBI is investigating Brown regarding these transactions,” said Rosen.
FBI spokesman Gary Laturno would neither confirm nor deny his agency’s investigation.
The controversial loans were made in July, 1984, two weeks apart and on two adjacent pieces of property in Santee. Both parcels were eventually purchased by Silberrad Development Inc., a subsidiary of Silberrad Inc., which is owned by Brown.
FDIC examiners became aware of the transactions during a routine audit last year but took no action against the bank, the holding company or Brown.
“No . . . regulatory action was taken,” said Rosen. “As far as the bank is concerned, it’s a done deal.”
The bank admitted to a “technical violation” on the loans, but it was unrelated to the eventual purchase of the land by Brown, said Rosen. He would not disclose the technical violation but acknowledged that some bank employees, as a result, are “no longer” working at the bank.
One loan in question, for $150,000, was made to John Neu, president of Surface Optics, a small aerospace firm in Scripps Ranch, on July 25, 1984.
In December, 1984, Neu sold the property to Silberrad Development. However, transfer of the property wasn’t officially reconveyed--or recorded as completed--until October, 1985, according to a report published Wednesday in the San Diego Daily Transcript.
Neu’s original purchase of the property and the subsequent sale to Brown’s Silberrad Development were arranged by real estate broker Bob Klymkowych.
Neu on Wednesday said he doesn’t know James Brown and that he was introduced to the bank by Klymkowych. The Bank of San Diego, said Neu, “processed the loan rather expeditiously at the going rate and (with) going terms.”
Klymkowych could not be reached for comment Wednesday.
The other loan at issue, for $175,000, was made on July 10, 1984, to Pauline E. Saska for the purchase of a parcel next to Neu’s. Saska deeded the property last January to Silberrad Development, which in turn transferred the property to a general partnership, according to the Transcript article Wednesday.
Neither Saska nor her attorney, David J. Loadman, could be reached for comment Wednesday.
Both the Neu and Saska loans were paid back to the bank in full, Rosen said.
BSD’s subsidiaries--which include the Bank of San Diego, American Valley Bank, Coast Bank, Bank of La Costa and Borrego Springs Bank--typically lend funds to directors and officers. As of Dec. 31, directors and officers owed BSD’s subsidiaries a total of $8.9 million in loans.
Complicated Formula
Under a complicated regulatory formula, individual directors and officers are limited by law to borrowing no more than 25% of a bank’s shareholders’ equity plus its allowance for loan losses.
That means that, at the Bank of San Diego, as of June 30, directors or officers could each borrow up to about $2.4 million in unsecured and secured debt.
It is unknown how much Brown borrowed from the bank in 1984, 1985 or this year.
The central issue, however, appears to be one of disclosure, according to sources close to the investigation.
Brown is a founding chairman of the Bank of San Diego and has been a guiding force in the development of BSD and its subsidiaries. In June, Brown relinquished his title as Bank of San Diego chairman, explaining that he wanted to spend more time as holding company chairman and at his other enterprises.
He also owns Chicago Title Insurance, which reportedly handled some of the documents for the Neu and Saska loans.
“There is absolutely nothing wrong with banks making loans to insiders or having other types of transactions with insiders, (such as) buying insurance,” said BSD attorney Rosen. “Directors’ business isn’t only good business, it’s encouraged” by regulators and inadustry consultants, he added.
Such transactions must be “properly disclosed and . . . fair,” Rosen said.
Rosen suggested that FDIC examiners often “go on witch hunts and that they get overzealous hunting for problems.”
‘Upsetting to See’
“It’s very upsetting to see these things,” one BSD board member said. “There are sophisticated people on the board . . . (and) we’re trying to do a good job.”
“Jim Brown is . . . the finest person with the highest integrity,” offered another director. “Any business he did with the bank was on the up and up.”
