Ex-Owner of American Diversified Still Smarting After Federal Seizure
Ranbir Sahni did not receive a single rose or box of chocolate from the scores of people arriving at American Diversified Savings Bank last Valentine’s Day.
Instead, nearly three years of intense government scrutiny and auditing climaxed that afternoon as the Federal Savings and Loan Insurance Corp. declared the savings bank insolvent, seized control and ousted Sahni, its maverick owner and chairman.
At its peak in January, 1986, Costa Mesa-based American Diversified boasted about $1 billion in assets and ranked as the 39th largest S&L; in California out of 219 institutions.
The savings bank had lent hundreds of millions of dollars to its in-house development arm, and American Diversified-financed apartment complexes, hotels and office buildings blossomed around the country. The savings bank also invested in wind farms and ethanol plants, and the rapid growth in deposits that financed the offbeat investments drew the unwelcome attention of state and federal regulators.
In taking over the savings bank, FSLIC officials said American Diversified was out of control, that its loans and investments were substandard and that Sahni had committed fraud in transactions with the savings bank.
But Sahni, a one-time Indian air force pilot and successful developer before he got into the savings and loan business, says he was a victim of the Federal Home Loan Bank Board’s myopia. He believes that he was picked out and picked on because he dared to involve his institution in non-traditional lines of business.
His claim is virtually the same one voiced by other controversial Orange County bankers whose institutions were seized by the government after suffering multimillion-dollar losses.
The nation’s chief savings and loan regulator, Federal Home Loan Bank Board Chairman Edwin Gray, regularly cited American Diversified’s wind farms as a prime example of financial deregulation run amok, though he stopped short of naming the S&L; outright.
And so, less than a year after Sahni acquired control, American Diversified became subject to visits and audits by an almost constant stream of government regulatory officials.
Sahni said in a recent interview that his biggest mistake was that he refused to accept that the U.S. government could put him out of business.
He met frequently with state and federal regulators in an attempt to explain his unique way of doing business and said he was convinced that once they understood, they would leave him alone.
“As they (the regulators) see our success over and over again, they’ll trust it,” Sahni said in a 1984 interview.
But his prophecy never materialized, and things progressed from bad to worse.
Today, both Sahni and the FSLIC agree that American Diversified is crippled beyond recovery and that it may end up costing the government insurance fund more than $300 million to wind down the S&L;’s operations. In the past 11 months, American Diversified’s real estate portfolio alone has fallen in value to $278 million from $425 million, according to the latest audit.
“This is the most complicated company I’ve ever seen,” said Thomas J. Haupert, who was named president and chief executive of American Diversified by FSLIC last August. “They’re in every business in the world.”
Industry observers doubt Haupert can rescue American Diversified. “The organization is destroyed. It can only be buried,” said a source familiar with the company’s operations.
In an attempt to recover some of the money it is spending to wind down the S&L;’s operations, the FSLIC filed a $76-million federal lawsuit just a few days after the takeover last February.
The suit alleges that Sahni and former president Lester G. Day committed fraud and breached their fiduciary duties by engaging the S&L; and its subsidiaries in “numerous” transactions without complying with federal banking regulations and without exercising adequate financial and accounting controls over the various operations.
The one specific example of Sahni’s alleged misbehavior cited in the suit is a complex real estate deal in which, FSLIC charges, Sahni intentionally structured the transaction and concealed vital documents so that he could personally profit from a gross overvaluation of some of the property. In all, the suit alleges, Sahni improperly received $1.5 million in proceeds from the Colorado deal. Sahni maintains that the bank made a $6-million profit on the transaction while he lost $1 million.
The suit also accuses Sahni of damaging the S&L; by paying president Lester Day $558,000 in bonuses last year, at a time when American Diversified was insolvent. “No good cause existed for the payment of such enormous bonuses,” the suit said.
The FSLIC action said the bonus was paid in violation of a direct order from the agency that prohibited the S&L; from paying bonuses to any officers who earned in excess of $80,000 per year. Day’s salary at the time was $195,000 per year.
FSLIC officials went on to file a second lawsuit in July, which Sahni successfully settled to his benefit.
And it is that action, the former S&L; owner claims, that shows clearly that he is a victim of harassment by the agency.
The suit claimed that Sahni wrongly kept for himself nearly $1.1 million in proceeds from the sale of some municipal bonds and accused him of a “systematic pattern” of diverting assets and business opportunities from the S&L; to his separately owned companies. Allegations included fraud and violations of the federal Racketeer Influenced and Corrupt Organizations Act.
But Sahni recently reached a settlement with the FSLIC, under which the suit was dismissed and he received 10% of the $1.1 million in question.
“Why would you pay money to a guy who defrauded you?” Sahni asked rhetorically about the settlement. “This was a frivolous lawsuit. I deserve the $1 million, but it costs me more than that to sue them and collect it all.”
Sahni labeled the allegations against him, particularly the racketeering claims, as “irresponsible” and said a government agency should not make such accusations recklessly. FSLIC officials would not comment on the settlement.
The allegations in both the dismissed lawsuits and the suit still pending reflect a pattern of criticism of American Diversified’s operations that began in 1984, when the Securities and Exchange Commission began investigating the S&L;’s real estate syndication department.
And it continues today with the FSLIC suit and with state and federal investigations into a series of loan swaps and real estate dealings between American Diversified and Consolidated Savings Bank, an Irvine S&L; that was also declared insolvent last year.
The SEC inquiry began when the agency objected to the way American Diversified packaged its real estate limited partnerships, claiming that they should have been registered as securities offerings.
American Diversified claimed that they were private placements and did not fall under the SEC’s registration rules. Without admitting or denying guilt, Sahni recently settled the case by signing a consent decree and agreeing not to sell unregistered securities in the future.
While the SEC investigation was in progress, the state Department of Savings and Loan issued a cease-and-desist order prohibiting American Diversified from lending any more money to its development company.
Both the SEC complaints and the state’s concerns were resolved administratively, but the savings bank’s dealings continued to be questioned by state and federal regulators.
“The power the FSLIC has, no one has,” said Sahni, 50, a native of India who became an American citizen in 1984. “They are spending millions fighting us. It’s a vendetta.”
FSLIC officials deny his vendetta theory. Regulators said American Diversified suffered serious problems beyond poor loan documentation and sloppy record keeping. In December, 1985, American Diversified’s net worth was less than 1% of its total assets, and the value of certain assets was overstated by at least $28.3 million, according to the FSLIC.
A former state Department of Savings and Loan official, who asked not to be identified, said: “They were running a sloppy shop. We were supportive of new things, but there was a certain naivete. The entire group was not dealing with reality.”
Like many other Orange County S&L; operators, Sahni came into the industry as a real estate developer. In the 1970s, he began building and syndicating federally subsidized, multifamily housing complexes in Watts and other areas.
Attracted by the state and federal deregulation of the S&L; industry, Sahni purchased a small S&L; in Lodi, Calif., in June, 1983, for $2.8 million and merged his development company, with $105 million in assets, into the savings bank.
By year’s end American Diversified’s assets ballooned to nearly $300 million from $11 million.
And by late 1985, American Diversified’s headquarters operations filled 6 1/2 floors of a Costa Mesa high-rise and Sahni was reigning over a financial empire employing 1,600 people nationwide. American Diversified’s opulent offices overlooking South Coast Plaza featured Oriental rugs, chandeliers and custom furniture.
A few weeks before the Valentine’s Day takeover, Sahni made a last ditch attempt to save the savings bank by offering to sell out to a consortium of investors gathered by Thomas J. Barrack Jr., a Los Angeles real estate financier.
Barrack said he had a $20-million proposal to rescue American Diversified and had assembled a team of lawyers and accountants to delve into the savings bank’s books. Because the S&L; was in a perpetual state of turmoil due to the near constant auditing, Barrack said he could never obtain up-to-date financial figures.
Still, based on the sketchy information Sahni provided, Barrack filed a change of control application and presented his proposal to the Federal Home Loan Bank Board in San Francisco. Barrack told the staff he needed an immediate decision to save the ailing S&L.; He said he received a cordial but chilly reception. Feeling time was running out, Barrack said he flew to Washington to present his proposal to the bank board staff there.
This time, he said, the reception was warmer. But a week later, FSLIC stepped in and seized control. In a recent interview, Barrack said his proposal to rescue American Diversified “went into oblivion.”
Other groups of financiers, one including former American Diversified executive vice president Wyn Pope, also proposed various ways to rescue the savings bank. They, too, were ignored by the San Francisco staff, Pope said.
“I told the regulators a week before the takeover that we--Lester Day and I--were willing to step down and help the new people run it. I told them you’re going to lose a lot of money if you take it over,” Sahni said.
But Sahni said the idea was rejected. The legal counsel to the Federal Home Loan Bank of San Francisco, Sahni said, told American Diversified’s attorney that “there won’t be any accommodation to Mr. Sahni.” The FHLB attorney declined to comment.
The death knell sounded after American Diversified received the first of several appraisals of its real estate, prepared by an appraiser hired by the Federal Home Loan Bank of San Francisco’s chief appraiser. The appraisers began systematically reviewing and reducing the value of American Diversified’s projects.
Based on the new values, the bank board staff ordered the savings bank to take immediate write-downs, or reductions in values of assets carried on its balance sheet. These write-downs pushed the S&L;’s net worth, or capital position, below the regulatory limits.
Ignoring these warning signs, Sahni dug in for a lengthy battle. He ordered his attorneys to begin drafting a lawsuit against the FSLIC in attempt to nullify the supervisory orders limiting American Diversified’s operations.
But the FSLIC pounced first--seizing the bank and filing its lawsuit before Sahni could file his.
Looking back, no one in the industry seemed surprised that Sahni’s experiment failed.
Associates said Sahni was regarded as a brilliant entrepreneur, but a total outsider when it came to dealing with the tightknit fraternity of S&L; executives. He was also criticized for being ignorant of, or unwilling to play by, the rules.
Now, nearly one year after his ouster, Sahni spends his time in a small corner office located in the high-rise across the street from his former headquarters.
“Your power base is gone,” he said in a recent interview. “No one will give you a loan. You’re a dirty person. It’s not like a parking ticket. It’s your life.”
Sahni, who once earned about $2.5 million a year, said he is struggling to reestablish himself as a real estate developer.
“FSLIC actions create a dead baby,” Sahni said. “The company has a spirit and needs a leader. You cut its head off and the body does not know what to do. The parts are not worth as much as the whole.”
INSTITUTION: American Diversified Savings Bank, Costa Mesa THE BEGINNING: Acquired in June, 1983, for $2.8 million. Assets at $11 million THE GROWTH: Grew to $1 billion in assets with two offices during 1985 TAKEN OVER: Seized Feb. 14, 1986. Assets at $977 million. Operating under FSLIC program
