State’s S&Ls; Riddled by Insider Fraud, Panel Told

The California savings and loan industry, the nation’s largest, is riddled with insider fraud that is reaching “epidemic proportions,” according to testimony Saturday at a congressional subcommittee hearing in Los Angeles.

The testimony also indicated that law enforcement agencies are reeling under the workload in prosecuting these complex banking fraud cases. Indeed, one unintended theme running through the hearing was that bank crimes by insiders do pay.

“The best way to rob a bank is own one,” quipped William J. Crawford, commissioner of the state Department of Savings and Loan.

Fraud has played a major role in savings and loan failures in California over the last several years, said Rep. Doug Barnard Jr. (D-Ga.), chairman of the House commerce, consumer and monetary affairs subcommittee.

“The subcommittee’s investigation . . . strongly suggests that misconduct by (savings and loan) insiders, by major borrowers and by appraisers has become the leading cause of thrift insolvencies here and has reached epidemic proportions,” Barnard said.

The subcommittee held the hearing in Los Angeles as part of its job of overseeing financial institutions and bank regulatory agencies. In recent years, the subcommittee has authored major reports on banking failures and real estate appraising.

Although problems in the savings and loan industry are not unique to California, they do seem more pronounced here, along with several Southwestern states, notably Texas. California has more than 200 savings and loan firms, including most of the nation’s largest.

“Although wide-ranging financial institution misconduct is neither unique to California nor the thrift industry, and while many West Coast thrifts are well-run and profitable, it is difficult to escape the conclusion that California leads the nation in financial institution white-collar crime,” Barnard said before the hearing began.

Among those testifying were Robert C. Bonner, the U.S. attorney for most of Southern California, who echoed the subcommittee chairman’s remarks.

“Insider greed and fraud perpetrated on our financial institutions--banks and savings and loans--are rampant in Southern California,” Bonner said. “The number of cases is proliferating at an alarming rate, and the dollar losses are astronomical. Unless brought under control, public confidence in our banking system may be destroyed.”

Range of Abuses

The abuses range, Bonner said, “from simple transactions involving insiders who made direct payments to friends and relatives to complex schemes featuring shell companies, double escrows and other devices designed to obfuscate transactions in which financial institutions purchase overvalued property or companies controlled by bank insiders.”

The fraud problems have played a major role in the gradual financial deterioration of the Federal Savings & Loan Insurance Corp. Government auditors said recently that the agency was technically insolvent because its potential liabilities exceeded its assets by more than $6 billion.

Thirty-one thrift failures in California over the last three years, most of them fraud related, have cost the FSLIC $3.7 billion, Barnard said. (FSLIC incurs the liquidation and sale costs when a savings and loan firm fails. It also insures customer accounts up to $100,000.)

Prosecutors acknowledged that they do not have enough staff to combat this rising tide of white-collar crime. “Only rarely can we assign (a prosecutor) full-time to one case,” Bonner said, adding “it is neither unreasonable, nor unusual, for complex bank fraud investigations to take two to three years to complete.”

Own Worst Enemies

However, a confidential memo authored by the subcommittee staff also suggests that regulatory and law enforcement officials are their own worst enemies when it comes to building a criminal case.

For example, attorneys representing the FSLIC often fail to share valuable evidence because they believe it may damage their pending civil damage suits.

“Clearly, something is wrong,” according to the staff memo, a copy of which was obtained by The Times. “Some FSLIC . . . attorneys have uncovered useful evidence of criminality, but are not ready to share it with the assistant U.S. attorney or the FBI agent.”

Contributing to the problem is an apparent lack of experience among FBI agents who must investigate the crimes.

“An assistant U.S. attorney in Los Angeles made clear that inadequate training of FBI agents is a real problem, notwithstanding the FBI’s much touted one-week white-collar training program,” the memo read. “She told us: ‘FBI agents become confused very easily in these cases, and are often bewildered and overwhelmed at the beginning.’ ”

318 Cases Pending

There were 318 pending criminal investigations in Southern California at the end of 1986, involving alleged bank crimes of at least $100,000, according to subcommittee records.

The FBI and Justice Department are investigating about a dozen major Southern California thrift failures that have occurred in the last three years, the subcommittee report said. The most active investigations are going on at Beverly Hills Savings, North American Savings and Sun Savings, the report said.