Legal Woes Piling Up in S&L;’s Failure : Regulators Expect to Add Defendants
Janet F. McKinzie kept a caricature of herself hanging on her office wall at North America Savings & Loan Assn. The caption stated: “Master of Disaster.”
The title is appropriate, according to federal regulators who are trying to unravel what happened at the failed Santa Ana savings institution.
In an amended complaint filed last month in U.S. District Court in Los Angeles, the Federal Savings and Loan Insurance Corp. alleged that McKinzie and 54 individuals and companies turned North America Savings into a financial disaster through a complex series of sham transactions.
State regulators alleged that it is the worst case of insider fraud ever uncovered at a California savings and loan.
As investigators continued to pore over truckloads of records, FSLIC lawyers said they expect to add more defendants and more claims to the lawsuit.
They alleged that McKinzie and the late Duayne D. Christensen, North America’s founder and chairman, set up at least 120 companies for various purposes and that just a handful have been thoroughly investigated so far.
To ensure against loss of potential evidence, Mayer, Brown & Platt, a Los Angeles law firm retained by FSLIC to pursue the lawsuit and find out what happened to the S&L;’s assets, is duplicating and microfilming documents and storing copies elsewhere.
McKinzie has so far refused to comment on FSLIC’s allegations. Her lawyers said they have not read the agency’s 118-page amended complaint because she has not been able to pay them. A court hearing on their request to be relieved from representing McKinzie is scheduled for Oct. 19.
Her lawyers said, however, that while McKinzie expects to be indicted on criminal charges arising from the ongoing investigation, she has said that she is innocent of wrongdoing.
State regulators seized North America Savings on Jan. 16--hours after Christensen was killed when his brown 1985 Jaguar crashed into a bridge support on the Corona del Mar Freeway.
A week later, the state determined that North America Savings was insolvent and called in federal regulators, who closed the institution and transferred its assets to a newly chartered federal S&L; of the same name.
FSLIC was appointed receiver and began sifting through thousands of documents. Investigators found scores of seemingly bogus deposit accounts, signatures believed to be forged, false statements and evidence of conflicts of interest and an elaborate cover-up, according to the lawsuit and previously filed court documents.
The suit alleged a conspiracy to artificially inflate the net worth of North America Savings to create the illusion of profitability and to ward off regulatory scrutiny.
The mastermind behind the systematic “looting” of the S&L;, the suit said, was Christensen, a Westminster dentist who gave up his dental practice to engage in other businesses.
Christensen formed North America Savings in September, 1983. The FSLIC suit said he and McKinzie then used the S&L;’s millions of dollars in federally insured deposits for their personal benefit.
McKinzie was Christensen’s confidante, business manager, sole heir and only beneficiary of his $10-million life insurance policy, the proceeds of which are being held in escrow until the court resolves competing claims by the S&L;, Christensen’s three children and others.
McKinzie, who began working with Christensen in 1980, was also his fiancee, said Kent P. Larsen, an independent insurance agent who put together the $10-million life insurance policy.
And McKinzie was “de facto vice chairman” of North America Savings, even though she was hired only as a consultant, FSLIC said in its suit.
The network of family members and professional associates assembled by Christensen to help carry out his investment schemes dates back at least to Aug. 29, 1971, when Christensen formed Newport Equities Trust, the suit said.
Newport Equities was a business trust and the primary vehicle for Christensen’s investments. Christensen owned 27% of the trust and persuaded a number of doctors and dentists to invest with him.
“North America Savings appears to have been operated as a shadow entity of Newport Equities,” Erickson said. Major Newport Equities properties were sold to the S&L;, the suit said, with the trust liquidated in 1984.
One scheme detailed in the suit--the Summerton project--is typical of the way in which Christensen, McKinzie and their associates are accused of siphoning money from North America Savings, said attorneys from Mayer, Brown.
The project involved the purchase and purported development of condominiums on 13 acres near San Jose.
The suit said more than $6.4 million in S&L; deposits were funneled into the hands of Christensen, McKinzie or their associates through a repurchase scheme and through kickbacks from Summerton vendors and subcontractors who provided no services or materials.
Newport Equities sold the land to North America Savings on Dec. 21, 1983, for $7.7 million. In the next two months, the S&L; sold 10% of the project to three investors--including S&L; director Myron S. Mickelson, a Huntington Beach physician--for nearly $4.8 million, according to the lawsuit.
When the S&L;’s executive committee, headed by Christensen, decided in May, 1984, that the new arrangement would delay construction, the committee decided to repurchase the 10% interest for $5.6 million--$800,000 more--even though no improvements had been made, the suit contended.
The S&L; had recorded the $4.8-million sale as income, and it failed to remove the sum from its books until ordered by regulators to do so in December, 1984, thus artificially inflating the S&L;’s net worth for most of the year, the suit said.
Meanwhile, North America Savings authorized McKinzie in September, 1984, to handle all Summerton construction matters, the suit said. Central State Construction, one of the firms owned by McKinzie, became the project’s general contractor.
The suit alleges that Central State, Christensen and McKinzie conspired with about 20 other defendants to divert more than $5.6 million from the S&L; through the Summerton project during 1985 and 1986.
The S&L; paid some of the money directly to Central State and three other McKinzie-owned firms, Norcal Marketing & Public Relations, Interstate Management and Elk Grove-based Plaza Group, her real estate company, the suit said.
In other cases, the S&L; paid vendors and subcontractors, who, in turn, usually endorsed the checks directly to Central State, other McKinzie companies or associates of Christensen and McKinzie, the suit alleged.
Sometimes, however, the firms kept portions of the payments for themselves and sent the remainder to the Christensen-McKinzie companies and associates, the suit said.
North America Savings, for instance, sent a $468,000 check in July, 1986, to Villa Ornamental Iron Works, a firm owned by Richard and Victoria R. Walker, who endorsed the check over to Central State, the suit said.
The Walkers, who could not be reached for comment last week, are defendants in the suit.
On another occasion, the suit said, North America Savings paid $227,496 in September, 1985, to an architectural firm called the Grenada Group, which sent a $212,496 check--$15,000 less--to McKinzie’s Interstate Management.
In addition to the Summerton project, the FSLIC suit detailed allegations of frauds involving other real estate ventures. Among the allegations:
- Christensen and McKinzie created a paper trail showing that they were using Plaza Group and two other companies to withdraw $11 million from North America Savings to bankroll real estate purchases. But, the suit said, no real estate purchases were made, and, the money was split up among Plaza Group, its parent company, an Arkansas firm with ties to McKinzie and Christensen’s uncle, George R. Wheeler. The agency alleged that $165,000 of the $6.9 million that went to Plaza Group and its parent company was used to buy McKinzie’s Rolls-Royce Corniche, which bore a license plate that read XTACI.
- Christensen, McKinzie, Victoria Walker and two S&L; employees conspired to cover up the $11-million real estate fraud by making false statements about what had happened to the money and who controlled it, creating fake North America Savings records showing that the funds were in deposit accounts at Imperial Bank and Bank of Alex Brown and forging signatures on bogus letters and phony certificates of deposit to confirm the deposits. An exhibit attached to the lawsuit shows a letter in whichMcKinzie admonishes Walker to “be sure to sign good” the phony letters and to put them “in sealed envelopes so it looks professional.”
- Christensen, McKinzie and others caused North America Savings in November, 1983, just two months after the S&L; opened, to buy property in Victorville from Sunnyslope Corp., which was controlled by Christensen and McKinzie, for more than $1.8 million--nearly twice the $960,000 Sunnyslope paid for the property two months earlier.
- North America Savings paid McKinzie and Plaza Group excessive fees and commissions and unwarranted expenses totaling nearly $3.5 million for consulting work in 1985-86. More than $934,000 was used to pay off McKinzie’s bills for credit cards, Neiman Marcus, jewelry, decorators and Learjet charters, the suit said.
The suit alleged several cover-ups, including an elaborate charade in which McKinzie sent written “scripts” to her former husband, Kenneth McKinzie, to S&L; director Merrill Schmidt and to a Newport Beach real estate broker.
The scripts, attached as exhibits to the suit, told the men what to say if regulators or private investigators questioned them about Christensen’s interest in Newport Equities Trust or the trust’s sale of a 20-unit South Lake Tahoe condominium building to the S&L.;
Stories Scripted
“You and I have got to get together prior to your answering any questions regarding the matters you discussed with Doc,” her Aug. 29, 1986, letter to the Newport Beach broker stated. “Your story should go something like this” followed by a list of nine items the broker should include in his story.
The South Lake Tahoe condominium, Kingsbury of Tahoe, had been a thorn in the side of state regulators almost since North America Savings opened its doors, because Christensen had contributed the equity in the building to the S&L;’s capital base and was trying to inflate its value, state regulators have said in court papers.
The FSLIC suit said a Newport Equities subsidiary called Tahoe Bronze bought Kingsbury for $3.7 million in December, 1982, and sold it a year later to the S&L; for $14.7 million. The suit alleged that the condominium project was worth just $2.4 million.
In addition, Christensen and McKinzie diverted about $5.6 million in S&L; funds to pay off an existing mortgage on the property, the suit alleged, but the mortgage holder never received the money.
