A congressional report released Wednesday rapped federal prosecutors in San Francisco for allegedly failing to act on an FBI recommendation to prosecute former officers and directors of Stockton-based American Savings & Loan Assn.
Though the FBI made a “prosecutive recommendation” more than a year ago, the U.S. attorney in San Francisco has yet to act, according to a report from the House Committee on Government Operations. The case “inexplicably remains in limbo,” the report said.
However, the U.S. attorney’s office in San Francisco vigorously denied the charges. William McGivern, chief assistant U.S. attorney, said the office never received a completed FBI investigation or recommendation regarding American Savings. However, as is Justice Department practice, he refused to comment on whether the San Francisco or other district branches of the U.S. attorney’s office were investigating the matter or considering indictments.
Lenient Sentences Cited
The comments about American Savings are contained in a comprehensive report by the House Government Operations Committee criticizing inadequate efforts by federal prosecutors to combat fraud in the nation’s banking industry.
“The U.S. Government is now confronting a growing and long-term epidemic of insider and outside abuse, misconduct and criminality in financial institutions,” the report said, adding that such abuse costs taxpayers millions of dollars through federal bailouts of institutions that fail because of the misconduct. Such fraud and misconduct, ranging from phony land deals to bogus loans, play a role in nearly one-third of all commercial bank closings and more than three-quarters of all savings and loan association failures, the report said.
The report added that “the lack of eventual prosecutions and the imposition of often lenient sentences together constitute the greatest single impediment to deterring criminal behavior in the banking and thrift industry.” It said civil lawsuits by federal regulatory agencies--usually launched after savings institutions have failed--"are a wholly inadequate substitute for criminal prosecutions.”
U.S. thrift regulators placed American Savings into receivership last month after heavy real estate losses wiped out its capital. Texas billionaire Robert M. Bass has agreed to take over the thrift, the nation’s second largest, through a $550-million injection of capital.
Though the House report did not name the officers and directors at American Savings under investigation, sources said among them was Charles W. Knapp, who was forced by thrift regulators to resign in August, 1984. American Savings was then owned by Irvine-based Financial Corp. of America. FCA, under Knapp’s leadership, became the target of voluminous civil litigation involving controversial and questionable loan programs.
Regulators from the Federal Home Loan Bank Board ousted Knapp as chairman and chief executive of FCA because they felt American Savings’ lending practices were risky and reckless. Most of the other top officers and directors left the financial institution soon after Knapp resigned.
Knapp’s attorney, Arthur N. Greenberg of Los Angeles, denied any wrongdoing by Knapp, now head of a Los Angeles merchant banking firm. Greenberg said investigations by the FBI and the Securities and Exchange Commission did not lead to filing of criminal charges against his client. That indicates that “there is no case at all against Mr. Knapp,” he said. Knapp was out of the country and unavailable for comment.
In its criticisms of the U.S. attorney’s office in San Francisco, the House committee said the office has prosecuted only one major bank fraud case in the past two years, while at least 60 other cases, including American Savings, await grand jury action and prosecution.
The report also accused senior U.S. Justice Department officials of diverting $1.1 million in fraud-section travel funds to anti-obscenity enforcement favored by former U.S. Atty. Gen. Edwin Meese.
“This has . . . significantly delayed the timely investigation and prosecution of the cases arising out of numerous S&L; failures in the Dallas area,” the report said.
Justice Department spokesman John Russell confirmed the diversion of funds but said it had no negative effect on prosecutions there. “We’re pleased with the rate of activity” in prosecutions, he said.
Also, McGivern of the U.S. attorney’s office in San Francisco contended that the report’s figures were incorrect. He said the office has won convictions in several major bank fraud cases recently. “We don’t know where they got this information. . . . We push these cases as hard as we can given the resources we have.”
Joseph Russoniello, the U.S. attorney in San Francisco, was out of town and unavailable for comment.
The House Government Operations Committee’s report drew on previous findings of its subcommittee on commerce, consumer and monetary affairs, which held two public hearings last year on banking industry fraud.
Testimony at one of those hearings, held in Los Angeles, showed insider fraud to be a particular problem in the California savings and loan industry. It was at that hearing that William J. Crawford, commissioner of the California Department of Savings and Loan, testified that “the best way to rob a bank is own one.”
The House Government Operations Committee findings also represent a follow-up to a similar report that it did several years ago. That report, published in 1984, was highly critical of the way federal prosecutors were fighting insider bank fraud.
Its latest report is not much more complimentary. Though federal prosecutors have made progress in fighting bank fraud between 1984 and 1988, the committee noted, “numerous and serious problems remain.”
The criminal justice system has a serious shortage of experienced investigators and prosecutors to handle complex bank fraud cases, the report pointed out, while bank regulators and prosecutors often fail to cooperate with each other in ferreting out fraud at financial institutions.
As evidence of the continuing problem, the report cites the following:
- The insolvencies of 357 financial institutions that were under criminal investigation as of last February, a rise of 82% in just two years time, while there were more than 7,000 FBI and grand jury bank fraud investigations pending as of June 30.
- Major misconduct plagued the business operations of some 776 savings and loans--about 25% of the industry--from 1984 through the middle of last year.
- The nation’s deposit insurance fund for savings and loans, the Federal Savings and Loan Insurance Corp., is facing an “absolute minimum” of $12 billion in losses at thrifts crippled by fraud and other misconduct.
Justice Department spokesman Russell defended the agency’s efforts, saying it cannot be as aggressive as it would like because of its limited personnel and funds. “It’s Congress that keeps cutting us back . . . we’re doing the best we can with what we got,” he said.
The report comes at a time of increasing debate about the possibility of a taxpayer bailout for the FSLIC--a topic likely to be a major issue facing the 101st Congress, which convenes next January.
FSLIC insures customer deposits up to $100,000 per account and pays the bill when a savings and loan fails. But the thrift industry’s losses, which have been soaring in recent months, have strained the government agency’s resources to their absolute limit. As many as 900 of the nation’s 3,100 federally insured thrifts are in financial trouble.
Official government estimates of potential FSLIC losses from thrift industry failures range from $40 billion to $50 billion, while some private-sector estimates are twice that high.