Accountants Called One of the Targets in Suits Filed to Recover Part of S&L; Losses

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Times Staff Writer

Since bankrupt savings and loans began littering the landscape in the mid-1980s, federal regulators have sued countless people associated with the failed institutions to recover part of the staggering losses.

Among them are accountants, whose job it is to look for mismanagement and fraud in their annual audits. Federal Home Loan Bank Board Chairman M. Danny Wall singled them out Thursday as one group of professionals that regulators are suing for their roles in the collapse of numerous S&Ls.;

In Orange County, regulators have accused accounting firms of malpractice in auditing and reporting on the financial condition of three of the 12 county S&Ls; that collapsed in the past 4 years:


At Beverly Hills Savings & Loan in Mission Viejo, regulators sued Touche Ross & Co., one of the nation’s Big 8 accounting firms.

At North America Savings & Loan in Costa Mesa, regulators sued the Pasadena accounting firm of Jeffrey & Palazzola.

At Ramona Savings & Loan in Orange, regulators sued Tustin accountant Mike Sage, who vanished after cashing $120,000 in checks at Ramona and taking the money in $100 bills.

Wall said most of the Big 8 accounting firms will eventually end up as defendants in suits to be brought by FSLIC.

“We were sued separately, not with the others at North America,” Ronald Jeffrey, owner of Jeffrey & Palazzola, said. “It’s pretty routine. Basically, regulators allege accountancy malpractice, but they haven’t even specified an amount.”

He called the action a “deep pockets suit” because regulators were looking to his insurance company for payment. He said a settlement is likely.


“It’s a typical deal. They get something out of the insurer and that’s it,” he said. “We don’t believe there’s anything to it, but it’s expensive to defend yourself nowadays. This is going to happen any time a financial institution goes under. Accountants will be first behind directors and officers to be sued.”

The Federal Home Loan Bank Board and its deposit insurance arm, the Federal Savings and Loan Insurance Corp., have been filing lawsuits against former directors, officers and others as a way of getting some reimbursement, at least from companies that insure the former executives and the professionals who worked for the S&Ls.;

Lawyers, for instance, have been sued over their representations of the failed American Diversified Savings Bank in Costa Mesa and the collapsed Consolidated Savings Bank in Irvine. Suits against directors and officers also include as defendants such professionals as appraisers and stockbrokers, said Jack D. Smith, the bank board’s executive general counsel. Judgments typically have been large, like the record $35 million against a law firm in Louisiana last month, he said, but the actual amount FSLIC ultimately recovers is usually smaller.

Regulators have collected $253 million on such suits in the last 3 years, Smith said. But that barely begins to compensate for the $39 billion that the bank board and FSLIC have promised so far to spend over the next 10 years to clean up the S&L; mess.

A Touche Ross partner said there was nothing new to say about the 1986 lawsuit that FSLIC filed against it and a host of former Beverly Hills Savings directors, officers and others. Regulators are seeking $300 million from the defendants, and the court file has grown to an immense 58 volumes. Touche Ross has denied liability.

Jeffrey denied he did anything wrong in his work for North America Savings, then in Santa Ana. But he said he was grateful that he was sued separately last year and not included in the massive $40-million lawsuit against the estate of the S&L;’s late owner, Duayne D. Christensen, and against Christensen’s confidant and fiancee, Janet F. McKinzie, and others.


McKinzie has said in court papers that she expects to be indicted on criminal charges stemming from the January, 1987, crash of North America. The FBI has been investigating the collapse.

Christensen died in a single-car crash early on the day he was supposed to supply regulators with proof that he had raised $6 million in new capital. When regulators seized the S&L; later that day, they began to unravel what they called the biggest insider fraud ever of a California S&L.;

Mike Sage Case

One of the more bizarre cases involving an accountant is that of Mike Sage and his audit of Ramona Savings in 1985.

It was Sage’s audit that claimed Ramona had earned $4.2 million that year and ended up with $8.3 million in net worth, which is assets minus liabilities. Ramona’s sole owner at the time, John L. Molinaro, said he took a $2-million dividend out of the S&L; in May, 1986, based on the audit.

As state S&L; regulators began to question the payment, they discovered improper accounting methods and overstated income.

In an August, 1986, letter to the regulators, Sage said they should not rely on his audit because “several audit adjustments” were not reflected in the financial statement, resulting in an audit that “could lead to material differences” and lead people to “incorrect conclusions on the financial condition of the association.”


Audit Reveals Loss

A later audit by regulators determined that Ramona had lost $23 million in 1985 and had a negative net worth of $19 million, meaning its liabilities exceeded its assets by that much.

Sage has never been found and never been heard from since that August letter, said Mark S. Lee, a Los Angeles attorney for FSLIC.

“We’ve looked all around--in Mexico City and even, I think, in Australia,” Lee said. “He’s vanished.”

The $20-million lawsuit against Molinaro and former Ramona co-owner Donald P. Mangano Sr. is still pending, however, and regulators have won partial judgments against them for about $12 million, including interest, Lee said.