On Trial: The Ruin of Tiny Ramona S&L; : Inexperienced Owners Accused of Using the Orange-Based Thrift as a ‘Piggy Bank’
John L. Molinaro had never set foot inside a financial institution except as a customer until the day he and a partner bought Ramona Savings & Loan.
The Santa Ana resident had no college degree, and his only business experience was as a carpet salesman. “I had no experience at all . . . in connection with the running and directing of a savings and loan association,” Molinaro acknowledged in a court deposition years later.
Nevertheless, Molinaro and real estate developer Donald P. Mangano won swift approval from regulatory agencies in April, 1984, for their $4-million purchase of Orange-based Ramona and its $55 million in assets.
Stopped Writing Mortgages
The Federal Savings and Loan Insurance Corp. has alleged in a lawsuit that once Molinaro and Mangano were in charge, they began a scheme to systematically drain the institution of its assets.
The Federal Home Loan Bank Board--of which the FSLIC is an arm--concluded in a report that the tiny thrift’s 57-year tradition of writing single-family mortgages ended almost overnight and that Molinaro and Mangano began investing depositor funds in a slew of real estate investments.
Ramona collapsed in September, 1986, subsequently requiring a $65.5-million federal bailout of depositors. Nine months later, Molinaro allegedly was planning to leave the country after depositing millions of dollars in former Ramona funds in Caribbean banks, according to court papers and regulators.
“Ramona was operated essentially as a petty cash fund and personal piggy bank,” said Del Fassett, supervisory agent with the Federal Home Loan Bank of San Francisco, which regulates savings and loans in its region.
Trial Starts Tuesday
On Tuesday, Molinaro, 48, and Mangano, 52, are scheduled to start trial in U.S. District Court in Los Angeles on more than 30 criminal charges, including bank fraud and conspiracy, stemming from a Palm Springs real estate deal that represents a small portion of the activities covered by the civil action. Government officials say it is the first prosecution of owners of a Southern California S&L; since the national thrift debacle began to unfold in the early 1980s.
Both men have pleaded innocent. If convicted, Molinaro--sole owner and operator of Ramona at the time of its collapse--faces a maximum prison sentence of 165 years and $8.3 million in fines; Mangano could receive a 155-year sentence and $7.8 million in fines.
Numerous government officials say Ramona’s transformation from a traditional mom-and-pop thrift into a scandal shows how the S&L; industry was plundered after its deregulation in 1982. The case also demonstrates how difficult it is years later for prosecutors to press criminal charges against the individuals accused of mismanaging and defrauding institutions across the country.
“Ramona is a good living example of what went wrong with the S&L; industry and why it went wrong, “ Fassett said.
Three years after Molinaro bought half of Ramona, he was arrested in a San Francisco passport office.
Suspicious because a middle-aged man by the name of John Anthony Cook had presented a birth certificate that looked brand new, the U.S. passport agency called the FBI on July 22, 1987.
The man was arrested on suspicion of passport fraud. The FBI searched him. Subsequent investigation disclosed that John Anthony Cook had died in 1957 and that the suspect was in fact Molinaro.
The FBI reported that a bag he was carrying contained numerous business cards from the Cayman Islands, bank records and travel brochures on Eastern Europe and China. Further inspections of his car and bank holdings uncovered a gun, $278,000 in cash, at least $100,000 in gold and diamonds, and death certificates--all obtained on the same day--for four different people. The FBI also found a notebook containing a handwritten list of at least 60 personal reminders, such as this entry: “consider bouncing $ on-shore, then off-shore again.”
Plan to Flee Charged
The Federal Savings and Loan Insurance Corp. charges in a civil suit that Molinaro was planning to flee to the Cayman Islands in order to avoid litigation. Nine months earlier, FSLIC had shut down Ramona.
“Mr. Molinaro was not fleeing the country,” said Gerald V. Scotti, his attorney. “If you think you are going to be incriminated criminally, you don’t stick around 9 months.” Molinaro recently finished serving a prison sentence for passport fraud.
So far, FSLIC has recovered $3 million from accounts Molinaro set up in the Caribbean after the agency convinced a federal court judge that the money belonged to Ramona.
Molinaro has argued that the accounts contained his personal savings, money he earned during his 18 years in the carpet business.
“He had made deposits in the Cayman Islands with money he had legitimately owned long before he had ever heard of Ramona Savings & Loan,” Scotti said. “These (funds) were earned separately and independently.” Molinaro told investigators at the time of his arrest that the overseas accounts were set up as trust funds for his children.
FSLIC alleges in its lawsuit that part of the proceeds were from a $2-million dividend Molinaro had illegally obtained from Ramona. Molinaro has denied that he knowingly took the dividend in violation of banking rules. Scotti said Molinaro actually lost money on Ramona and has accused federal regulators of using “Gestapo-like tactics” in seizing his assets.
Tried to Serve Order
Near the time Ramona was closed, FSLIC tried to serve a temporary restraining order that would have frozen Molinaro’s assets. Four investigators tried to find him at eight different addresses in California, conducted a 2-day stakeout of a San Jose home he owned and called dozens of hotels, according to court papers.
Molinaro has denied charges that he was avoiding authorities. He said he was living at his $1.5-million home in Santa Ana. “I was living there, but I was moving about a bit,” he said in a deposition. He acknowledged in a deposition that he had stayed in several Orange County hotels, but he said “that was for the purpose of meeting ladies every now and then” and not to duck the court order.
The FSLIC lawsuit, filed four days after the thrift’s collapse, seeks more than $65 million in damages to cover the money the agency is spending to restore order among Ramona’s former accounts, even though the S&L; no longer exists.
Despite FSLIC’s claims that Molinaro and Mangano began pilfering Ramona almost as soon as they set foot inside, the U.S. attorney’s criminal prosecution is limited in scope and mostly centers on a single Palm Springs real estate deal that regulators say contributed to Ramona’s demise.
To prove criminal intent in white-collar crime cases involving S&Ls;, the Justice Department must reconstruct a paper trail of transactions to document the fraud. Because S&L; fraud is fairly sophisticated, prosecutors narrow their sights on particular schemes that are more easily documented and understood.
“When we bring a criminal case, we want to focus on those charges we can easily prove and those charges we can present to a jury in such a way that the jury can understand the fraud,” said Terree A. Bowers, chief of the major fraud section for the U.S. Attorney’s Office in Los Angeles.
Vindication Predicted
Scotti said his client will be vindicated. Molinaro has argued that any violations of banking laws at Ramona were a result of his client’s inexperience, not part of a criminal plan to defraud the institution.
“I am convinced and confident that the evidence will show there was no criminal intent,” Scotti said.
Michael E. White, Mangano’s attorney, declined to discuss specifics of the case.
The alleged Palm Springs scheme is said to have begun shortly after Molinaro and Mangano, who were neighbors and friends, acquired Ramona. Taking advantage of new laws that allowed state-chartered S&Ls; to invest 100% of their assets in real estate, the thrift invested heavily in land development deals.
It paid nearly $3 million for a tract of vacant land in Palm Springs and signed a construction contract with Mangano & Sons, an Orange company owned by Donald Mangano. The project was a 180-unit luxury condominium complex.
Cherokee Village was finished in mid-1985 after Ramona spent about $25 million--a fourth of its assets--on the project. Mangano & Sons realized a $3.75-million profit, regulators said in the criminal indictment.
“RSL’s investment in Cherokee Village proved to be a huge mistake,” Assistant U.S. Atty. Steven E. Zipperstein said in court records. “Because defendants set the prices for the individual condominium units too high, and because the Palm Springs condominium market was glutted, RSL was virtually unable to sell any units.”
Only seven of Cherokee Village’s 180 units had been sold by the summer of 1985. Federal regulators had urged Ramona in March, 1985, to do something, so the thrift converted Cherokee Village into a resort featuring eight swimming pools and the Tracy Austin Tennis Center.
No Better As Hotel
Cherokee Village fared no better as a hotel. Mangano sold his 50% share in Ramona to Molinaro in May, 1985, but continued to exert some influence over the thrift, according to the indictment. Molinaro became chairman, chief executive and sole owner.
The federal government’s indictment against Molinaro and Mangano says the two men decided to sell Ramona before it and Cherokee Village went belly up. So, they allegedly transferred Cherokee Village to Mangano to hide the problem from a potential buyer of Ramona. Once a buyer was found, they intended to transfer Cherokee Village back to the S&L; unbeknown to the new owner, the indictment says.
The indictment alleges that the deal worked this way:
Molinaro found three men willing to set up four dummy corporations. Ramona then recorded a supposed sale of its Cherokee Village resort to three of those corporations for a $30,000 paper profit per residential unit.
The men then transferred all of the stock in the three corporations to Mangano, which made him the new owner of Cherokee Village. For their trouble, the three men received a parcel of land in north Palm Springs, which was transferred from Ramona to the fourth corporation.
Even though no money had changed hands, Ramona recorded a $4-million profit on the deal. “This would placate the regulators, while simultaneously making RSL appear healthier to a potential buyer,” the indictment alleges.
Ramona found a buyer and allegedly agreed to loan him, through a third party, the $7.2 million he needed to buy the thrift. Molinaro and Mangano then transferred ownership of Cherokee Village back to Ramona, disguised as a land acquisition of 23 acres in Palm Springs, according to the indictment. No mention was made of Cherokee Village.
Meanwhile, Molinaro had Ramona’s board issue him a $2-million cash dividend based on the $4-million profit the S&L; had recorded on the allegedly bogus Cherokee sale, according to the civil suit and indictment.
Control Not Assumed
Four months before Ramona was put into FSLIC receivership, the same buyer paid Molinaro $6.3 million for the thrift but never assumed control because regulators rejected the proposed change of ownership.
Ramona’s records indicated that it had a net worth of $6.7 million, but examiners say the thrift actually had a deficit of $19 million, meaning that its liabilities exceeded its assets by that amount. “It was an outrageous fraud,” said William Davis, deputy commissioner of the state Department of Savings and Loan.
Both Molinaro and Mangano deny any wrongdoing in connection with Cherokee Village. For his part, Molinaro said he was relying on the validity of records kept by accountants, including Michael Sage of Tustin. “I had no reason to believe they did not present a true and accurate financial picture of Ramona Savings & Loan,” Molinaro said in a deposition.
But authorities say Sage was involved in the alleged scheme. He currently is a fugitive from a federal grand jury indictment alleging that he helped a friend fraudulently apply for a $100,000 loan from Ramona.
The latest estimate of the cost of cleaning up the national S&L; debacle is $157 billion. While Congress grapples with how to fund the bailout, it has placed much of the blame on the new breed of S&L; operators who entered the industry after deregulation.
But many of the S&L; owners, executives and borrowers now being held accountable for the collapse of institutions blame the government for encouraging new, riskier types of investments that contributed to their downfall. “They have encouraged the policies they now decry,” said Scotti.
Even regulators admit some responsibility for the disaster, conceding that inexperienced executives such as Molinaro should never have been allowed to operate thrifts.
“If you were an ordinary, normal person with no criminal record and had the money, you could buy one,” said Davis of the state Department of Savings and Loan. “This was undoubtedly a mistake.”
