Regulators Sue Former Officers of Pacific Savings : Losses Due to ‘Negligence’ at O.C. Thrift, Suit Asserts
Federal regulators have sued 19 former directors and officers of Pacific Savings Bank and three of its real estate subsidiaries, claiming that their negligence led to the collapse of the Costa Mesa savings and loan.
The suit, filed in U.S. District Court in Los Angeles, seeks at least $70 million for losses sustained at Pacific Savings through “excessively risky endeavors,” “negligent lending and investment practices” and “excessive and abusive” compensation for top executives.
Federal regulators forced out the S&L;’s directors and most top officers in June, 1987, and installed a manager from Glendale Federal Savings & Loan.
In February, Pacific Savings became one of the first S&Ls; taken over by the joint banking-and-S&L; regulatory team created by President Bush as part of his rescue plan for the S&L; industry. Under the new program, the Federal Deposit Insurance Corp. took operating control of the insolvent thrift.
The lawsuit filed by the FDIC against Pacific Savings names 14 directors who had served on the S&L;’s board at various times between 1984 and June, 1987. Included are former Chairman Joe G. Baker and former President Verne F. Potter. Among the five officers named is Peter Inman, who ran much of the S&L;’s real estate operations and remained an officer until he resigned in March.
Baker, Inman and some of the other defendants could not be reached for comment.
Potter, calling twice from his car telephone, only managed to say he was surprised that the suit was filed. Both times the calls were interrupted by static, and the connection was lost.
The suit, filed by the FDIC, is one of at least nine lawsuits that thrift regulators have filed against operators of Orange County S&Ls; that have collapsed since 1985. Only one, a suit against the former operators of Butterfield Savings & Loan in Santa Ana, has been settled. The others are still pending.
Unlike previous suits against former Orange County thrift managers, the Pacific Savings suit does not allege fraud on the part of former operators. To prove negligence, regulators must show that operators failed to apply reasonable and prudent judgment to their business decisions.
Former Pacific Savings operators “made some bad investment decisions,” but that doesn’t mean they should be held liable in a lawsuit, said Robert G. Wiens, president of Redlands Federal Savings & Loan. Wiens is a good friend of Potter and knows Baker.
The suit also alleges breaches of contract and fiduciary duties in the failure of directors and officers to use their “best efforts” to perform their duties prudently and to exercise the degree of care, skill and good faith that others in their positions would exercise.
According to the suit, Pacific Savings began phasing out the S&L;’s traditional business of mortgage lending in 1981 in favor of an aggressive program of commercial and construction lending and direct investing in “speculative real estate ventures.”
In addition, directors failed to institute policies or standards to guide management and failed to exercise control of the S&L; adequately, the suit alleges.
And because of negligent lending and investment practices, it claims, they failed to obtain or verify financial information on borrowers, accepted overvalued appraisals on collateral and funded loans too close to the full value of the property.
The high-risk loans and investments led to operating losses that were covered only by the sale of branches and other assets, the suit states. Pacific Savings once had a network of 60 branches throughout Southern California, but operators sold 48 of them by June, 1987. In 1985, a year the S&L; reported $4.6 million in profit, sales of 13 branches helped to mask a huge operating loss, the suit alleges.
FDIC attorney Robin Weiner said that from 1982 through 1986, the S&L;’s operating losses ranged from $16 million to $26 million annually before gains from the sale of assets were included.
Also named in the lawsuit are two appraisers and a Colorado appraising firm. The FDIC claims that they “grossly overstated” the value of Texas and Colorado apartment complexes that the S&L; invested in or used as security for loans.
The suit identifies a number of loans and investments in apartment complexes in Texas and Colorado that were made allegedly with poor underwriting on properties that appraisers overvalued.
Though the suit did not list any salaries, it claimed that the excessively high base pay was padded with “large bonuses” that sometimes doubled the base pay.
Pacific Savings, which lost $47 million last year, will turn 100 years old next year if regulators don’t sell it or close it before then.
A HISTORY OF PACIFIC SAVINGS BANK
1981
The 91-year-old Santa Fe Federal S&L; in San Bernardino merges with Pacific Federal S&L; in Hollywood and Oceanside Federal S&L; to form Pacific Federal S&L;, a mutual association owned by depositors rather than outside shareholders. The new association begins selling many of its 60 branch offices.
1982
Moves headquarters from Hollywood to Costa Mesa to participate in that city’s new redevelopment activity.
1983
Posts annual loss of $7.2 million.
1984
Converts from a federal charter to a state charter to take advantage of more liberal California laws governing investment activities by S&Ls.; It also changes its name to
Pacific Savings Bank.
Reports annual loss of $9.9 million.
1985
Reports annual profit of $4.6 million.
1986
Retained by Federal Home Loan Bank in February to manage insolvent American Diversified S&L;, also in Costa Mesa.
Reports $109.5-million loss for the year, largely from soured real estate investments in Colorado, Louisiana and Texas. Net worth falls to negative $69.3 million.
1987
Required by regulators to write down the value of real estate assets in economically depressed Texas and Colorado.
Top management replaced by regulators in June. Glendale Federal Savings hired to take over management. Despite this action,
Pacific is not placed in receivership or under conservatorship, a normal step when an S&L;’s financial condition has deteriorated.
Posts $113-million annual loss.
1988
Pacific’s acting president announces the S&L; is “ready for sale” and says an operating profit in the second quarter cut first 6 months’ loss to $17.7 million.
Pacific’s fourth-quarter financial report brings loss for the year to $47 million.
1989
New federal regulatory group made up of S&L; and banking regulators places Pacific into conservatorship under President Bush’s day-old S&L; bailout program.
Federal regulators sue 19 former directors and officers of Pacific Savings and three of its real estate subsidiaries, claiming their negligence led to the thrift’s collapse.
