Highland Savings, Bankroller of Slumlords, Faces Racketeering Suit
Highland Federal Savings & Loan Assn., a 21-year-old thrift with 10 local branches, is the lender of first--and sometimes last--resort for some of the city’s worst slumlords.
Its president, Ben Karmelich, and board of directors have repeatedly made exceptions to their own lending policies to give large, sometimes risky loans to slumlords, their companies and their agents. Karmelich says Highland has never knowingly given a loan to a slumlord, and that exceptions to standard loans are allowed under certain circumstances. Such exceptions were approved in advance by board members as required by internal regulations, he said.
According to William Davis, chief deputy commissioner of the California Department of Savings and Loan, some of the transactions raise serious ethical questions about whether Karmelich abided by federal regulations that require each officer of a thrift to “avoid placing himself in a position which creates . . . a conflict of interest or appearance of a conflict of interest.”
Deputy City Atty. Stephanie Sautner, head of the city attorney’s slum task force, which is now suing Highland and other defendants on civil racketeering charges, said in an interview that Highland Federal’s lending patterns “smack of insider dealing and fraud.”
--Karmelich has lent millions to slumlords from Highland Federal, authorized additional loans from a private “investment club” made up of Highland directors and made still others from his own pocket. An active real estate investor, he has also co-owned a Skid Row Hotel. He was once cited for slum-related code violations on an old apartment building he owned. The charges were dismissed after repairs were made.
--Karmelich personally notarized allegedly forged deeds on old buildings in 1983. As part of that transaction, Karmelich and his wife appeared as personal beneficiaries on a $550,000 mortgage signed by the buyer, a partnership involving a longtime Highland borrower and stockholder who has since been convicted of slum violations.
--Highland has made notable exceptions to its lending policies for slum investors, including some of Karmelich’s friends and business partners. Some received loans over Highland’s internal lending limits. One slumlord, a former business partner of Karmelich’s son, received highly unusual third, fourth, fifth--and even ninth--trust deeds from Highland. Savings and loans generally insist on first and second trust deeds.
--That slumlord, Joe Fitzpatrick, received millions in Highland loans in the name of his “straws” (reportedly including a dog named Teluce Black) and his shell companies (including MLUS Inc., an anagram of SLUM). Highland continued giving loans to Fitzpatrick even after he was sued by Security Pacific, Highland’s own bank, for defaulting on $1.7 million in loans.
Fitzpatrick acknowledged in a court proceeding last year that he had been convicted of bank robbery in Boston 20 years before. He went bankrupt here in 1986, leaving Highland with what Karmelich said were “hundreds of thousands” in losses. Karmelich now calls Fitzpatrick a “con artist.” Karmelich said he was unaware of Fitzpatrick’s past at the time, and unaware of his huge default to Security Pacific. He said he extended the loans because Fitzpatrick showed a net worth of $6 million.
Highland Federal, Karmelich and several of their clients and associates are among 142 defendants in a racketeering suit jointly filed in March by the Los Angeles city attorney and two other law firms representing tenants.
Specifically, according to the lawsuit, Karmelich “facilitated numerous transfers” of slums to uncredit-worthy owners and shell corporations, allowing slums to be held “solely for the purpose of taking out large loans” in an “attempt to inflate the value of the property, thereby falsely inflating Highland’s assets.”
“We are an uncommon lender,” Karmelich said after the lawsuit was filed. “We aren’t the normal lender. And we don’t want to be. . . . For the first 10 years all we loaned on was inner-city property.” The only reason Highland had been named as a defendant, he said, was because “we don’t redline poor and minority areas.”
Through attorney Michael Berk, Karmelich stressed that Highland “is permitted to make exceptions to its general practices if they are deemed to be in the best interest of the association.”
Some of the exceptional loans made to slumlords come under the category of what is known as “loans to facilitate” the sale of problem properties, Berk said. Because regulators frown upon foreclosures that put lenders in the position of owning property, thrifts are allowed to make extra-generous terms on such properties.
Berk said there are no internal Highland limits on such loans, sometimes dubbed “loans to friends” in the trade. Asked about Highland’s loans to Karmelich’s own business partners, Berk said Karmelich had removed himself from the process and turned their applications over to other Highland officers.
“Ben (Karmelich) feels very strongly that the only thing he is guilty of here is being an active businessman,” Berk said.
As for other apparent conflicts of interest, Karmelich said his son had dissolved his partnership with Fitzpatrick at his request “because although there was nothing immoral about it, it didn’t look good.” He said Highland officers dissolved their “investment club,” called Northeast Investment Corp., because they were “no longer interested in it.”
Northeast Investment Corp. owned an old 18-unit apartment building at 1000 Echo Park Blvd. that changed hands 13 times in less than a decade, passing through the hands of three prosecuted slumlords, according to the city’s lawsuit. Twice, Northeast re-acquired the slum property after foreclosure and transferred it again, once to Fitzpatrick and later to an employee of a fugitive slumlord, records show.
Perhaps the most puzzling transaction involved a deal that Karmelich, a notary public, personally notarized and stood to profit from himself. In that 1983 deal, a Fitzpatrick partnership bought two old downtown hotels, one a slum, from another active investor named Syed Mouzzam Ali.
In an interview, Ali said he sold the buildings to Fitzpatrick, but not to the particular Fitzpatrick partnership that appeared on those deeds as the buyer. “They forged it,” Ali declared heatedly when shown his purported signature on the document. He demonstrated how he signs his name from right to left in Arabic, then crosses back over from left to right in English.
Karmelich said he knew Ali personally and was “absolutely sure” the man signed the deed himself. “I assure you I wouldn’t notarize anything unless they signed it right in front of me and I know the person,” Karmelich said.
In a second document recorded at the same time, Karmelich and his wife appeared as lenders on a $550,000 trust deed signed by Fitzpatrick’s partnership that bought the property. Two months later, they appeared as beneficiaries on a second note for $22,771.55. By the end of the same year, records say, both debts were paid off.
A virtually identical sale on a second hotel, a slum, closed escrow at the same time. Samuel Mevorach, a Monterey Park businessman who is a longtime business associate of Karmelich, appeared as the lender on a $110,000 Fitzpatrick note on that hotel.
The Federal Home Loan Bank of San Francisco, which regulates Highland, will not comment on transactions involving the savings and loans it charters. The Times posed this transaction and others in hypothetical form to a top state official who regulates state-chartered thrifts.
Davis, the chief deputy commissioner of the California Department of Savings and Loan, said the thrift’s president appeared to have violated federal ethics regulations that require that lending officers keep personal and private business strictly separate.
“By God, if you’re going to be a real fiduciary, you ought to take your own business and keep it clean away from your office,” he said. “If this guy (Fitzpatrick) starts getting in trouble on his loan, what’s to stop you from saying, ‘Hey, c’mon in and I’ll give you a loan from the institution to help the other one out’?”
One of the most curious aspects of the deal is that Karmelich’s associate, Mevorach, used the same mailing address in the transaction as has been used for Teluce Black, the alleged dog who has received loans from Highland. Karmelich described Teluce Black in an interview as a “slightly built” Latino man whom he believed to be Fitzpatrick’s gardener. He said he gave him the loan based on Fitzpatrick’s guarantee.
A black Labrador named Toulousse was licensed to Fitzpatrick.