Charles Knapp Again the Center of Controversy : His Mortgage Firm’s Status Is a Matter of Dispute After Closure of West L.A. Office

Charles W. Knapp--the controversial Los Angeles financier who once headed Financial Corp. of America, the nation’s largest savings and loan--had big plans in mind when he formed Trafalgar Mortgage a couple of years ago.

Under the leadership of Lawrence Taggart, a former top California banking regulator, Trafalgar Mortgage was supposed to become a nationwide mortgage lender within three years through the acquisition of up to 200 small companies.

“Charlie wants to be one of the most substantial lenders in the country,” Taggart said in an interview in May, 1988.

Today, Taggart is gone and, according to interviews with several former employees, Trafalgar Mortgage is in chaos. Three of its four offices, all in Southern California, have been closed, leaving only a small staff in the Santa Ana office.

‘Nothing Got Paid’

The firm recently closed an office in West Los Angeles at Wilshire Boulevard and Bundy Drive. Employees said in interviews that the office was as much as $96,000 in arrears on its $26,000-a-month rent and that the staff had not been paid in several weeks. The office opened only three months ago.

“Nothing ever got paid,” said one disgusted former employee. “It was a horrible experience.”

Although Knapp would not comment directly on the troubles, his spokesmen sharply disputed contentions that Trafalgar Mortgage is in trouble.

“The company is doing great,” said attorney Terry Christensen, who said the firm earned $1.2 million in the first six months of 1989 and should make $2.5 million before the year is over. (Trafalgar Mortgage and two subsidiary companies had a net worth of $1.72 million as of Sept. 30, 1988, according to company financial statements.)

Howard A. Siegel, acting head of Trafalgar Mortgage, said the West Los Angeles office was closed because the managers were out of control, hiring people and spending money without authorization. It was “a rogue operation,” Siegel said.

Trafalgar Mortgage’s woes have cropped up almost five years to the day after savings and loan regulators forced Knapp to resign as chief executive of Financial Corp. of America, which was a publicly traded financial institution that owned American Savings & Loan in Stockton.

Knapp, now 54, resigned amid a crisis of confidence that did not end until American Savings lost nearly $7 billion in deposits. FCA ultimately went bankrupt after American Savings failed because of heavy losses on real estate development loans made when Knapp was in charge.

After a quiet period that lasted only a few months, Knapp returned to the limelight with the announcement that he was forming a company known as Trafalgar Holdings as a private investment banking firm. The company chose tony office digs in Westwood as its headquarters.

In recent years, Knapp has been dogged by controversial business deals, ranging from an unsuccessful effort to take over a Japanese ball-bearing company to a soured Texas real estate development deal that has been ensnarled in litigation.

Knapp has also been sharply criticized, privately and publicly, by former partners and associates who question his business methods. “Let’s just say that I’m not sorry that I left the company,” said Mark S. Dodge, former general counsel at Trafalgar and FCA, who parted ways with Knapp in November, 1987.

Knapp’s private life has been bumpy as well. Records in Los Angeles County Superior Court indicate that, as of last February, he was $187,500 behind in support payments to his ex-wife, Brooke Knapp, a well-known aviator who set a world speed record for business jets in 1983.

Plans

Brooke Knapp declined to comment for this story, while Christensen, Knapp’s attorney, said there is a continuing dispute over how large the payments should be. Knapp is now married to a movie actress named Lois Hamilton.

Trafalgar Mortgage, operating as a subsidiary of Trafalgar Holdings, appears to have been ill-starred from the outset. Its grandiose plans have been undercut by a shortage of capital, unfavorable market conditions and turmoil in the ranks of management, former employees say.

It was supposed to fund mortgage loans, then sell the loans in the secondary market, where they would be packaged and sold to investors as mortgage-backed securities.

According to Taggart, an early effort to provide capital for Trafalgar Mortgage with a $15-million private placement of stock unraveled after the stock market crashed in October, 1987. “The timing just wasn’t right,” Taggart said.

Taggart also said Trafalgar Mortgage suffered from rising interest rates, which hurt business last year, and by the death of trouble-shooter Robert Ciani, a mortgage securities and banking expert hired early this year to help Taggart run the company. Ciani died recently after suffering from a brain tumor.

Taggart quit in late April, having tired of the daily commutes that took him from his home in San Diego to Trafalgar offices in Santa Ana and West Los Angeles. “I was driving five to six hours a day,” said Taggart, who was commissioner for the California Department of Savings and Loan in 1983 and 1984.

In the mortgage lending operations at the Wilshire-Bundy office, employees were bitter because they said they were misled by false promises and were not paid on time.

“They told us they were an up-and-going operation,” Steven Schleppey, who was office manager of the West Los Angeles operation, said in an interview last week. “I was told later they had not funded a loan in four months.”

One employee, loan underwriter David C. (Clay) Finley, complained to the state labor commissioner that he had not been paid for about six weeks starting in mid-June. According to his complaint, he was owed $3,000.

Rocky Start

The West Los Angeles operation was originally supposed to be a partnership between Knapp, who would pay the expenses of the business, and John D. Richter, who used to work for Knapp at American Savings as a district sales manager. It was Richter’s job to hire the sales staff and generate the business.

The offices were housed in ample space on the 10th floor of the Wilshire-Bundy building that had been an office of Trafalgar Securities, which had cut back its operations.

According to Schleppey, the Wilshire-Bundy operation went poorly from the start. Bills went unpaid, supplies were impossible to get and, sources told The Times, Richter and Knapp disagreed heatedly about how the operations should be funded and organized. Richter declined to be interviewed for this story.

Knapp reportedly told Richter and Schleppey that he did not want to make a major investment in Trafalgar Mortgage because he had sustained heavy losses at Trafalgar Securities. According to Schleppey, Knapp said he had lost $4 million on those operations.

Christensen, Knapp’s attorney, characterized the Los Angeles operations of Trafalgar Mortgage as a “short-term experiment” that did not work out because Richter and his staff generated no new business.

“These are guys that in three months never booked one loan,” said Christensen, a partner in the Century City law firm of Christensen, White, Miller, Fink & Jacobs. He added that all the salaried employees were eventually paid.

The frustration climaxed in mid-August when the entire Los Angeles staff of Trafalgar Mortgage picked up and moved to new offices in Beverly Hills, where the employees are operating as an affiliate of a San Jose-based mortgage company.

Knapp, meanwhile, closed the offices and had the locks changed. The space remains vacant, though the Trafalgar name remains on the door.