Bizarre Tales of Heavy Drug Use Will Highlight S&L; Fraud Case : Thrifts: Prosecutors say the firm’s late founder and his assistant spent millions on such things as cars, shopping sprees and big-name entertainment.

This was clearly no ordinary birthday bash.

Hundreds of well-dressed guests had poured into the Newport Beach Marriott in the fall of 1986 and gorged themselves on a boatload of shrimp appetizers and a river of liquor. The full-course meal that followed was served on tables decorated like lily ponds.

But the piece de resistance of Janet Faye McKinzie’s birthday extravaganza was the entertainment. Some of the guests were shocked to see Sammy Davis Jr. stroll out on stage and start singing a mix of tunes including “Happy Birthday” for the guest of honor.

The audience’s surprise was natural. McKinzie, after all, wasn’t one of Orange County’s movers and shakers. She was a former real estate broker working as a consultant for a tiny Santa Ana thrift, North America Savings & Loan.

Federal and state officials now claim that McKinzie and the thrift’s founder and chairman--one-time Westminster dentist Duayne D. Christensen--looted millions of dollars from North America, spending depositors’ money on everything from utility bills to big-name entertainers.

North America was declared insolvent and seized by regulators in 1987 and was shut down a year later, costing taxpayers $120 million.

Today, the bizarre tale of Janet Faye McKinzie’s involvement in the thrift’s collapse is scheduled to go to trial in U.S. District Court in Santa Ana. She faces 40 counts of bank fraud, conspiracy and racketeering and could receive more than 200 years in prison if convicted on all counts.

Christensen is named as an unindicted co-conspirator, having died in a mysterious car crash just 9 1/2 hours before North America was taken over by regulators. Already three people, including McKinzie’s assistant, have pleaded guilty to charges that they participated in the fraud.

McKinzie, 40, has pleaded innocent.

The prosecution is expected to characterize her as a modern day Bonnie Parker, stealing millions of dollars from North America with the help of Christensen.

The defense is likely to argue that she was nothing more than a drugged-out disciple of a dentist playing Svengali. Richard (Racehorse) Haynes--McKinzie’s lawyer and one of the nation’s leading litigators--has indicated in court papers he will use a “diminished capacity” defense, arguing that Christensen duped McKinzie into unknowingly helping him steal $16.6 million from North America by plying her with prescription drugs.

The case is considered one of the most egregious examples of alleged insider fraud and greed to emerge from the nation’s thrift debacle.

For instance, McKinzie and Christensen each bought a Rolls-Royce--hers bore the license plate “XTACI.” And the U.S. Attorney’s Office claims that McKinzie spent about $750,000 in thrift funds at Neiman-Marcus in just two years, much of it spent after regular store hours. Some of that went to North America employees, who were given thousands of dollars in gifts and cash.

“We saw widespread fraud when we seized the institution “ said William Davis, chief deputy commissioner of the state Department of Savings and Loans. “We were shocked and amazed at what we found.”

North America was stockpiled with hundreds of phony accounts, fake certificates of deposit and forged invoices, which regulators claim were being used to make the institution look profitable while it was being pilfered. McKinzie is charged with helping to prepare some of the phony papers, including invoices for construction work that was never performed. The money North America paid as a result of those invoices was diverted--according to the indictment--for “her personal enrichment and to other fraudulent purposes.”

McKinzie met Christensen while he was trying to sell some property in the early 1980s, and she soon went to work for him as his executive assistant and constant companion. He once proposed marriage but was spurned.

Haynes has indicated in court papers that he will portray McKinzie as being under a drug-induced spell imposed by Christensen. He has said Christensen gave McKinzie medication on a daily basis and even had a cook sprinkle drugs on her food.

“The use of drugs by Duayne Christensen was simply one of many techniques that he used upon defendant McKinzie to make her compliant to his will,” Haynes said in a pleading. “Another technique he used was to remove her from her family and to keep her isolated from her friends.”

Haynes has lined up several psychiatrists to testify about McKinzie’s drug addiction. The use of the so-called diminished capacity defense is somewhat common in trials involving violent crimes such as murder but is rarely seen in white-collar crime cases.

Former employees of North America say McKinzie used to have paper bags full of prescription drugs delivered weekly and sometimes had trouble walking. But they refuted charges that Christensen was a pill pusher.

“I truly believe she was the one who was manipulating him,” said one high-ranking employee.

“He was mesmerized by her,” said another employee. “She walked into a room and he couldn’t see anything but her.”

The government is expected to challenge a drug-addiction defense, arguing that McKinzie was coherent enough to engineer what it says were multimillion-dollar scams.

For instance, Christensen had a heart attack in the mid-1980s and McKinzie assumed control of the thrift for several months. The government will argue that is further evidence that McKinzie willingly participated in the fraud, though the defense has claimed that she was simply following instructions issued from Christensen’s hospital bed because she was “being controlled, manipulated and drugged.”

The trial starting today is focusing on two specific deals that the government alleges were nothing but pure fraud.

The first involves about $11 million in loans that were deposited into supposedly bogus accounts for an Arkansas man. The government alleges that McKinzie ended up receiving the money. The second transaction involved a $5-million payment to a company allegedly owned by McKinzie for construction work that the government said was never done.

The trial marks the government’s first use of the RICO statute--the Racketeer Influenced and Corrupt Organizations Act--against a failed savings and loan on the West Coast. RICO was used so that the government could freeze the proceeds from a $10-million life insurance policy Christensen had bought for McKinzie.

Just three days before his death, he rewrote his will naming McKinzie the sole beneficiary. His ex-wife and three children received nothing.

The Orange County coroner classified the cause of Christensen’s death as undetermined, failing to decide whether it was an accident or suicide. Christensen died when his Jaguar crashed into an overpass piling on the Corona Del Mar Freeway. He was 57. Later, the same day, federal regulators took control of the thrift.

Regulators claim that North America was a fraudulent operation almost since its beginning in 1983, after Christensen invested $6.4 million to get it started. He and regulators quarreled regularly.

Besides the criminal trial, McKinzie is charged in a civil racketeering suit filed by the Federal Savings and Loan Insurance Corp., which alleges that McKinzie aided Christensen in defrauding North America out of more than $40 million, along with 54 others.

HISTORY OF NORTH AMERICA SAVINGS

September, 1983: Duayne D. Christensen, a Westminster dentist, invests $6.4 million to open North America Savings in Huntington Beach.

November, 1986: North America, now based in Santa Ana, loses $8.9 million for the first 11 months of 1986 and has a negative net worth of $1.5 million by the end of November.

January, 1987: Christensen is killed when his car crashes into a bridge support on the Corona del Mar Freeway. Within hours, North America Savings is declared insolvent by state regulators. When evidence of widespread fraud is detected, the state turns the institution over to the Federal Savings and Loan Insurance Corp., and the FBI and the state attorney general’s office begin criminal investigations. Charles Bottomley is hired by FSLIC to manage the thrift.

February, 1987: Federal regulators sue Janet F. McKinzie, Christensen’s business manager and executive consultant, charging that she and Christensen defrauded the institution of more than $20 million and caused its collapse.

March, 1987: Lawyers for federal regulators operating the thrift revise the amount missing to $40 million.

December, 1987: After moving to new offices in Costa Mesa, North America puts its art and collectibles up for auction. Regulators estimate the thrift paid more than $250,000 for the office decorations.

June, 1988: Federal regulators announce that they will close and liquidate North America, along with another Orange County institution, American Diversified Savings Bank, and distribute $1.3 billion to depositors.

April, 1989: A federal grand jury in Los Angeles returns a 40-count racketeering indictment against McKinzie and five other former principals of the savings and loan, alleging that they looted the institution of more than $16 million.

November, 1989, to January, 1990: Three of McKinzie’s associates plead guilty to criminal charges in connection with alleged fraud at North America.

Jan. 9, 1990: Racketeering trial of Janet McKinzie is scheduled to begin.

Source: Los Angeles Times research