It Won’t Be Easy to Bring the Looters of Thrifts to Justice
Despite President Bush’s declaration of war on savings and loan rogues last week, bringing thrift industry looters to justice remains difficult for prosecutors and grows harder each day.
The worst offenders have already been purged from the business--the money they spent on Gulfstream jets, French chefs and Limoges china is long gone. Prosecutors must often build cases using sloppy records, faded memories and details of convoluted deals that jurors may never fully understand.
Finally, the reality is that many thrifts failed because of incompetent and reckless investing that was legal under the looser rules that prevailed between industry deregulation in 1982 and last year’s thrift reform legislation.
On Friday, Bush told federal prosecutors that he wants to double spending to pursue savings and loan fraud, but Democrats called it too little, too late. Ironically, Bush’s own son, Neil, is caught up in the thrift scandal as his role as a director at the failed Silverado Banking Savings & Loan in Colorado is being probed.
Bush’s urging of a crackdown is a clear response to the growing frustration that taxpayers and members of Congress feel as the cost of the savings and loan fiasco soars while the best-known thrift offenders run free.
“The public has lost its patience. That loss of patience in the past has been justified,” conceded T. Timothy Ryan Jr., the nation’s top savings and loan regulator, in a recent interview.
Treasury Secretary Nicholas F. Brady now estimates that the S&L; cleanup will cost in the range of $90 billion to $130 billion, an amount that reflects what the government would spend to clean up the mess if it could write a check today. But the eventual costs may approach $500 billion because the government must borrow the money over 30 to 40 years.
The FBI is investigating 530 failed institutions for possible criminal violations. So far, the government’s conviction rate on major thrift indictments is running about 86% during the past three years. Critics argue, however, that the prosecutions have been largely confined to easier cases and low-level executives, an allegation that the Justice Department strongly denies.
Since 1987, Justice Department figures show, there have been 184 major indictments related to savings and loan activities involving losses of $100,000 or more. As a result, 159 people have been convicted. In Dallas, the center of the efforts, 77 people have been charged, with 52 convictions, two acquittals and the remaining cases pending.
The government’s biggest success story to date is Vernon Savings & Loan in Texas, which cost taxpayers $1.3 billion when it collapsed in 1987 with a remarkable 96% of its loans bad. Eight former Vernon executives have been convicted, including one who received a 30-year sentence. Earlier this month, the government’s chief target at Vernon, former owner Don R. Dixon, was indicted on 38 counts that included making illegal donations to politicians and hiring prostitutes with the S&L;’s money.
But critics say that Vernon is an exception, that convictions have largely involved executives at small thrifts that were not the major contributors to the thrift fiasco. Former thrift executive Charles W. Knapp, who headed Financial Corp. of America in Los Angeles, was investigated extensively for his role there, but no charges were brought. Knapp is now under separate investigation for a transaction involving a company he headed and an Arizona thrift.
In some key cases, prosecutors have stumbled. In Iowa, Thomas Gaubert was acquitted in 1988 for his role in Capitol Savings & Loan. And the trial of San Francisco financier J. William Oldenburg, accused of using money in a Utah thrift he owned to pay an inflated price for land, ended in a hung jury last December. Oldenburg, who owned the Los Angeles Express of the defunct United States Football League, is scheduled to be retried in November.
In California, the two biggest successes recently were the convictions of the former owners of Ramona Savings & Loan in Orange, and the 22-count conviction of Janet Faye McKinzie, former consultant to North America Savings & Loan in Huntington Beach. Ramona’s former owners, Donald P. Mangano Sr. and John L. Molinaro, received prison sentences of 15 years and 12 years, respectively. McKinzie is due to be sentenced next month.
But both thrifts were relatively small. North America’s collapse in 1987 cost taxpayers $118 million, while Ramona’s cost them $65 million. By contrast, the collapse of Lincoln Savings & Loan in Irvine and CenTrust Bank in Miami are each expected to cost taxpayers more than $2 billion.
Some local thrifts remain under investigation by authorities in California. The best known is Lincoln and its former owner, Charles H. Keating Jr.
Investigations are also continuing at First Network Savings, a medium-sized failed thrift in Century City formerly headed by Carl M. Rheuban, a Westside businessman with close ties to Democratic politicians. Columbia Savings & Loan in Beverly Hills is still being investigated for its ties to former Drexel Burnham Lambert junk-bond financier Michael Milken. And regulators are asking the Justice Department to investigate Charter Savings Bank in Newport Beach, seized earlier this month.
Why have so many of the best-known thrift rogues not yet been charged?
Assistant U.S. Atty. Terree Bowers, who is coordinating thrift prosecutions for the U.S. Attorney’s Office in Los Angeles, said federal prosecutors are deliberate about filing charges because federal laws designed to speed up the judicial process cut the time between the filing of charges and the start of trials.
Bowers rejects the criticism that prosecutors avoid tough savings and loan cases. “We’re not shying away from cases because of their complexity. We relish tackling those kinds of cases,” he said, citing Ramona Savings and North America Savings as examples.
Los Angeles thrift lawyer Paul H. Irving said it is often difficult to reconstruct what happened at a failed savings and loan. One ailing thrift he worked on, he said, had failed to keep promissory notes on its loans.
The federal Office of Thrift Supervision earlier this month submitted 20 names to the Justice Department for possible prosecution. Prosecutors now enjoy a longer statute of limitations on thrift fraud, extended to 10 years by last year’s legislation.
Ryan, the OTS director, said he now believes that the Justice Department is moving quickly, although he acknowledges that many cases will be tough to prove because the trail of documents may not exist anymore and because former thrift owners usually hire good lawyers.
“These are very tough paper cases,” Ryan said. “And the defendants are very well represented.”
SOME RECENT CONVICTIONS INVOLVING CALIFORNIA SAVINGS & LOANS
Institution: Bell Savings, San Mateo Principal(s): David Butler, former chairman and chief executive Result: Pleaded guilty in 1988 tomisapplication of loanproceeds and false loan information. Sentenced to two years imprisonment, five years probation and ordered to perform 500 hours of community service.
Institution: Centennial Savings, Santa Rosa Principal(s): Beverly Rose Haines, former executive v.p. Result: Pleaded guilty to bank embezzlement and making false entries to bank records. Sentenced to five years imprisonment and ordered to pay $2.8 million in restitution and a special assessment to a crime victim fund. Sentence was later modified to five years probation and community service.
Institution: Columbus/Marin Savings, San Rafael Principal(s): Eric J. Noda, former senior v.p. Result: Pleaded guilty in 1987 to bank fraud. Sentenced to five years in prison, with all but six months suspended. Placed on five years probation and ordered to liquidate his assets to repay $1.3 million stolen from the institution. He also agreed to cooperate in the government’s ongoing investigation.
Institution: Founders S&L;, Los Angeles Principal(s): Anthony M. Essex, former vice president Result: Pleaded guilty to three counts of fraud. Sentenced to six months in jail and ordered to pay more than $63,000. He was also ordered to perform community service and placed on five years probation for falsifying income tax returns.
Institution: Golden Pacific Savings, Windsor Principal(s): Jay S. Soderling and Leif D. Soderling, former owners Result: In 1987 both pleaded guilty to misapplication of funds and overvaluing securities to a bank. Both sentenced to five years imprisonment with all but six months suspended on the first count, and two years in prison with all but six months suspended on the second count, with prison terms to run consecutively; plus five years probation on both counts. They were also ordered to make full restitution to the government and perform community service.
Institution:North America Savings & Loan, Huntington Beach Principal(s): Janet Faye McKinzie, former consultant Result: Found guilty of 22 counts of racketeering, conspiracy, bank fraud, wire fraud and interstate transportation of stolen property. Federal prosecutors are recommending a 20-year prison sentence and payment of $18 million in restitution and fines. Sentencing is scheduled for July 20.
Institution: Progressive S&L;, Alhambra Principal(s): Norman R. Giddings, former senior v.p. plus three attorneys with a Beverly Hills law firm and seven others. Result: Found guilty of fraudulent real estate transactions. Sentences ranged from probation to up to eight years in prison plus $1 million in restitution.
Institution: Ramona S&L;,Orange Principal(s): Donald P. Mangano Sr. and John L. Molinaro, former owners Result: Convicted on more than 30 counts of bank fraud and conspiracy. Mangano was sentenced to 15 years in prison and Molinaro to 12 years. Mangano and Molinaro recently agreed to pay $5.9 million to settle a civil lawsuit brought by the Federal Deposit Insurance Corp.
Institution: Sun Savings, San Diego Principal(s): Dan Dierdorff, founder Result: Pleaded guilty to illegally transferring thrift funds to a secret account and forgery. Sentenced to eight years in prison and ordered to pay more than $212,000 in fines and restitution.
Compiled by Melanie Pickett
