S&L; Criminal Referrals Are Making Waves : Investigations: Public announcements about the possibility of wrongdoing at thrifts have sparked an internal debate among industry regulators.


Those familiar with Charter Savings Bank--from local builders to state officials--were surprised when federal regulators said recently that they had asked the U.S. Justice Department to investigate the possibility of criminal wrongdoing at the Newport Beach thrift.

It turns out that some savings and loan regulators were surprised they said it too.

Such public announcements about the possibility of wrongdoing--at Newport Beach-based Charter and other failed S&Ls--have; for the first time lifted the veil of secrecy surrounding so-called criminal referrals, which are formal requests for criminal investigations.

But in so doing, it has sparked an internal debate among the agencies and regulators supervising the beleaguered thrift industry. And it has raised questions about such actions at a time when political finger-pointing over who is to blame for the thrift debacle has reached a fever pitch.

Disclosure of criminal referrals will continue to be part of the stepped-up, coordinated effort that the Bush Administration is putting forth to combat fraud in the industry, said T. Timothy Ryan Jr., director of the Office of Thrift Supervision.

But Ryan, who has become the government's point man in seeking criminal charges against thrift crooks, said OTS is disclosing "only relatively important referrals" such as those involving senior management, directors, accountants, lawyers, appraisers, other thrift advisers or significant borrowers.

"When we put it in a press release, I can tell you that it's not the bank teller" that regulators are targeting, he said.

Illegal Activities

Government officials say that thrift fraud reached epidemic proportions in recent years. U.S. Atty. Gen. Dick Thornburgh has estimated that illegal activities account for at least 30% of the total cost of the industry bailout to American taxpayers, or about $150 billion of the more than $500 billion it is estimated to cost over the next 40 years.

President Bush wants Congress to give him an additional $25 million--on top of $75 million already authorized--to hire more FBI and IRS agents and prosecutors to investigate thrift fraud. He created a new executive Justice Department position, called special counsel for financial institutions, to coordinate the inquiries and prosecutions.

The reason for the massive effort is the crush of suspected insider crimes and the time and effort required to prove such complex cases.

The Justice Department has received 6,993 referrals of possible wrongdoing at thrifts from early 1987 to the end of last year. As of Dec. 31, the department said there were 891 thrift fraud cases under way but that many of those involve multiple referrals. The investigation of the failure of Vernon Savings in Texas, for example, involved 53 referrals.

Since Oct. 1, 1988, the department has obtained indictments of 306 people suspected of causing $2.4 billion in losses at 237 thrifts, agency officials said. So far, 200 defendants have been convicted of thrift fraud; they have been sentenced to a total of 381 years in prison and ordered to pay $799,100 in fines and $55.9 million in restitution. Three defendants have been acquitted.

In total, the agency is investigating the possibility of criminal wrongdoing at 530 failed financial institutions. That number including 30 banks, thrifts and credit unions in the FBI's seven-county Los Angeles district, which stretches from Orange to San Luis Obispo counties. Locally, 70 are agents assigned full-time to investigate fraud cases at financial institutions, said Lawrence G. Lawler, special agent in charge of the FBI Los Angeles district.

Fraud's Role in Failures

"I've read stories about how much of the losses are caused by mismanagement, but from what I've seen, the majority of them are caused by fraud," Lawler said. "Where some president takes a trip to Europe and spends $6 million to find a cook, it's irresponsibility, sure, but it's fraud too."

But while many industry experts and thrift officials agree that fraud contributed to the downfall of some institutions, they do not think it is the main cause of thrift failures. In most cases, the fraud occurred as executives overstepped the bounds of legality to save an already faltering institution.

Although all agree that the fraud is real and that the criminals should be punished, some industry officials worry that the attention on wrongdoing has become a political football. The result is a diversion of the public's and politicians' attention to finding scapegoats and away from correcting problems.

"The thing that's driving all of this is that members of Congress and the Administration are detecting something that's very real out there," said Bert Ely, an industry consultant in Alexandria, Va. "That is, there is a growing public anger over the cost of the thrift industry bailout."

He said the finger-pointing that has intensified in recent months is obscuring the government's own failings in responding to changing economic conditions, shaping and reshaping the thrift industry and sending mixed signals to its regulators about what S&Ls; can do.

It is also easier for politicians to point fingers at alleged crooks than at themselves and the problems they created, agreed James Barth, former chief economist with the OTS and its predecessor agency, the Federal Home Loan Bank Board.

Barth blames federal regulations adopted in the early 1980s for the thrift problems. Bad loans, inflated assets, poor management, high-risk ventures and economic downturns also helped cause the failures.

Barth estimates that only 10% of the thrift losses can be blamed on fraud and that most of that contributed to but did not cause the failures. "If anybody believes it's simply fraud and insider abuse that caused this mess, it means they're being terribly misled," he said.

Referral Carries Stigma

The sharp focus on fraud may also be generating a public attitude that all thrifts and their officials are corrupt. The public disclosure of a criminal referral carries with it the stigma of a government-sanctioned accusation.

"What defense attorneys are very concerned about is that you say, 'S&L;' and the attitude of the jury is, 'Send them to jail,' " said Ely, who is currently an expert witness in a major Texas thrift-fraud case.

Others are concerned about who decides when a referral should be made. It is, after all, made by regulators trained to audit books and interpret arcane financial rules, not by investigators and lawyers familiar with criminal law.

At Charter Savings Bank, for instance, public attention was focused on the top when regulators seized it June 15. In taking the action, the OTS said in a press release that it had made "a number of referrals" to the Justice Department to seek a criminal investigation. Officials refused to provide further details regarding the referrals.

The thrift was 90% owned by Mola Development Corp., and its chairman was Frank J. Mola, the real estate firm's owner. Without knowing what the referrals alleged or who the targets might be, builders, thrift leaders and even the state's top regulator came to Mola's defense.

Mola's chief aide, Peter E. von Elten, denounced the referrals, saying that Mola never used Charter to finance his development projects and that no one in the organization should be a target of any criminal investigation.

William D. Davis, state commissioner of the Department of Savings and Loan, said that the referrals surprised him. Mola was always a man of his word, Davis said, "a very reliable person" who did all that regulators asked of him.

Charter's failure, Davis said, was mainly the result of recent changes in federal law and regulations that made a previous acquisition of a failing thrift a losing proposition.

Sources said the referrals centered on two sets of loan transactions, one of them a $1.2-million arrangement with the failed First Network Savings in Los Angeles, its former chairman, the politically well-connected Carl M. Rheuban, and a separate Rheuban company. Mola officials could not be reached for comment on those loans.

'Pressure' on Staff

That the referrals were released publicly angered some OTS staff members, according to several insiders. They said there has been "tremendous pressure" to make referrals "as an easy way to build a body count" on the amount of fraud in the industry. In addition, referrals shift the pressure from the regulators to the investigators and prosecutors.

Some officials at the Resolution Trust Corp., the federal agency created last year to manage failed thrifts, question the new policy too.

"The announcement created real depositor concern," said Kevin Shields, an RTC spokesman with the Denver regional office. "We had a significant outflow of deposits (at Charter). When depositors were asked why they were closing their accounts, they referenced that part of the press release about the criminal referrals."

Shields said that he was not second-guessing the referrals themselves, only the need to make them public. He did not know how much of Charter's deposits were withdrawn by customers.

OTS spokesman William Fulwider, however, said the public notices of referrals serve "to demonstrate that we're looking into these matters and that we're actively pursuing wrongdoing." The disclosures are part of the "higher profile" Ryan is bringing to the enforcement area, he said.

Ryan said he intends to continue the policy he initiated since taking office in early April.

Still, the referrals offer little assurance that a crime was committed or that if it was, that the culprits will be brought to justice.

Probes Can Take Years

Fraud cases involve long, complex investigations that carry little assurance that they will result in indictments or convictions. Larry Lawler, the FBI chief in Los Angeles, said manpower is so strained and the paper work involved so exhaustive that completing a major fraud case can take years.

Take a look at Orange County.

The county has been home to a disproportionate share of the institutions that failed in the last decade--19 S&Ls;, 10 banks and a thrift and loan--and most have been or are under FBI investigation for embezzlement or fraud. Although regulators and prosecutors promise indictments in the near future, only five people at three defunct Orange County institutions have been convicted so far, and no other indictments have been returned yet.

Those convicted include the two owners of Ramona Savings & Loan in Orange and a consultant to North America Savings & Loan in Santa Ana. Both institutions, regulators said, presented clear cases of fraud.

The FBI's Lawler said that his office is handling seven of the nation's top-priority criminal investigations, including that of Lincoln Savings & Loan in Irvine, one of the nation's most notorious thrift failures. Lincoln, which was seized in April, 1989, is expected to cost the taxpayers more than $2 billion.

The other top-priority cases in Orange County, he said, are Mercury Savings in Huntington Beach and two that have since been closed--American Diversified Savings Bank in Costa Mesa and Consolidated Savings Bank in Irvine.

The others the district is handling are First Network, Westwood and Brookside S&Ls;, all in Los Angeles.

Push for More Action

A push for federal prosecutions is also coming from public interest groups such as Public Citizen's Congress Watch. Citing government documents and testimony, the group says that the Administration and the Justice Department could be doing more to reduce the backlog of referrals that go unaddressed.

But both OTS and the Justice Department say the backlog is not as great as the referral numbers might indicate because those figures are misleading. And referrals don't mean much, anyway, unless the Justice Departments decides the evidence merits investigation, Justice Department spokesman Douglas Tillett points out.

"We will pursue the evidence as it exists, and we have our own way of setting priorities," he said.

Besides, the agency is "wary of this rush to judgment," Tillett said of the hype on thrift fraud. "We would rather let investigations be allowed to run their normal course to ensure due process. We're getting into a crisis situation."

Ely, Barth and others in the industry want the crooks behind bars, and they say the money Bush seeks is "a drop in the bucket" compared to the ultimate cost of the bailout. Still, they doubt the effort will have much effect.

"A couple of years down the road, we will have spent more money on prosecutions and I bet you we're going to come up with relatively few additional people behind bars," Ely said.


The magnitude of the savings and loan crisis has overwhelmed law enforcement agencies. Of more than 21,147 criminal referrals made to the U.S. Justice Department since 1988, active investigations are under way in only 4.2% of the cases.

21,147 criminal referrals involving S&Ls;, banks and credit unions in 27 months ended Dec. 31, 1989.

6,993 criminal referrals involving losses of more than $100,000 at S&Ls.;

891 thrift cases being actively pursued.

FAILED FINANCIAL INSTITUTIONS UNDER FBI INVESTIGATION: '86: 206 '87: 282 '88: 357 '89: 404 '90: 530 LOSSES More than $150 billion--the estimated loss caused by financial crimes to be repaid by taxpayers over 40 years. Less than $100 million--the amount recovered from financial criminals PROSECUTIONS 306--people charged in fraud or embezzlement from thrifts involving more than $100,000 since Oct. 1, 1988. 200--convicted of thrift crimes involving losses of more than $100,000 during the period. 3--acquitted in major thrift fraud cases during the period.

PENALTIES 1.89 years--the average length of sentence for the 346 convicted in all S&L; fraud and embezzlement cases. 9.4 years--the average length of sentence for bank robbery. SEIZED THRIFTS States with the highest number of thrifts under conservatorship of the Resolution Trust Corp. as of June 11, 1990: Tex.: 77 La.: 25 Ill.: 23 Calif.: 19 Ark.: 12 Fla.: 12 Colo.: 10 Miss.: 10 N.J.: 10 Okla.: 8 Kan.: 8 S & L FRAUD CONVICTIONS Cases of criminal fraud at thrifts involving losses of more than $100,000, Jan. 1988 to March 1990: Tex.: 82 Calif.: 48 Fla.: 34 Ill.: 18 La.: 18 Kan.: 14 Tenn.: 12 Wash.: 11 N.J.: 9 Mid.: 7 Ore.: 7 Source: Resolution Trust Corp., U.S. Justice Dept., Public Citizen

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