In Alleged Thrift Fraud, 3 Small S&Ls; Stand Out : Savings and loans: The cases of Brookside, Westwood and First Network suggest why regulators say Southern California became the nation’s thrift fraud capital.
As regulators see it, Edward Israel and Albert Collins are two of the reasons that Southern California now ranks as the savings and loan fraud capital of the nation.
The two men took a tiny West Los Angeles thrift, Westwood Savings & Loan, and turned it into a cash machine for questionable real estate investments, according to allegations contained in a lawsuit. By hiding their real estate interests and using Westwood deposits to invest in their property, regulators contend, Israel, Collins and some associates made millions in secret profits for themselves.
Westwood is among dozens of savings and loans that have failed nationwide. The cost to taxpayers of its failure ultimately may add up to $260 million.
Westwood also is one of seven Southern California thrifts that have earned the dubious distinction of being top-priority investigative targets of the FBI as it digs ever more deeply into massive fraud in the savings and loan industry.
Larger institutions such as Lincoln Savings & Loan in Irvine have received the bulk of attention amid the furor over widespread abuse in the thrift industry. But much of the wrongdoing is alleged to have occurred at institutions that were far smaller and more obscure. Besides Westwood, for example, regulators have alleged that there was improper behavior at Brookside Savings & Loan and First Network Savings Bank of Southern California.
Regulators say fraud was not the only reason behind the failures of Brookside, First Network and Westwood--all of which have been seized by the government--but it played a part. The failures of the three institutions alone will cost taxpayers an estimated $435 million or more.
The three S&Ls; stand as case studies of why the thrift industry was so ripe for fraud. All grew primarily by investing in risky commercial real estate and apartments, rather than by writing traditional single-family home mortgages. All were founded or acquired by people who grew up in the field of real estate, not banking.
And owners of the three used similar tricks of the trade, according to lawsuits, criminal charges and other legal filings: Some deals under government scrutiny allegedly involved so-called straw men--people who pretended to own property or investments that were actually owned by thrift officials. S&L; officials backdated documents and lied to regulators, the government maintains. And a complex network of companies allegedly was used sometimes to send thrifts’ money out the door and ultimately into top executives’ pockets.
The Justice Department has received 16,400 complaints from the public, thrift insiders and others about fraud involving Southern California thrifts--76% of all such complaints nationwide.
Why has Southern California become the nation’s thrift fraud capital? One reason is the “ton of savings and loans around here,” said Lawrence G. Lawler, special agent in charge of the FBI district in Los Angeles. “Why do we have so many bank robbers? Because we have more banks.”
There is also a regulatory reason: A state law passed in the early 1980s allowed thrifts here to invest all their assets, through subsidiaries, in real estate--something that S&Ls; in many other states couldn’t do.
And some offer a cultural explanation: “I think California ever since the 1940s has been the place to make a fast buck, and there are people who come out here to do it,” Lawler said.
Michael S. Moers and Arthur M. Pastel, former co-owners of Brookside, have pleaded guilty to separate sets of felony counts in connection with Brookside’s failure. Westwood’s Israel and Collins--along with Moers--have been accused of civil violations in a federal suit but have denied the charges. The U.S. Attorney’s office says investigations of Brookside and Westwood are continuing. First Network’s owner, Carl M. Rheuban, has not been the target of criminal or civil filings by the government, but descriptions of his alleged dealings are found in court papers and a state audit. None agreed to be interviewed for this article.
Here is a look at what allegedly went awry at these three S&Ls.;
Westwood S&L;
Real estate developer Edward Israel and builder Albert Collins never managed a thrift before they acquired tiny California Women’s Savings & Loan in 1981, regulators say. But it appears that they never intended to run it like a traditional savings and loan anyway.
Instead of concentrating on home loans, they used the thrift mainly to finance big commercial real estate projects. In two years, the thrift--renamed Westwood--grew 25-fold.
By late 1983, Israel and Collins had become brash enough to wage a bidding war against financier Ivan F. Boesky for control of Santa Barbara Savings & Loan, a thrift eight times Westwood’s size.
But as it grew, Westwood was quietly losing money to fraudulent deals crafted partly by its owners, regulators charge in an ongoing suit filed in 1987 by the now-defunct Federal Savings and Loan Insurance Corp. (FSLIC). Israel, Collins and certain other Westwood officials and business associates have denied the charges. Only Israel, Collins and their associate Michael Moers were targeted for criminal probes stemming from the allegations, according to papers filed as part of the suit.
In one example of alleged fraud, regulators pointed to Westwood’s October, 1983, purchase of property on Pearl Street near downtown Denver from a limited partnership called American Pearl Street Ltd. Regulators contend that Israel, Collins and two other people were actually behind the partnership and ultimately pocketed the sales price. One of those people who allegedly shared in the deal was Moers, who in 1984 bought part of Brookside Savings & Loan.
Such deals were not Westwood’s only problem. The thrift also suffered--and eventually collapsed--after some of the loans that fueled its growth soured.
Westwood’s biggest mistake may have been a series of loans made in 1983 to various entities controlled by Dallas real estate syndicator Craig Hall, whose financial empire began to crumble in 1986. The loans helped the thrift grow enormously and provided phantom up-front profits through lightning-fast purchases and resales of the same properties, according to regulators. But the loans eventually went sour, taking the thrift down with them.
Regulators cited a litany of problems with the financing, including overly optimistic property appraisals and loans made with inadequate collateral. In some transactions, Westwood allegedly bought properties and then loaned money to Hall entities to instantly buy the same real estate back for a big markup.
Brookside S&L;
Michael Moers dropped out of law school to get into real estate, not savings and loan management. He managed apartments, bought his first building in 1975, then acquired about 20 more in the next two years, he recalled in a recent newspaper interview.
Nonetheless, the government let Moers and fellow real estate developer Arthur M. Pastel buy Brookside Savings & Loan in 1984. Their criminal behavior began almost immediately after the acquisition.
Pastel and Moers recently pleaded guilty to charges that, about a month after buying Brookside, they launched a scheme to get the thrift to buy their hidden interests in the big Barrington Oaks apartment complex in San Antonio.
The scheme relied on layers of limited partnerships, one controlling the next. Brookside seemed to buy the apartment stake from a straw man--but actually it was buying from Pastel and Moers. The straw man got Brookside’s check for $1.7 million but passed on the money to Moers and Pastel.
Moers also has pleaded guilty to participating in a scheme involving Brookside and Westwood that, according to regulators, cost Westwood an estimated $3.7 million.
Moers admitted that he and business associates at Westwood had their two thrifts buy an option they owned on a prize property in West Los Angeles. Those partners were Israel and Collins, according to the FSLIC. Although that’s as much as Moers has admitted to, regulators maintain that there was more to the deal.
About a year and a half later, after allegedly investing several million dollars in the real estate but not actually buying it, Westwood could not afford to pour more money into the deal, FSLIC contends. So Moers, according to FSLIC, offered to have Brookside take over Westwood’s half of the deal, letting Westwood off the hook in case no buyer ever surfaced.
But the government charges that Moers had already secretly lined up a buyer who paid enough to cover Brookside’s investment. Westwood simply lost the money it had invested, the government says.
First Network
As a devoted fan of magic, First Network owner Carl M. Rheuban adorned the headquarters of his Century City thrift with a valuable collection of antique posters advertising magicians, including one who looked like Rheuban himself.
But it was the real estate developer who looked like a magician when he founded Deauville Savings Bank in 1983 and made it grow into a $120-million thrift by late 1985.
For a while, the thrift--renamed First Network--helped make Rheuban a successful Westside businessman. He had an expensive home in Pacific Palisades. He became well known on the social scene, helping organize such events as a 1985 Los Angeles appearance by former Israeli Defense Minister Ariel Sharon and a 1987 celebration of Jerusalem Day, which marks the anniversary of the end of the Six Day War in 1967.
He also became a top fund-raiser for Democrats--and, occasionally, Republicans. He personally contributed nearly $90,000 to Senate and presidential campaigns from 1985 to 1990.
For a while, regulators believed that First Network was sound. They let it acquire troubled Tahoe Savings & Loan in late 1988, when a flood of such deals was approved.
But as he grew in social and political stature, Rheuban was weaving “the most complicated transactions I have ever seen,” said California Savings and Loan Commissioner William D. Davis. These transactions had the effect of using First Network to enrich Rheuban, according to court papers and a state auditor’s report.
Davis said a state audit alleges that Rheuban paid himself dividends based on phony profit figures for the thrift. The audit also contends that much of some $25.6 million that Rheuban contributed to bolster First Network’s capital position came from the thrift itself, Davis said.
One clue to the alleged circular schemes appears in a declaration filed in Rheuban’s recent personal bankruptcy case. The declaration was part of a motion by Rheuban’s creditors to have a bankruptcy trustee appointed; a judge agreed to appoint the trustee.
According to the declaration--made by George Hale, a thrift trouble-shooter who was hired at regulators’ urgings to run First Network last fall when a routine audit pointed up problems--Rheuban allegedly had First Network lend money to borrowers who in turn agreed to lend money back to him or one of his companies. Rheuban then used the loans for his own purposes and to artificially bolster First Network’s capital, Hale maintained. In a response also filed in the bankruptcy papers, Rheuban denied the charges.
Hale said in the filing that one set of deals worked like this: First Network in 1988 loaned $21.6 million to Victor Fargo and Fargo Industries, a La Jolla real estate concern, which then used the money to buy the Beverly Heritage Hotel in Costa Mesa. Northview Corp., which had owned the hotel, then allegedly loaned $13 million to a Rheuban entity, which then loaned the money to Rheuban. Finally, Rheuban bought $11 million worth of First Network stock, Hale said.
Don Willenburg, an attorney for Northview, which recently filed for bankruptcy protection, said company officials “were not aware of the closing of the loop.” Victor Fargo did not return phone calls.
First Network turned out to have lots of other problems. The Office of Thrift Supervision said First Network lost $11 million in the last three months of 1989 and at the end of the year, nearly a third of the investments and loans on its books had gone sour.
