$30-Million Fraud Alleged in Continental Loan Sales

About 40 financial institutions nationwide claim they have been defrauded out of more than $30 million by a troubled Irvine-based company that sold them automobile-finance contracts signed by consumers with bad credit.

Continental Capital & Credit Corp. is facing several lawsuits from banks and thrifts that bought packages of auto-loan contracts underwritten by Continental. The company’s officers and independent brokers who sold the contracts are also named as defendants in the lawsuits.

In addition, a bankruptcy court trustee is investigating allegations that more than $6 million was funneled out of Continental by insiders to numerous other businesses owned by Gordon DeBoer, Continental’s owner and a Newport Beach resident.

DeBoer and his attorney declined to comment on the allegations.

Continental filed for Chapter 11 bankruptcy in March, 1989, and is now being liquidated.

Officials familiar with the Continental case say it is rooted in the deregulation of the savings and loan and banking industries in the 1980s. To stay competitive, many financial institutions plunged into businesses in which they previously had no experience, such as high-risk auto loans.

Several S&Ls; that invested heavily in Continental contracts, including Security Federal Savings & Loan Assn. in Peoria, Ill., and Imperial Federal Savings Assn. in San Diego, are now under federal control, at least partly because of the losses from bad auto loans.

Charles Gibbs, an attorney representing Amwest Savings Assn., based in Bryan, Tex., said the thrift indirectly acquired about $10 million worth of the Continental contracts when it purchased another S&L.; He estimates that the losses from those Continental investments will be close to $5 million.

“The loss grows daily as we get more and more defaults,” Gibbs said, adding that he is not confident that Amwest will be able to recoup its losses from Continental. “Tangible assets remaining in the debtor company doesn’t appear to be much.”

DeBoer, 50, a Vietnam veteran and former IBM marketing manager, has been chairman and chief executive officer of Continental since 1980. He describes Continental as “a privately held investment banking firm” specializing in everything from financing investor notes to leveraged buyouts.

The company sold more than $80 million in car finance contracts from mid-1987 until January, 1989. The loans were made to consumers who had past credit problems but supposedly had improved credit.

The loan packages were attractive to banks and thrifts because Continental guaranteed high interest rates and promised that the contracts were insured in case of default. But the insurance coverage often was not there because of contract loopholes or Continental’s failure to pay premiums, the financial institutions allege.

In addition, they claim that the contracts were issued to consumers with bad credit recruited by auto dealers. The contracts were approved when the dealers paid kickbacks to Continental, court documents claim.

Michael D. Velez, former assistant to Continental President John T. King, said in a sworn statement that the company required car dealers to pay “a membership fee” of $3,000 to $5,000 to have loan proposals reviewed, as well as 10% to 25% of each car buyer’s installment contract that Continental approved for financing.

“Mr. King told us not to reveal this kickback arrangement to the contract purchasers,” Velez said. The understanding between the dealers and debtor under this arrangement was that Continental “would approve virtually any contract placed with them by the dealer,” he said.

John King, who has since left Continental and is now president of a mortgage lending firm in Newport Beach, declined to comment.

Velez also said that Continental sold to the dealers items that they in turn sold to the car buyers at inflated prices. One such device, he said, was known as a Continental Alarm, a security alarm worth about $30 that was sold to car buyers for $900. Also, he said, the dealers paid Continental for an extended warranty on each automobile. Continental bought the warranty for $200 and sold them for $500 to dealers, who generally charged the car buyers about $1,300.

Bank and S&L; officials said that while they knew that the car loans would be made to people with some credit problems, they were assured that Continental would only approve a contract if the buyer had been able to make home payments or had shown some other proof of good credit.

But attorneys for Marquette Bank of Minneapolis said an examination of the credit reports showed that “routinely unqualified purchasers were given financing.” One borrower, they claim, had six uncollected debts and had filed for bankruptcy.

“The overall effect of these practices,” Velez said, “was to sell cars to consumers with extremely poor credit histories at prices grossly in excess of their value.”

According to court documents, more than 60% of the car loans that Continental packaged are in default and the estimated total loss for all of the financial institutions involved will be more than $30 million.

A lawsuit filed Nov. 22, 1989, in U.S. District Court in Santa Ana by six institutions against Continental--which altogether invested $4.2 million in the automobile financing contracts--said that one broker peddling the Continental contracts said defaults amounted to only 1% to 3%. Also, they say the broker misinformed them that repossessed cars were being sold without any loss, while instead the loss from such sales was about 50%.

The financial institutions also complained that while they were told the money raised from their contracts would be kept in their own accounts, money from all accounts was co-mingled. The banks and S&Ls; said Continental tried to keep interest payments current by employing a “Ponzi scheme.”

“Under the theme, plot and plan, Continental repaid earlier investors with money solicited, paid and obtained from later investors, instead of obtaining money from collections and collection efforts made under the automobile contracts,” the lawsuit alleges.

Also, the lawsuit alleges that from March 1 through Dec. 31, 1988, Continental Capital transferred more than $5 million of its assets to 11 other companies in which DeBoer has an ownership interest.

A bankruptcy court trustee has begun investigating the alleged diversion of funds and in June filed a lawsuit against Hollywood Film & Video, a film processing laboratory in Los Angeles. The suit contends that property Hollywood Film & Video owns on Sunset Boulevard was purchased with $635,000 in funds given by Continental with authorization from DeBoer, a principal owner of both companies, “for the sole purpose of deceiving and defrauding the creditors of Continental and converting the assets of Continental for the benefit of himself and Hollywood Film and Video.”

Michael Mallard, president of Baltimore Savings & Trust, who recommended on behalf of the creditors that a court trustee take possession of Continental’s assets, is angry about the losses that the financial institutions have suffered.

“I would only hope these individuals do not get away with it. My feeling is that the program was misrepresented,” he said. “This is a very complicated issue. I don’t think it will go away overnight.”

Others familiar with the Continental Capital debacle say the financial institutions and brokers who participated were negligent for failing to make sure the program was designed with checks and balances.

Harlan Gittin, owner of Puente Hills Nissan, said he worked for Continental by getting his dealer friends to sell cars with its financing. They were eager to do so, he said, and eventually about 200 dealerships in California and Denver were financing sales through Continental.

Gittin said he believes DeBoer’s concept of providing car loans to consumers with less-than-perfect credit histories was workable and potentially could have performed a public service, especially in Southern California, where car ownership is a near necessity.

But he said the program was doomed by DeBoer and King’s ignorance about how to go about choosing who should get the loans. “In order to finance people with credit problems, you have to distinguish between the credit criminal and those that have good intentions,” he said.

He said he was surprised that the brokers and financial institutions that entrusted money to Continental did not pay more attention to how the car loans were being processed or how much the cars were sold or insured for. “Nobody did their homework,” he said. “I think they were all negligent, everybody.”