Suits Tell of Battle Inside Citadel : Management: Court papers shed the first real light on the intense boardroom struggle involving two former directors who sought greater influence at the S&L.; : Suits Tell of Battle Inside Citadel
James Taylor, the retiring chairman of Citadel Holding Corp., walked out of the thrift’s Glendale headquarters in March, 1989, lugging with him two boxes of documents containing the S&L;’s biggest secret--proof of the bitter, costly management battle that has been under way for years behind its placid facade.
What Taylor took with him was not a paper trail of junk bond swindles, crooked real estate deals or costly taxpayer bailouts. Citadel and its subsidiary, Fidelity Federal Bank, has about $5.6 billion in assets, and is simply an ordinary, medium-sized S&L; that continues to survive.
But the documents Taylor carted out told parts of the story of a messy boardroom fight that has raged inside and outside the thrift’s walls for the last five years, culminating in four major lawsuits in three courts in Los Angeles and Delaware that are still making their way through the courts, and include charges of illegal securities trading by board members, double-crossing, lying and fraud.
At the center of the mess is a struggle between two strong-willed former Citadel directors, each of whom once sought greater influence at the company. Citadel’s management claims that one ex-director, Alfred Roven, concocted a scheme to cash in illegally on Citadel’s rising stock price while he was on the company’s board. Roven, meanwhile, claims that the other ex-director, James Cotter, mounted a secret takeover of Citadel, then pushed the S&L; toward a merger, simply to line his own pockets.
Citadel officials have cast an air of mystery over the legal fight by making virtually no mention of it to shareholders since 1988. Even today Citadel officials and the other principals in the affair are tight-lipped about the suits.
But the documents in the Citadel cases take up yards of shelf space, and from these pages it is possible to piece together bits of the boardroom brawl.
The suits haven’t been good news for Roven or Cotter and may have hurt Citadel too. An otherwise positive report last June on the thrift by First Boston analyst Eric I. Hemel blamed the “diminished” value of Citadel’s deposits on “considerable management turbulence over the past several years.” There has been a revolving door in the executive suite since the boardroom battles began in 1985, with three chairmen or chief executives having left Citadel.
Another problem is that the court fight is expensive. Citadel has spent about $500,000 carrying through its lawsuit against its ex-board member Roven. And thanks to an indemnity agreement Citadel signed years ago, it may have to pay a big chunk of Roven’s legal costs in his fight against Citadel. Roven claims that he’s already run up a $900,000 legal tab defending himself against Citadel’s charges. These sums aren’t pocket change for a company like Citadel that turned just a $19-million profit in the nine months that ended Sept. 30, 1990.
Most of the boardroom drama is contained in two cases, both filed in federal court in Los Angeles. On one side is Roven, who has sued Citadel and Cotter, claiming that Cotter took over the thrift and unfairly pushed Roven out. On the other side is Citadel, suing Roven for allegedly illegal securities deals involving Citadel stock. In Citadel’s suit Roven has requested that the judge make a decision on the case based on the evidence already presented. Meanwhile, both sides are waiting for the same judge to decide on Citadel’s request that most of Roven’s claims against Citadel and Cotter be dismissed.
Before 1985, Citadel had been a quiet savings and loan run by chairman Spencer Scott, who’d risen to the top of the company since his early days working as a teller there just after World War II. Citadel was “a fairly average company,” judged one thrift industry analyst; its stock languished at about $12 a share early in 1984. So there was something incongruous about two street-wise investors like Cotter and Roven knocking at the company’s door late in 1984 and early in 1985.
Alfred Roven was not a household name, even among savvy raiders and financiers. In 1985, Roven, now 48, was a local Los Angeles investor, buying and selling stocks, bonds and real estate. But Roven was better known to the Securities and Exchange Commission. In the early 1980s, Roven twice settled civil charges by the SEC that he’d violated securities laws. In reaching agreements with the SEC, Roven did not admit or deny the allegations, which included an SEC charge of writing checks with insufficient funds to purchase securities.
Several years later when Roven began investing in Citadel, he thought that Citadel’s stock was so undervalued that if the thrift were to be sold, shareholders would get a healthy premium for their stock, according to Roven’s SEC filings.
Cotter, now 52, was an even more daunting figure. A financier and sometime greenmailer, Cotter, an attorney, got his start in finance in the late 1960s helping the late Los Angeles movie-theater tycoon William Forman invest the fortune he made from the Pacific Theaters chain. Cotter works with several investment arms--and through Hecco Ventures I, an investment partnership Cotter helps run, he still makes investments with Forman’s son Michael, whose wealth Forbes magazine estimates at more than $425 million. Cotter is also chairman and the biggest stockholder of Craig Corp., a Los Angeles company that owns 50% of Stater Bros., the 101-store grocery chain that is prominent in San Bernardino and Riverside counties. Today, Cotter’s Hecco Ventures and Craig Corp. together own about 19% of Citadel’s stock.
Cotter shuns publicity, but he sometimes gets it with moves like last year’s successful campaign to get Del Webb Corp., a Phoenix retirement community developer, to drop its poison pill anti-takeover defense.
By early 1986 Cotter’s group and Roven, through various investment entities, each acquired a 9% stake in Citadel, and both had gained seats on Citadel’s board for themselves and some associates. None of this happened quietly. Roven had to sue Citadel to get placed on the board.
In court papers, Roven claims that while both he and Cotter were on the board, Cotter secretly began plotting to push Roven out so Cotter could control the S&L; for his own purposes. Cotter and Citadel, in court papers, deny any such conspiracy existed. But that doesn’t mean Citadel and Cotter claim their relations with Roven were harmonious.
Indeed, then-Citadel President Edward L. Kane loosed a slew of charges in 1988 about Roven’s personal conduct as a member of Citadel’s board. In a deposition taken that year as part of a suit Roven filed against Citadel in Delaware--and lost--in an attempt to keep his seat on the board, Kane charged that Roven irked the thrift’s executives by delving into day-to-day decisions and engaging in drawn-out arguments at board meetings.
Kane, a longtime Cotter ally, also claimed Roven once nearly got into a scuffle with an investment banker at one board meeting. “I didn’t feel (that) was appropriate,” Kane explained in his deposition. “He would yell and holler at the employees,” Kane added. Roven denied the charges in the 1988 suit.
But, in any case, some tension between Roven, Cotter and Citadel’s management was inevitable. Cotter had gained representation on Citadel’s board through an amicable deal with Citadel’s management; Roven, on the other hand, had fought for his seat. And by early 1986, each had filed separately for permission from the Federal Home Loan Bank Board (FHLBB) to buy a much larger stake in Citadel--a move the federal government would define as a “change in control” of the S&L.;
Whatever went on in the boardroom, Roven now alleges in court documents that Cotter secretly planned a series of chess moves that would push Roven out of the thrift’s board. Cotter’s opening maneuver, Roven now claims in his lawsuit, was having Citadel hire lawyers from Gibson, Dunn & Crutcher, the same large Los Angeles law firm that represented Cotter. Roven charges that the dual representation meant Citadel’s lawyers were in Cotter’s pocket.
The accusation is a key to Roven’s claims against Citadel and Cotter, because Roven claims in his lawsuit that Gibson Dunn attorneys began in June, 1986, to “sabotage” his application with the FHLBB by secretly lobbying against him. Roven has not said what evidence he has of the alleged lobbying. Gibson Dunn attorneys, who still represent Citadel, deny any wrongdoing.
From then on, according to Roven, Cotter began to spread his tentacles around Citadel. By early 1987, Roven claims that Cotter had secretly put together a group of confederates including Taylor--then chairman of Citadel--plus President Edward Kane, Chief Financial Officer Samuel McCarver, and Director Ralph P. Perry III.
In May, 1987, as Citadel’s annual shareholders meeting approached, this group was ready to weaken Roven’s influence, he claims. Roven was reelected and so was firmly in place on Citadel’s board. As Citadel later explained it in SEC documents, immediately after the shareholders meeting, the board essentially decided to let another committee--the board of directors of Citadel’s subsidiary, Fidelity Federal--make the important decisions for the thrift. Then, by not re-electing Roven to Fidelity’s board, as Citadel’s management explained in its 1988 proxy statement, it “substantially reduced (Roven’s) ability to play a role in the business.” Roven claims that Cotter engineered the changes. But Citadel justified the moves in the same proxy by saying that Roven had “improperly” meddled in the thrift’s affairs.
Events took a new turn in August, 1987, when Citadel, with Taylor at the helm, sent a warning letter to Roven saying that it believed he had been secretly and illegally profiting on the rise in Citadel’s stock price by using “options” on the stock, according to SEC documents. The letter was followed by a lawsuit Citadel filed in federal court in Los Angeles in October, 1987, seeking to recover $8.75 million in Roven’s alleged profits from the options.
(Options give an investor the chance to buy a certain amount of stock; the option is only good for a certain amount of time and specifies an “exercise” price at which the shares may be bought.)
Here the story grows murky, with Citadel’s charges and Roven’s defense buried beneath details of complex securities laws. But, simply put, Citadel’s case is based on laws that bar corporate insiders--a category that Citadel claims included Roven--from making money on quick changes in the price of their company’s stock. The idea is to discourage them from profiting from inside information. The laws generally apply to stock, not options. But Citadel claims that the highly specialized option agreements Roven made gave him many of the advantages of trading the stock itself.
Citadel claims that Roven’s options let him make money when Citadel’s stock rose, even if he didn’t exercise them and buy stock, essentially because the price of the options changed when Citadel’s stock did. And in the case of one set of options, Citadel claims Roven could order the person who actually owned the Citadel shares to sell them--just as if Roven owned the stock himself.
According to a court statement by a broker who helped arrange the trading of Roven’s options, Roven once asked him to try to persuade the person who actually owned the stock to vote the shares the way Roven wanted. The broker said he ignored Roven’s request. In court documents Roven has vehemently denied Citadel’s charges, claiming that he traded the options not to make money, but in order to have stock available to buy, should the federal government let him acquire 25% of Citadel.
In a recently filed brief, Roven’s lawyer claimed that a broker who arranged for Roven to buy one set of Citadel options has retracted his own earlier claims that Roven could order the stock underlying his options to be sold. Roven says, moreover, that he never actually collected any profits on the options.
In October, 1987, the stock market crashed, just after Citadel first accused Roven of illegal options trading. Roven asserts that his Citadel options, which he’d paid over $1 million to maintain, suddenly became worthless.
But Roven apparently didn’t lose money on all of his Citadel investments. During the same market plunge, Roven sold most of his Citadel stock stake for an average of about $32 per share, after commissions. He paid less than $20 per share to buy much of his stake, so at least on this transaction Roven apparently made a profit.
After this selloff Roven owned less than a 2% stake in Citadel and his battle to regain some control of Citadel all but ended. Roven remained on Citadel’s board until management mounted a successful effort to have him voted out at the July, 1988, shareholders meeting.
With Roven essentially leaving the picture, in mid-November, 1987, the drama shifted about 10 miles from Glendale to the Van Nuys headquarters of Valley Federal Savings when Citadel announced that it wanted to acquire the smaller S&L.;
In 1987, Valley Federal actually looked like an attractive takeover target. It was a fairly good performer--with $3.1 billion in assets and a strong branch network both in the growing San Fernando and San Joaquin valleys--and might have made a good match for Citadel, whose branch offices were primarily in Southern California. With perhaps a bit more staff than it needed, some outsiders figured an acquirer could cut Valley Federal’s staff and make it a leaner, more profitable operation. Citadel eventually spent $2 million to pursue the Valley Federal acquisition. But the money nearly bought Citadel a ticket for a train wreck.
Just months after Citadel announced its interest in Valley Federal, the Van Nuys thrift started reporting losses at a unit that made loans on mobile homes. The losses would eventually wipe out all of Valley Federal’s capital cushion. And a look at both thrifts’ most recent government filings makes it appear that if Valley Federal’s merger with Citadel had gone through, Citadel wouldn’t have met federal capital standards either.
Cotter was deeply involved in Citadel’s pursuit of Valley Federal. In January, 1988, Citadel said it had options and commitments to buy 39% of Valley Federal’s common stock, and nearly 10% of it was to be acquired from Cotter’s Hecco Ventures. Then, in May, 1988, Cotter even won a seat on Valley Federal’s board and resigned from Citadel’s.
Valley Federal fought the proposed acquisition and complained in a filing with the FHLBB that Cotter controlled Citadel. Meanwhile, Roven claims in his lawsuit that although Cotter had left Citadel’s board, Cotter’s cronies kept him fully informed of Citadel’s deliberations.
Between June and September, 1989, Cotter’s Hecco Ventures cut its Valley Federal holdings from nearly 10% to a 6.6% stake, selling its Valley Federal stock for $9.25 to $12 per share. Cotter has denied any wrongdoing concerning the Valley Federal stock trades.
In an August, 1989, filing with the SEC, Hecco said it sold the stock because of “problems” with Valley Federal’s mobile home loan portfolio. Hecco said it also hoped that reducing its involvement in Valley Federal would help promote “a transaction” between Citadel and Valley Federal.
No such transaction ever happened. Citadel announced on Sept. 29, 1989, that it had dropped its bid for Valley Federal, and immediately Valley Federal’s stock plunged $3 per share to $7. After Valley Federal announced in January, 1990, the second of two writeoffs totaling almost $156 million, thanks to the mobile home unit, its stock plunged to $1.25 per share and has yet to recover.
After the Valley Federal deal died, William C. Walbrecher Jr. joined Citadel as its new chief executive. Today, both Roven and Cotter have left Citadel’s board and gone their own ways, although the board still includes people Roven has claimed are Cotter’s allies, and Cotter’s various investment arms still own 19% of Citadel’s stock. But the various lawsuits continue.
Among the remaining puzzles is exactly what role former Citadel chairman James Taylor had in the whole affair. Taylor was chairman of Citadel when the S&L; launched its securities suit against Roven. Taylor said in a deposition that Cotter took over Citadel in an unlawful change of control, Roven has claimed in court papers.
And Roven claims in his lawsuit that Taylor contacted the Federal Home Loan Bank Board in early 1989. According to Roven’s suit, “Taylor advised government regulators of certain unlawful activities in which Cotter and others were involved.” Roven alleges that Cotter and his “associates” responded by forcing Taylor to quit. The FHLBB’s successor, the Office of Thrift Supervision, declined to comment on the claims. Citadel claims in court papers simply that Taylor and Citadel had “serious disagreements” before he resigned.
Another puzzle is why Citadel, Roven and Cotter continue to pursue these legal affairs long after any contest for the control of the S&L; has ended. One attorney associated with the legal battle had a simple explanation: “This case is more about two people than it is about” the battle for one savings and loan.
The Key Players
Ex-directors Cotter and Roven have each been at the center of lawsuits involving Citadel.
James Taylor, former chairman of Citadel Holding Corp., is accused by Roven in court papers of being part of a group secretly formed by Cotter to push Roven out of the decision-making process at the thrift.
