Judge Acquits 3 in S&L; Fraud, May Reverse Guilty Plea

Three businessmen accused of stealing $1.2 million from Sterling Savings & Loan in Irvine have been acquitted by a federal judge here who has indicated that he will also set aside the guilty plea of the prosecution’s star witness.

U.S. District Judge J. Spencer Letts ruled on Thursday that the government had wrongly charged the men with bank fraud because the money was allegedly taken from a Sterling subsidiary, Sterling Builders Inc., and not the thrift itself.

The U.S. attorney’s office cannot appeal the decision because the case didn’t go to trial.

“The judge thought some crimes other than those charged had been shown but that there was a failure of proof for bank fraud,” said James Brustman, a Santa Ana attorney representing one of the defendants.

Now, the U.S. attorney finds himself in a unique situation.

Letts has indicated that he will reverse the guilty plea next week of Darrell Dean Knox, a former Sterling Builders controller who was the key witness in the trial of the three businessmen.

Knox, 46, of Fallbrook, pleaded guilty to conspiracy and bank fraud for concocting a scheme to cash more than 200 checks from Sterling Builders. He has agreed to cooperate with authorities.

Knox’s case didn’t go to trial because of his plea. Therefore, federal prosecutors can appeal Letts’ reversal and they intend to do so.

“Because the judge ruled against us on the other three (defendants) doesn’t mean we still don’t think this guy committed a serious crime,” Assistant U.S. Atty. Carolyn Kubota said Monday. “I guess there is some inherent unfairness in it, but it wasn’t of our making.”

Knox pleaded guilty to issuing checks to fictitious entities and then having the other defendants help him launder the money through several bank accounts.

Sometimes he forged the endorsement signatures on checks made out to Sterling Builders contractors and then deposited those checks into bank accounts he controlled.

He admitted to embezzling funds from Sterling even after he was fired in late 1988, using 23 blank checks he had stolen.

The three men acquitted last week were Richard Russell Holtby, 44, of Murrieta, Daniel Lewis O’Brien, 39, of Fontana and Allen Zane Frazier of Midland, Tex.