Ex-Officials Steered Thrift to Collapse, Suit Alleges

Federal officials on Thursday sued nine former Gibraltar Savings directors and officers--including former state controller and unsuccessful gubernatorial candidate Houston I. Flournoy--alleging that they recklessly steered the Simi Valley thrift toward collapse.

The federal Resolution Trust Corp, which is charged with mopping up the nation’s thrift mess, is seeking $100 million in damages for negligence.

Gibraltar, part of Gibraltar Financial Corp., failed in 1989 at a cost to taxpayers now estimated at $988.6 million, making it one of the nation’s most expensive thrift failures. The thrift failed largely because of losses on mortgage-backed securities, real estate investments and risky junk bonds.

Officers sued include former Chief Executive Herbert J. Young; former President Jerome Nussbaum; James N. Thayer, who served as chief executive after Young, and former Chief Financial Officer John R. Williamson.

Flournoy, a former director of the thrift, was the Republican candidate for governor in 1974, losing a close race to former Gov. Edmund G. Brown Jr. He served as state controller from 1967 to 1974.

In addition to Flournoy, other directors being sued include Robert R. Sprauge, Rafael E. Vega, Melvin P. Spitz and Bernice H. Hutter.

Martin Washton, a Los Angeles lawyer who represents Flournoy and the other former outside directors, said that the defendants contend that they are not liable for Gibraltar’s collapse. Nussbaum’s lawyer had no comment. Lawyers representing the other defendants could not be reached.

The lawsuit, filed in U.S. District Court in Los Angeles, alleges that Gibraltar grew rapidly, attracting money by paying sky-high rates on deposits and aggressively investing the money in risky assets. In particular, it invested in securities backed by mortgages.

The thrift grew 22% a year from 1983 to 1987, the lawsuit alleges, “without appropriate internal procedures and controls being put into place or followed.”

The lawsuit says the thrift also engaged in “cherry picking” in which it concealed operating losses by selling high-yield assets, generating gains on its financial statements while deferring unrealized losses.