Former Banker Knapp Indicted Over 1988 Loan

Charles W. Knapp--the former Los Angeles banker whose freewheeling ways set the stage for the failure of the nation’s largest thrift--was indicted Thursday on charges that he lied to win a $15-million loan from an Arizona savings and loan that also later failed.

Knapp--whom regulators forced from his job at Financial Corp. of America and its subsidiary, American Savings & Loan, in 1984--faces a maximum penalty of 51 years in federal prison and $2 million in fines if convicted on all eight counts in the indictment.

Knapp, who was released on $380,000 bail after a hearing Thursday in U.S. District Court in Los Angeles, declined to comment on the charges. His lawyer, Michael D. Nasatir, said Knapp would plead not guilty in a hearing Monday.

The indictment is only the latest in a string of troubles for Knapp, who has fallen far from his halcyon years of the early 1980s, with business failures, a messy divorce and millions of dollars in debts and civil judgments.

Last year, citing these debts, highlighted by a $750,000 judgment awarded to the Federal Deposit Insurance Corp., Knapp and his wife, actress Lois Hamilton, filed for protection under federal bankruptcy codes.

Knapp surrendered to federal authorities about noon Thursday. “Mr. Knapp will plead not guilty and he expects to be fully vindicated after all the evidence comes in,” Nasatir said.

The indictment also named Anthony C. Sarno, Knapp’s financial consultant, and Joseph V. Nash, his accountant. Sarno appeared in court and was released on $50,000 bail; Nash is serving an 11-year sentence after being convicted last year of defrauding four banking institutions of nearly $900,000.

Although Knapp is widely blamed for the insolvency of American Savings in 1988 that led to a federal bailout estimated at $1.7 billion, years of federal investigations had produced no criminal charges.

Ironically, his indictment Thursday had nothing to do with American Savings. Rather, it concerned a 1988 loan that Knapp’s Trafalgar Capital Corp. obtained from Western Savings & Loan of Phoenix. Knapp created Trafalgar after leaving Financial Corp. of America.

The indictment charges that Knapp, Nash and Sarno conspired to concoct financial statements that grossly overstated Trafalgar’s assets in 1988 in order to qualify for the $15-million loan, which assistant U.S. Atty. Carolyn Kubota said was never paid back. Western Savings folded in 1989.

Thursday’s indictment echoes some charges in a civil suit filed last June against Knapp and others by the federal Resolution Trust Corp., set up in the wake of the S & L debacle to dispose of assets from failed thrifts.

The racketeering suit, still pending in federal court in Phoenix, alleges that Trafalgar Capital improperly obtained the $15-million line of credit from Western Savings by improperly inflating the value of Trafalgar’s assets by more than $40 million. The suit also alleges that Trafalgar misused the line of credit to prop up the ailing thrift.

After Western Savings failed, Bank of America acquired its branches in 1990.

Thursday’s indictment alleges, among other things, that Knapp and the others made false statements about Trafalgar’s holdings to make it appear that a subsidiary had a $71-million interest in the Circle C Ranch development in Texas.

In fact, the indictment alleges, Trafalgar never closed a deal for Circle C, and the $71-million figure was created out of thin air when one subsidiary of Trafalgar sold its interest to another Trafalgar unit in a sham real estate transaction.

A $1-million payment Trafalgar made toward the interest in the Circle C development was drawn on a checking account that actually had only $800 in it, the indictment added.

The indictment also detailed false statements that Trafalgar received certain income that it in fact never collected; that the firm financed an acquisition and loan to a development company that did not exist, and that it had interests in small companies pursuant to agreements that were never finalized.

Knapp first gained prominence when his fast-growth policies inflated American Savings to the nation’s largest thrift after his holding company, Financial Corp. of America, acquired it in 1983.

Critics later said that those policies helped force the thrift into insolvency; a later internal investigation laid the blame squarely on Knapp’s policies.

American Savings’ explosive growth was fueled with high-cost deposits raised through professional money brokers. At the same time, Knapp oversaw loans in high-risk real estate ventures and investments in risky securities.

At one point, the thrift found itself owner of a foreclosed bordello and a kitty-litter mine.

By the time regulators sought Knapp’s ouster in 1984, American Savings was already on a downward spiral, a harbinger of the disaster that would eventually affect nearly 1,000 thrifts and leave taxpayers with a bill that could rise as high as $500 billion.

In 1988, American Savings was taken over by federal regulators in one of the largest thrift bailouts in the nation’s history. American Savings was later sold to Texas billionaire Robert M. Bass.

Despite criminal investigations into Knapp’s actions at American Savings, no criminal charges were brought against him in connection with the thrift’s failure. Knapp has been a defendant in a number of civil suits.

Fall of Financier Charles W. Knapp 1983--Knapp’s Financial Corp. of America merges with the parent company of American Savings & Loan. He oversees explosive growth at American Savings, based on high-cost deposits and high-risk loans. 1984--Knapp is forced out by banking regulators as chairman and chief executive of FCA. The Securities and Exchange Commission forces FCA to restate its earnings, prompting a $7-billion run on deposits at American Savings. 1984--Knapp forms Trafalgar Holdings, a financial services firm, in Westwood. 1988--Federal regulators take over American Savings because it is insolvent; the thrift is sold to Texas billionaire Robert M. Bass. The bailout costs taxpayers an estimated $1.7 billion. 1992--The U.S. government files a civil suit against Knapp and others, claiming Knapp obtained an improper $15-million line of credit from Western Savings in Phoenix. Beset by personal financial problems, Knapp files for bankruptcy protection. 1993--The U.S. government indicts Knapp and others in connection with the Western Savings loan, alleging that they conspired to defraud the financial institution by lying about Trafalgar’s assets.