UCI Study Finds Light Sentences for Thrift Fraud

By JAMES S. GRANELLI

Nov. 17, 1994 12 AM PT

TIMES STAFF WRITER

IRVINE —

Those convicted of defrauding the nation’s savings and loans receive prison terms far shorter than those imposed on the average burglar, according to a UC Irvine study released Wednesday.

In addition, more than a fifth of the S&L; fraud perpetrators have gone without jail time, according to the three-year study by two UCI professors and a professor at St. John’s University in New York. Thrift fraud caused an industry debacle that could cost taxpayers $500 billion over time.

Orange County, especially, is the nation’s thrift fraud capital and “California’s S&L; hell,” UCI criminology professor Henry N. Pontell said in an interview. Pontell headed the $240,000 study funded by the Justice Department’s National Institute of Justice.

Since 1985, there have been 27 thrifts based in Orange County that failed--more S&Ls; than in any other California county. The nation’s two costliest failures--American Savings & Loan and Lincoln Savings & Loan--were based in Irvine.

“We’re the white-collar fraud capital of the United States, as far as I’m concerned,” Pontell said. “It’s not what you see in the streets but what you don’t see that is killing people, especially the elderly who are often preyed upon most by con artists.”

The UCI study, called “Fraud in the Savings and Loan Industry: White-Collar Crime and Government Response,” found that 78% of 580 people sentenced for thrift fraud were sent to prison, but only 4% were given terms of 10 years or more and only 13% of those sentenced received at least five years behind bars.

The median sentence was less than two years, according to the study.

Losses from the nation’s thrift debacle of the 1980s range from $160 billion to $180 billion, Pontell said, but taxpayers will end up spending at least $500 billion over more than 20 years to cover those losses.

Financial scams by high-level insiders and such outsiders as major borrowers and consultants account for at least 25% of the total loss, according to the study by Pontell and colleagues Kitty Calavita, a UCI associate professor of criminology, and Robert Tillman, an assistant professor of sociology at St. John’s.

Orange County has been such a hotbed of criminal fraud activity, Pontell said, because of its very character.

“Orange County has extreme wealth and flagrantly displays it,” he said. “The proportion of people with Porsches, for instance, is probably the largest in the world.”

Such affluence and basic opulence, he said, marks the county as a place where life is lived in the fast lane--a place that attracts many people who want to get rich quick by any means.

“S&L; fraud was endemic throughout the country, but it was part of the ecology, part of the environment here,” he said.

But those convicted of thrift fraud received less punishment than other criminals.

In 1988, for example, the average prison term for those convicted of major thrift crime was 36.4 months, while the average burglar was given 55.6 months in prison and the average car thief was sentenced to 38 months, Pontell said.

The thrift cases that year accounted for losses of more than $8 billion, but judges meted out fines and restitution of less than $348 million, and only a fraction of that was collected, the study said.

While sentences for S&L; defrauders has been light in general, those convicted in serious cases where losses were high have generally received much tougher sentences, the study said.

In the Lincoln case, the nation’s most notorious S&L; failure, thrift operator Charles H. Keating Jr. was sentenced to 10 years in prison on his state securities fraud conviction and to 12 years, seven months on his federal racketeering, conspiracy and fraud convictions. He is in prison while he appeals his federal conviction.

In the 1987 failure of North America Savings & Loan in Santa Ana--a thrift that regulators say was set up as a criminal scheme--Janet Faye McKinzie became the first industry executive to be convicted of federal racketeering.

The thrift consultant, who ran the operation with owner Duayne (Doc) Christensen, was sentenced to 20 years in prison but was released six months ago after serving barely four years. Even prosecutors commended McKinzie for being a model prisoner who helped others while serving her sentence.

Criminals considered the federally insured funds at thrifts as “other people’s money” and treated it so recklessly that there was little doubt they intended to defraud the institutions, said Ronald Rus, an Irvine lawyer who helped small investors in Lincoln’s parent company--mostly elderly Southern Californians--recover much of their $285-million loss.

“I think that law enforcement has got to the point where it decided to make streets safe--so the elderly can go begging,” he quipped.

In their study, Pontell and his colleagues also dissected so-called criminal referrals, which are requests by regulators for FBI investigations into suspected criminal activities mainly by thrift insiders. They counted and matched names listed in the referrals, for instance, to see whose names came up repeatedly and what happened to them.

In California, they determined, just one in four people “referred” by regulators for criminal investigation was prosecuted. In Texas, where most referrals were made, only one in seven was prosecuted.

On the other hand, Pontell said, about 30% of those indicted were people--mainly borrowers and other outsiders--never listed by regulators.

The reason for the apparent lack of action against insiders, Pontell believes, is that prosecuting borrowers and other outsiders is easier than pursuing the often complex white-collar crimes of thrift executives.

Borrowers leave a trail of false documents, he said, while insiders can shield their actions by claiming they simply used poor business judgment. What investigators often find, he said, are records so poorly documented that the loans are essentially fraudulent.

Also, he said, the “sheer volume and magnitude of fraud cases limits the ability of the government to sanction violators.”

Failed S&Ls;

Since 1985, 27 savings and loan associations have failed in Orange County, which a UCI professor who studied thrift fraud calls “California’s S&L; hell.” The failures:

1985

April: Beverly Hills Savings & Loan, Mission Viejo

August: Butterfield Savings & Loan, Santa Ana

1986

February: American Diversified Savings Bank, Costa Mesa

May: Consolidated Savings Bank, Irvine

September: Ramona Savings & Loan, Orange

1987

January: North America Savings & Loan, Santa Ana

March: Equitable Savings & Loan, Irvine

March: South Bay Savings & Loan, Newport Beach

March: Perpetual Savings Bank, Santa Ana