O.C. Bank’s Downfall Also a Human Failure : Psychology: Sonora Group lease fraud depended on 234 generally law-abiding citizens to lie on loan documents.

It was a small scam, as frauds in affluent Orange County go.

A financing company called the Sonora Group ripped off a Newport Beach bank and several other lenders for nearly $12 million, leading to the bank’s failure in August.

But what has regulators, federal authorities and lawyers shaking their heads is that the Sonora Group in Costa Mesa was able to get 234 generally law-abiding citizens--including a tax accountant and nearly a dozen police officers--to help it defraud the bank.

For up to $5,000 each, most of these average people agreed to lie on documents submitted to the Bank of Newport so that Sonora Group could get loan proceeds. And some were paid an additional $1,000 for each person they referred to the company to join the scam.

Now, in a host of lawsuits in three counties, those people who allowed the Sonora Group to use their credit are being called to answer for their actions. A few have settled, but most assert that they themselves were victims of the Sonora Group’s operators, Lucy F. Looney-Rau and her husband, Charles B. Rau.

Under loans arranged by the Sonora Group, a heavy equipment leasing company, the people had become lessees of equipment they never saw, and both Sonora and the lessees became responsible for repaying the loans.

Nearly a dozen regulators, prosecutors, investigators, bankers, sociologists and lawyers said they had not heard of a fraud that relied on the cooperation of so many people. Even Charles E. Duff, a civil and bankruptcy attorney for the Raus, is baffled.

“When you hear all the facts, it’s astonishing,” said Duff, who would not reveal much because a criminal investigation is pending against his clients and others. “The question you have is how could this happen. It’s amazing.”

Others are equally puzzled:

* “It was just astounding to me,” said David L. Blankenhorn, who was brought in as the bank’s president just as the scam was falling apart. “I wouldn’t have believed it had we not unraveled it.”

* Irvine lawyer Ronald Rus, called in by the bank in April to find out what happened, said the fraud struck the struggling bank “like a bolt out of the night,” just as it had a buyer lined up. “We had a systematic bank robbery here,” he said. “The lessees were not holding the guns, but they’re the ones who were operating the getaway cars.”

* “If these people had opened their eyes, they could have seen it was not possible, but they looked at the deals with their hearts or they closed their eyes, and they thought it was truly all right,” said Paul Jesilow, associate professor of criminology at UC Irvine. “If you give people enough reasons for doing something illegal, you give them reason to say, ‘I’m not to blame.’ ”

But David McKenzie, a lawyer for Bellflower tax accountant Nancy Givens, questions bank lending officers for accepting gifts from the Raus and for failing to verify essential elements of the loans. His client, he said, simply co-signed for loans that someone else was paying back.

“It was a scam that took advantage of the greedy,” McKenzie said, referring to the lessees. “Luckily, we haven’t made greed a crime.”

The Raus already have admitted to federal prosecutors that they defrauded the bank, according to court documents in the bank’s lawsuit against them, but they have not entered a formal plea yet. The suit had been sealed from public view by an Orange County Superior Court judge until regulators last month moved the case to federal court in Los Angeles.

Prosecutors say the Raus are cooperating in an ongoing and wide-ranging investigation, one that other sources said includes the actions of bank employees and the lessees. Lawyers familiar with the investigation expect it to be concluded in the next few months.

Because the scam led to the failure of a regulated financial institution, a sentence for anyone convicted of bank fraud could include up to four additional years in prison, according to a 1989 federal law.

The Raus went bankrupt in June and eventually took with them 13 companies they owned or controlled, including the Sonora Group. Among Sonora’s debts are $5 million owed to the Bank of Newport and more than $6 million to three other lenders.

“This was the knockout punch for the bank,” Blankenhorn said. Regulators seized it Aug. 12 and closed it.

HOW THE SCAM WORKED

Sonora was a financing and leasing company for truckers and others who needed heavy equipment but couldn’t get a bank loan themselves. Lucy Looney--by all accounts, a friendly, charming, persuasive woman--had long been involved in the field and ran the company.

Sonora would buy, say, a forklift and lease it to a needy company. Then Sonora would sell the stream of payments owed under the lease to Bank of Newport, which collected monthly checks from the lessees.

Such lease-loan operations are common, legal and useful. The bank’s loan is secured by title to the equipment, the lessee becomes the de facto borrower and the leasing company essentially guarantees that the monthly payments will be made.

Heavy equipment users went to Sonora because it was a specialist in leasing such rolling stock, and they generally wanted to lease their equipment to obtain lower monthly payments than they would in repaying a loan to purchase the equipment.

Sonora always used real people with real credit to get real loans, but since at least 1992, it began obtaining the loans for equipment that never existed, never was purchased or never was delivered, according to court documents. The lessees essentially were straw borrowers, though some might not have realized that.

Lawyers investigating the scam said they don’t know yet why the Raus began involving lessees in the phony scheme, and the Raus have remained mum so far.

Under their arrangements with Sonora, most lessees swore on documents or told bankers that they had the equipment in their possession and would be using it, the bank’s lawsuit asserts. They mailed in monthly payments from their own checking accounts, but with money Sonora provided.

The bank and some lessees contend that Sonora used loan proceeds to pay off earlier loans, to give lessees up-front money for “lending their credit,” as Looney called it, and to live the good life throwing lavish parties at places like the Ritz-Carlton Hotel in Pasadena and buying expensive gifts for lenders and lessees.

“It was a classic Ponzi scheme,” said Ken Drost, general counsel of New Era Funding Corp., which bought a number of the leases from Bank of Newport. Before buying the leases, New Era conducted its own research, Drost said.

“We called these people and asked if the equipment was there, and they said it was,” he said. “We sent people to take pictures of the equipment, and found out later that Charles Rau would put the equipment there for a day--just for the pictures.”

Lawyer Rus and other lawyers have found in pretrial discovery that some people set up dummy companies that acted simply to facilitate the loans.

Exactly how many loans over the years had been fraudulent is uncertain. Investigator Evan Breitman of New York Credit in Marina del Rey, a company the bank retained in April to audit all Sonora files, said several hundred earlier lease-loans involved loans that had been fully repaid, with interest, on equipment that never existed.

The scam simply grew too large to cover all loans, he said, and most lessees now are looking for a way out.

“Some lessees said their names were forged, and a number of signatures may not match,” Breitman said. “But they still made the monthly payments.”

Sonora generated so many loans that it accounted for half the loans funded by the Bank of Newport’s leasing division. The bank, close to exceeding its limit on the amount of money it could lend to one borrower, began selling some leases to New Era and to Bank of the West in San Francisco and a Textron Inc. subsidiary in Santa Ana.

It was an anonymous letter to Textron Financial in early April that prompted the bank to look at its Sonora-arranged loans. Investigators believe an employee at Genuine Fisher, a Costa Mesa motorcycle parts company Charles Rau controlled, blew the whistle because he was angry that Rau was taking about $400,000 out of the fledgling Fisher to pay Sonora debts.

“BORROWING” CREDIT

With 15 years in the business, Lucy Looney had helped a lot of truckers, trucking firms and other users of so-called rolling stock get the equipment they needed when their own credit wasn’t good enough to obtain conventional bank loans.

Throughout the 1980s, first with a company called Perry Morris and, in 1986, with Sonora, Looney built a reputation as a friend to the heavy equipment industry.

“She furnished a real service to this little industry, where everyone started on a shoestring,” Breitman said.

Her own tax accountant, Nancy Givens, once co-signed on a loan Sonora arranged for Givens’ boyfriend, who runs a heavy equipment company but whose own credit had been ruined in a previous venture. But the two truck trailers for which he obtained the loan were delivered and he paid off the loan, said Givens and her lawyer, McKenzie.

“Anytime there was any equipment needed that no bank would handle, everybody in Fontana, where most of the heavy equipment is, said, ‘Try Lucy at Sonora. She can always get it through,’ ” Givens said.

With such a reputation, Looney appeared to have an easy time calling in favors.

According to lessees in sworn pretrial and bankruptcy documents, Looney duped them with hard-luck stories--a fellow trucker was ill or in financial trouble and his equipment would be seized unless he got a loan--or with promises to push through pending loans if only they would help this friend of hers, this fellow trucker.

“One person got a horse because his daughter was an Olympic equestrian,” said bank President Blankenhorn.

Givens herself thought she was simply co-signing on two loans Looney coaxed her into backing for a friend of Looney’s--whom Givens never met and now doubts ever existed. The loans, one for $54,050 and the other for $43,381, were supposed to be for forklifts that were being used by a “partner” in Ventura, Givens said.

Most of the time, though, Looney simply offered $5,000 to “borrow” a friend’s good credit for a loan on equipment for someone who couldn’t get a loan on his own. She also offered $1,000 for any referral sent her way.

Givens, for instance, referred two of her other clients, Los Angeles County Sheriff’s Deputy Thomas Redd and Sgt. Stephen Q. Finley. In turn, Redd referred other police officers.

Now Givens, Redd, Finley and scores of others are defendants in civil lawsuits brought by the bank and the other lenders to recover loan proceeds.

“Everyone I know and talked to went into this in good faith assuming that everything was legitimate and the equipment existed,” Redd said. “We all feel like victims.”

Finley, an investigator, said that he thought he was getting into some kind of investment. “I’m not a businessman,” he said. “I’ve been a police officer for 24 years, but I’m not a white-collar crime expert. This whole thing baffles me.”

Milo Burdick, who runs a Santa Fe Springs trucking company, said he has known Looney for more than eight years and has purchased trucks and trailers through her previously. “I had no idea anything crazy was going on,” he said.

But for lender New Era’s general counsel, Ken Drost, “borrowing” someone’s credit to deceive a bank about the true borrower’s credit is essentially bank fraud. “I’m surprised so many people are involved,” he said. “Some police officers, some accountants, some upstanding individuals who ought to know better.”

Even Raus’ attorney Charles Duff, who also represents Charles Rau in connection with the criminal investigation, called such “credit borrowing” bank fraud. What he doesn’t understand, he said, is how the scheme could go on for so long without the bank knowing about it.

THE BANKERS

Mark Heipler, an Oxnard lawyer, represents about 60% of the lessees sued by the bank and other lenders. He promises to file a suit in January on behalf of his clients against Bank of Newport, Sonora and others. The bank especially, he asserts, was beyond negligent. Someone on the inside had to be in on the fraud--or incredibly stupid, he contends.

“The Bank of Newport had about $12 million in lease-loans outstanding, and no one ever verified the existence of this equipment,” Heipler said. “If they had done their duty, they wouldn’t be out any money and all these people wouldn’t have their financial future in jeopardy.”

In depositions Heipler took of former bank employees, he drew out the fact that the Raus regularly gave gifts to Emil S. (Neal) Avellar, head of the bank’s leasing division, and Carolyn Sidejas, his assistant who has worked with him in various jobs for the past 25 years and now lives with him as well in Newport Beach.

Avellar and Sidejas acknowledged in depositions that they exchanged Christmas gifts with the Raus and received birthday gifts from them. The gifts the bankers received included jewelry and clothes. The Raus also paid for the bankers’ lodging for two nights at La Carrera Classic car race last year in Ensenada, Mexico. Federal law prohibits bankers from receiving gifts worth more than $25 from customers.

In addition, Avellar said in his deposition that he personally loaned $10,000 to a Charles Rau company last year at a 40% interest rate and received only one interest payment for $375. Sidejas testified in hers that she did a bit better with her $10,000 investment in another Rau company, getting about $3,000 at a 40% interest rate over eight months.

Both Avellar and Sidejas said in their depositions that they didn’t think the Raus were trying to buy them off and that neither the gifts nor the investments affected their ability to evaluate, audit or review Sonora files.

Such gifts and investments so far have not caused the bank’s insurance company to believe that there was any insider fraud. The insurer, which covers losses caused by employee embezzlement or fraud, is still reviewing the case, bank regulators said.

Still, they were all friends. Asked if she felt betrayed by Lucy Looney, Sidejas said, “I feel spit on.”

The bankers said they had trusted Looney and her husband. Though they didn’t see every piece of equipment that was supposed to have been purchased and leased out, they said they called every lessee to ask if they had the equipment. They refused to approve the bank’s purchase of any leases--essentially fund any loans--unless the lessees told them the equipment was in their possession and working properly.

When problems arose, such as missed monthly payments, the lessees continued to play along, telling bankers who called that they would get the payments in, Sidejas said in her deposition.

“I believe that they signed leases with Sonora knowing that they didn’t have equipment and knowing that when we talked to them, they would be lying to us,” she said in her deposition. “We have, of course, sat and said, ‘Why, why, why would the Raus do this?’ And I have to think, ‘Why, why would the lessees do this?’ ”

WHY THEY DO IT

Criminologists and sociologists said they aren’t surprised that the average citizen lies or cheats.

“From my own perspective, I see it as normal,” said Paul Jesilow, a UC Irvine associate professor of criminology. “Most of us do something illegal in a day and rationalize it, saying it wasn’t illegal.”

With a complex economy and a natural dislike of institutions, especially banks, people also can be won over easily by a con artist who provides a convincing hard-luck story to obtain the help needed to break the law, the professors said.

It also makes it easier to go along if people feel they can get away with it and if other people are involved in questionable activity, said Thomas Gabor, a criminology professor at the University of Ottawa.

“If others are involved and they know them, they feel in good company and their behavior becomes socially acceptable,” said Gabor, whose book “Everybody Does It: Crime by the Public” was published in June. “Few people want to see themselves as different or deviant.”

The major deterrent, Gabor said, is the certainty of facing charges, which research shows acts as a greater deterrent than the certainty of punishment.

Helping someone in ill health or in financial trouble also provides people with a strong motive to bend the law, said Ron Fagan, a Pepperdine University sociology professor.

“Most of these people knew or should have known something fishy was going on,” he said.

Bank of Newport’s Long Slide

Lease-loans to the Sonora Group were a final blow to struggling Bank of Newport. Long troubled with delinquent and non-paying loans, the bank saw its ratio of bad loans to total loans grow beyond the 3% level acceptable to regulators.

Bad Loans* 1994**: $5.3 million

Bad loans as % of total loans 1994**: 4.57%

Capital Crusher

The bank’s increasing losses slowly eroded its capital--its final cushion against losses. And its ratio of capital to assets dropped below the 6.5% ordered by regulators.

Earnings* 1994**: $-9.8

Capital ratio 1994**: 0.77%

Assets* 1994**: 167.8

*In millions

**For first six months; does not include Sonora losses.

Sources: Findley Reports; Sheshunoff Information Services, Austin, Tex.; Researched by JAMES S. GRANELLI / Los Angeles Times