Knapp’s Sentence Thrown Out by Appeals Court : Crime: But 1993 conviction of financier and two others for fraudulently obtaining $15-million loan is upheld.

A federal appeals court Monday threw out a 6 1/2-year prison sentence imposed on Los Angeles financier Charles W. Knapp for defrauding an Arizona thrift, saying it was too harsh a penalty in light of the evidence. The court ordered him to be resentenced.

But the U.S. 9th Circuit Court of Appeals in Pasadena upheld the 1993 convictions of Knapp and two other men for helping Knapp’s company, Trafalgar Holdings, fraudulently obtain a $15-million loan from the Phoenix-based thrift, Western Savings & Loan Assn., in 1988. The thrift collapsed from bad loans the following year.

The higher court also left intact an order by the lower U.S. District Court that the 61-year-old Knapp pay $11 million in restitution--a sum prosecutors claimed was the amount that Western Savings lost on the Knapp loan.

Assistant U.S. Atty. David Schindler, who helped prosecute the case before a federal jury in Los Angeles, said that if the lower court abides by the appellate court’s guidelines, Knapp’s sentence will be reduced by “a matter of months.”

The ruling indicates that Knapp, who has been free on bail pending his appeal, is still “going to serve several years in prison,” Schindler said, adding, “The 9th Circuit . . . distilled what was the heart of this case.”

Knapp referred inquiries to his lawyer, John Bartko, who said he had not yet studied the decision and had no comment except that Knapp would “pursue all appropriate remedies” in appealing the case.

Knapp, a maverick money man who in the early 1980s headed Financial Corp. of America, formerly the nation’s largest S&L; holding company, was convicted in the Western Savings case after prosecutors alleged that he qualified for the unsecured loan by concocting inflated financial statements. They also charged that Knapp and Trafalgar were “flat-out broke” when Knapp got the loan.

The two other men convicted in the case were Anthony C. Sarno, who received a 5 1/4-year sentence, and Joseph V. Nash, who received five years.

The appeals court said Sarno should also be resentenced on the same grounds as Knapp, because his prison term was also too harsh.

The appeals court said that part of the sentences imposed on Knapp and Sarno reflected the lower court’s judgment that their actions had substantially increased the risk that Western Savings would fail.

However, Western failed for a multitude of bad loans and other problems in addition to the bad Knapp loan, and therefore the Knapp and Sarno sentences were too harsh, the higher court ruled.

Nash, who acted as his own lawyer, will also be resentenced because he was not given adequate opportunity to speak in court during his sentencing hearing, the appeals court ruled.