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Tangled Anatomy of Massive Fraud Case : 'Investment Program' May Cost B of A, Several Others More Than $500 Million

April 07, 1985|JOHN M. BRODER | Times Staff Writer

For a mere $5,000, the pitch went, you too could get a piece of the action in Sun Belt real estate. Act now. Opportunities are limited.

The "Share the Wealth Real Estate Program," designed by a small group of Los Angeles area businessmen, was supposed to attract 3,000 individual investors looking for quick profits and big tax write-offs from Southern California and Texas properties.

Instead, participants and investigators allege in court documents and interviews, the 1981 offering was prelude to a massive fraud that ultimately may cost Bank of America and dozens of smaller institutions more than $500 million and is emerging as one of the biggest financial scandals in U.S. history.

The collapse of the investment program last year and B of A's pained admission that it lost $95 million in the deal raised the curtain on a drama that authorities say features three convicted felons, money laundering and offshore havens, Las Vegas connections, "inducements" to bank employees, a Runyonesque character selling diamond rings out of his pocket at a birthday party and an insurance agent who may or may not be dead.

As in many frauds, the victims are themselves partly to blame. Those who lost money were not unsophisticated dupes, but rather bankers and investors who apparently overreached in efforts to further their careers or show dramatic return on investments. They trusted the wrong people, neglected to inspect collateral, ignored warnings and got burned in the volatile California and Texas real estate markets.

Many Banks Affected

The Bank of America and related cases already have touched more than three dozen banks and thrifts across the country, spawned at least 20 lawsuits and led to the creation of an investigative task force composed of the FBI and federal, state and local prosecutors. Sources say they are months away from untangling the elaborate web of alleged conspiracy and presenting a case to a federal grand jury.

The case bears some notable similarities to the recent scandal that rocked the Ohio savings and loan industry when ESM Group Inc., a Florida government securities firm, went into bankruptcy, taking Home State Savings Bank, a big Cincinnati thrift, down with it. In both cases, analysts say, financial institutions seeking high yields invested millions of dollars through distant brokers without adequate scrutiny of the principals and the collateral involved.

Bank of America, the nation's largest bank, took the biggest loss in the mortgage deal when it discovered that several employees had committed the bank to the role of trustee and escrow agent for funds that other banks had invested in pools of residential mortgages. When the pools turned out to be based on grossly overvalued properties and backed by worthless insurance bonds, the bank said, it repaid the investors $133 million for interests in property worth no more than $38 million.

Promise of Secrecy

In exchange for the repayment, B of A extracted from the investors a promise of secrecy and a release from future legal liability.

Court suits filed by Bank of America and other victims of the alleged fraud say the losses resulted from an intricate set of transactions involving inflated appraisals, false loans among related parties, multiple loans on single pieces of property, mortgage-guarantee bonds written by companies without the ability to pay and ultimate default on the loans and the bonds. Bank of America described the deals as a "massive fraud" and an attorney representing several thrifts that stand to lose $9.4 million called it a "classic pyramid scheme."

But the alleged fraud extends far beyond the big San Francisco-based bank, investigators say. They are tracing hundreds of millions of dollars in apparently fraudulent mortgage and mortgage-insurance paper and poring over truckloads of documents seized from interrelated companies that did business under dozens of assumed names.

"Bank of America has already taken its earnings hit, but clearly this goes beyond Bank of America," said Derrald Johnson, head of an internal bank investigative team that has numbered as many as 100 persons.

"If it were only the $95 million the bank reserved for its own loss exposure, this wouldn't be one of the biggest financial frauds of all time, but other institutions have also been impacted. The question is just how much bigger it is."

In its 1984 annual report, the bank apologized to shareholders for the losses, calling its participation in the alleged fraud "painful and embarrassing."

The bank last month fired five employees, accusing them in state court of gross negligence for the way they handled the investment funds. It also is seeking $385 million from three firms that it claims conspired to cheat it through violations of federal securities, fraud and racketeering laws.

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