SAN DIEGO — The trustee in charge of liquidating the fraud-infested J. David & Co. investment firm has threatened to sue First National Bank of San Diego for nearly $23 million for allegedly transferring funds improperly among various J. David bank accounts, the bank said Tuesday.
The contention is "totally without merit," said Malin Burnham, chairman of First National, which served as J. David's lead bank.
Accountants for trustee Louis Metzger have said in court that J. David investor funds were massively commingled and that money flowed in and out of various checking accounts at First National.
Bank officials and attorneys for Metzger have been negotiating a settlement of the case for weeks in closed-door talks coordinated by U.S. Magistrate Harry McCue, according to sources close to the case.
The basis for the settlement talks are four depositions of current and former bank officials taken by trustee attorneys. The examinations detail what sources close to the case maintain are possible violations of banking practices.
Those depositions were turned over to the U.S. attorney's office here after U.S. District Judge J. Lawrence Irving last month ordered the trustee to turn over all "documents of relevance" to federal prosecutors.
J. David & Co. attracted about 1,500 investors and $200 million with promises of annual returns of up to 40%. Actual investor losses totaled about $82 million.
The J. David bankruptcy estate claims it has lost about $22.6 million from the allegedly unauthorized transfers from the J. David Banking Co. Ltd. account at First National, Burnham said in a prepared statement.
However, bank officials maintain, First National records show that the net amount of funds transferred to the J. David Banking Co. Ltd. "actually exceeded the amount of funds allegedly transferred without proper authority . . . by approximately $8.9 million."
The bank announced the possible lawsuit because its public-company status requires such disclosure, officials said. Other sources close to the case expressed surprise that the bank would reveal a possible legal action that is under negotiation.
The bank's two top executives, Ed Cunningham and Ed Peterson, resigned earlier this year, although bank officials insisted that the J. David case had nothing to do with their departures.
Trustee Metzger would not discuss the details of either the settlement talks or First National's disclosure. "We believe . . . that there is merit to our case," he said Tuesday.
Rather than being deposited in J. David's supposed "bank" in the tiny Caribbean island of Montserrat, J. David investor funds "never left San Diego" but instead were deposited directly into various J. David checking accounts, trustee accountants have previously testified in court.
Both J. David (Jerry) Dominelli and his second-in-command, Nancy Hoover, withdrew money from some accounts they were not authorized to, trustee accountants have said.
In addition, The Times has examined copies of investor checks made out to one of the many J. David businesses but deposited into the account of another.
The bank was named a defendant 13 months ago in a lawsuit filed by former J. David investors, who alleged that bank officials knowingly participated in the La Jolla investment firm's fraudulent business practices.
The bank settled the lawsuit last September; in exchange, the bank provided accounting work for the former investors that "detailed the commingling and misallocations of investors' funds," according to Michael Aguirre, an attorney representing several former J. David investors.
Whether bank officials knew of J. David's "Ponzi scheme" was the basis for the investors' suit. An internal bank memo dated Dec. 20, 1983, revealed that Dominelli told First National bankers that his cash-flow problems would soon be solved because he was going to use new investor money to cover withdrawal requests from existing clients--activity typical of a Ponzi, or pyramid, scheme.
The memo noted that Dominelli was "unprepared" for an avalanche of fund withdrawal requests, which totaled about $4.5 million in December, 1983, alone.
Dominelli was sentenced in June to 20 years in federal prison after pleading guilty to three counts of mail and bankruptcy fraud and one count of income tax evasion.
The grand jury is continuing its investigation into the J. David case, according to Assistant U.S. Atty. Robert D. Rose, who until recently was the sole prosecutor in the federal case.
Another prosecutor, Gay Hugo, is now also working on the case.