State banking regulators closed a Los Angeles check-cashing business Friday after discovering that the firm was insolvent and could not honor an estimated 30,000 money orders issued mostly to low-income residents of South-Central Los Angeles.
An estimated $2.3 million paid for money orders by customers of the company, American Security Financial, disappeared and so the orders cannot be honored, state authorities said.
Holders of the money orders will have to file claims in an attempt to get a portion of their money back, state authorities said.
The money orders are often used to pay rent and utility bills by low-income families lacking a traditional checking account.
Initial indications are that fraud may have played a "significant role" in the failure of American Security Financial, according to a written statement by Howard Gould, the state superintendent of banks. Gould said the matter had been referred to the state attorney general's office.
The insolvency was uncovered during a routine audit by state banking examiners, authorities said. Several dozen money orders were discovered missing, and the company did not have enough cash to honor $2.3 million worth of outstanding money orders, the authorities said.
American Security Financial had its headquarters at 311 W. Manchester Ave. and also operated seven check-cashing operations in Watts and elsewhere in South-Central. State authorities identified the president of the firm as Jerome L. Schwartz and its secretary-treasurer as Tobie L. Schwartz. No addresses were available.
William R. Adams, an assistant deputy superintendent in the banking department, said no determination had yet been made about the number of customers affected, since some may hold more than one money order. He said the average amount of the money orders involved is around $65, but some may be as high as $600.
Such check-cashing operations, which are licensed by the state, also sell food stamps and bus passes and serve as what Adams called "poor man's banks."
Landlords and utilities that have received the money orders in payment will have to seek the money from their customers in other ways. However, Adams said banking authorities are working with utilities to set up a program that will allow customers to make up the debt in small installments to lessen the impact of the loss.
Gould, the bank superintendent, also asked landlords to give special consideration to renters who unknowingly used the money orders. He also said efforts are under way to open new outlets for food stamps to replace the closed offices.
Authorities asked holders of money orders issued by American Security Financial to telephone them with information. The banking department will handle telephone calls over the weekend at two numbers, 213-736-2577 and 213-736-2515. During normal weekday hours, calls should go to 800-622-0620.