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'Looted, Pillaged' : Inside Jobs: New War on Bank Fraud

January 03, 1988|TOM FURLONG and DOUGLAS FRANTZ | Times Staff Writers

CHICAGO — As Judge Ann C. Williams prepared to sentence Daniel Walker in federal court here late one afternoon last fall, it was clear that she had little sympathy for the San Diego-bred son of a sailor who rose to become governor of Illinois in 1973.

The Walker in court that Nov. 19 was a puffy-faced and broken figure who had pleaded guilty to loan fraud and perjury in connection with his ownership and operation of First American Savings & Loan in suburban Oak Brook.

"It's clear to this court . . . ," the judge told the 65-year-old former governor, "that you, Mr. Walker, thought this bank was your own personal piggy bank to bail you out whenever there was a problem to be solved or you needed money to keep your businesses afloat."

Then, Williams stung the erstwhile politician, who ran for governor as a liberal reformer in the Democratic Party, with a seven-year jail term and ordered him to pay $231,609 in restitution to First American Savings.

Walker personifies a new breed of lenders who are feeling the pain of stepped-up U.S. government efforts--belated efforts, some say--to prosecute an unprecedented wave of insider fraud that has burrowed its way like a tapeworm into the nation's banking system.

From Los Angeles and Chicago to Cheyenne and Dallas, criminal activity in bank executive suites has begun to get center-stage treatment. It now rates equal billing with defense industry and health-care rip-offs as a top priority in the fraud section of the U.S. Justice Department.

"We've had an unprecedented proliferation of these kinds of cases," said Terree A. Bowers, head of the fraud section for the U.S. attorney's office in Los Angeles.

Law enforcement officials regard these new-style bankers as robbers who ruin the financial institutions they operate through reckless lending and insider dealing. This kind of behavior has "looted and pillaged" the savings and loan industry, according to Edwin J. Gray, a former chief federal regulator of the industry.

These are "crimes of greed," said Anton R. Valukas, the U.S. attorney here. "Some person is sitting there making a calculation of the likelihood of getting caught and of going to jail."

Unlike simple embezzlements where employees walk off with a bank's funds, the modern-day rip-offs are often sophisticated, hard-to-trace transactions committed by high-level insiders and their outside business associates, prosecutors and bank regulators say.

The wrongdoings run the gamut from falsification of financial reports to reimbursement of exorbitant business expenses to a particularly damaging lending practice known as the "land flip." These practices have allowed some lenders to live in regal style on fabulous pay packages even as their financial institutions are going down the drain.

Prosecutors say the wave of bank fraud reflects the same general decline of honesty among business executives that contributed to the insider-trading scandals on Wall Street. "It's a deficit of ethics," said Richard A. Stacy, chief federal prosecutor in Wyoming.

The trouble first surfaced in 1984 and 1985 after deregulation of the banking system in the early 1980s expanded the way in which savings and loan firms could invest their money. The legislation took many thrifts from the safe world of single-family mortgage lending into the treacherous realm of real estate development.

Only in recent months, though, have prosecutors scored noteworthy victories in the thrift industry that they hope will deter future criminal behavior.

In addition to the Walker conviction, scores of indictments and convictions have been obtained against people with ties to Empire Savings in Texas and Centennial Savings in Northern California. The two S&Ls were among the more egregiously run financial institutions in the nation until regulators seized them.

Fraud Role in Failures

The House Government Operations Committee's subcommittee on commerce, consumer and monetary affairs said fraud and misconduct played a role in half the 210 S&L failures of the last 3 1/2 years.

What's more, a staff study said, fraudulent misconduct has cost all federal deposit insurance funds at least $4.5 billion since 1984. The actual number is "probably much more," the study added.

The Federal Deposit Insurance Corp., which insures savings at commercial banks, estimates that the failures of nearly 100 banks between 1985 and the middle of 1987 showed evidence of fraud or insider abuse. The FDIC estimated the losses from these failures at $676 million.

Even the insurance fund for credit unions is not immune. The National Credit Union Administration estimates that insider abuse caused nearly $44 million in losses at failed or problem credit unions in recent years.

So pervasive has the problem become that it has overloaded the criminal justice system with cases that are both numerous and complex. "It was a crisis for which we were unprepared," prosecutor Valukas said in an interview.

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