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$1.5-Billion Suit Filed in S&L's Failure : Thrifts: Former officials and borrowers at Western Savings & Loan face civil fraud and racketeering charges.

June 15, 1992|SUSAN SCHMIDT | WASHINGTON POST

WASHINGTON — The federal government has filed civil fraud and racketeering charges seeking more than $1.5 billion from officials and borrowers of the now-defunct Western Savings & Loan Assn. of Phoenix, a thrift that lent millions of dollars to finance desert parkways and planned communities that never got off the ground.

Lawyers for the Resolution Trust Corp., racing to meet a statute of limitations deadline, filed suit in Phoenix just minutes before midnight Saturday, three years to the day after the government shut Western down.

It is estimated that the failure of Western Savings, which had $6 billion in assets, will cost taxpayers $1.7 billion. The nation's most expensive thrift bailout involved Charles F. Keating Jr.'s Lincoln Savings & Loan of Irvine, with an estimated cost of $2.6 billion.

The collapse of much of the savings and loan industry three years ago, which is expected to cost taxpayers $500 billion with interest, has government lawyers scrambling to file suit against officers, directors and borrowers to try to recover money. The deadlines will be harder to meet because staff turmoil has embroiled the legal division of the agency, RTC sources said.

The Western Savings lawsuit, filed under the Racketeer-Influenced and Corrupt Organizations Act (RICO), alleged that Western officials engaged in "sham sales" of real estate investments held by the thrift to create the appearance of profits, hide losses and appear to comply with regulations.

The phony sales, knowingly entered into by the borrowers, allowed the S&L's officials to keep control of the thrift and continue to take large salaries and bonuses, the lawsuit alleged.

Those in control at Western, the government contended, were "attempting to realize extraordinary profits by gambling Western's assets on high-risk real estate deals, imprudent loans and high-risk futures and securities trading in violation of law."

Among those named in the Western suit were Gary H. Driggs, John D. Driggs and Don Driggs, members of a politically prominent Arizona family whose forebears founded Western in 1929.

John Driggs, who served as Western's chairman, is a former mayor of Phoenix. The Driggses and other Western insiders cashed out $10.4 million in stock options in 1986 and 1987, when Western barely met federal capital requirements, the government contends.

None of the Driggses could be reached for comment Sunday.

The suit also named several borrowers and the Phoenix law firm Beus, Gilbert & Morrill. Federal sources said many potential defendants have signed agreements with the government in the past few days and weeks allowing for an extension of the statute of limitations.

From March, 1987, through September, 1988, the suit alleges, Western officials maintained that the thrift had sold $184 million of the real estate it held, booking $49.8 million in profit and closing $380 million in loans relating to the sales.

"In fact, those sales were all shams, the reported profits were illusory and illegitimate, virtually all the loans are in default, and virtually all of the property purportedly sold to outsiders has been returned to Western and the RTC," the suit alleged.

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