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Government Must Pay in Ploy for Redwoods

U.S. owes $72 million for 'baseless' actions meant to force a financier to give up forestland.

August 25, 2005|Tim Reiterman and E. Scott Reckard | Times Staff Writers

SAN FRANCISCO — A judge in Houston has ordered the federal government to pay $72 million to a company controlled by financier Charles Hurwitz, after concluding that federal banking officials had filed baseless legal actions against Hurwitz at the behest of California environmentalists.

Likening the government's conduct to that of a "cosa nostra," U.S. District Judge Lynn N. Hughes said Tuesday that regulators had a hidden political agenda when they sued Hurwitz and Maxxam Inc. a decade ago over the failure of a Texas thrift.

The judge said the move was designed to force Hurwitz into giving up thousands of acres of California redwoods owned by Pacific Lumber Co., which Maxxam had acquired in a takeover.

Hurwitz was under fire because Pacific Lumber had been cutting old-growth redwoods at an accelerated rate in Humboldt County along the state's North Coast. Environmental groups urged some politicians and the Clinton administration to push for a lawsuit by the Federal Deposit Insurance Corp. that would set in motion a "debt for nature" deal.

Their hope was that the federal government would win a judgment large enough to pressure Hurwitz into turning the redwood forest over to the federal government.

In 1995, the FDIC filed suit and the Office of Thrift Supervision took an administrative action that blamed Hurwitz for the failure of United Savings Assn. of Texas. Together the agencies sought more than $1 billion.

But an administrative judge recommended dismissal of the charges in the thrift supervision case in 2001, and the next year the agency agreed to settle for $206,000.

In the meantime, the state and federal governments had made a $480-million deal for 7,500 acres of Pacific Lumber's oldest redwoods to create the new Headwaters Preserve.

Although the FDIC moved to drop its lawsuit, Hurwitz and Maxxam pursued a counterclaim to recoup legal costs.

"They will recover their costs because the record reveals corrupt individuals within a corrupt agency with corrupt influences on it," Judge Hughes ruled Tuesday.

In a statement, Hurwitz said, "I ... feel redeemed. This ruling puts to rest a very long process of defending ourselves against a government agency's erroneous claims."

But the FDIC said it would appeal Hughes' ruling, predicting that the agency would ultimately prevail.

"Judge Hughes has been overturned twice by the 5th Circuit in this case, and we are confident that history will repeat itself," the agency said in a statement read by spokesman David Barr.

The FDIC contended that the December 1988 failure of United Savings of Texas cost taxpayers $1.6 billion.

However, the agency didn't sue Hurwitz, the principal owner of the Houston-based thrift, until August 1995 because he had agreed to waive the statute of limitations while trying to negotiate a settlement.

Indeed, Barr said, it was Hurwitz who first suggested the idea of turning over the Headwaters property in return for the government's dropping its claims against him.

"Hurwitz approached the FDIC in 1994 about doing a 'debt for nature' swap," Barr said. "We told him on several instances that we were not interested in the trees, we were interested in recouping the losses for the U.S. taxpayers."

The judge's ruling, however, cited evidence indicating that the "debt for nature" idea originated with environmentalists -- not Hurwitz -- and that it was widely discussed as a legal strategy among several departments and in a meeting with then-Vice President Al Gore.

"The Clinton administration was promoting the swap," Hughes wrote. "People from the White House, Forest Service, Interior Department, [Office of Thrift Supervision], FDIC and the vice president's office were now part of the plan to bring actions against Hurwitz and Maxxam to wring the redwoods from them."

Gore could not be reached for comment.

Karen Pickett, of the 1,500-member Bay Area Coalition for Headwaters, defended the "debt for nature" proposal as an innovative, legitimate way to acquire an important environmental resource.

"The judge's language is portraying this poor corporate raider against the Goliath of public agencies whose responsibilities are to ferret out wrongdoing," she said. "It's incredible."

The FDIC has been at loggerheads with Hughes before in this case. In early 1998, the judge released the FDIC's so-called authority-to-sue memo -- a strategic and normally highly confidential document outlining its game plan for the litigation.

On Feb. 13, 1998, the FDIC took its protest to the U.S. 5th Circuit Court of Appeals, which ruled that Hughes should have kept the memo sealed, Barr said.

Two months later, he said, the judge again unsealed the strategy memo, and the agency again went to the appeals court, which again ordered the memo sealed.

Toward the end of his 131-page opinion, Hughes, who was appointed by President Reagan, excoriated the FDIC. "These people discarded the mantle of the American Republic for the cloak of a secret society of extortionists."

United Savings of Texas, which was seized by regulators in December 1988, was one of many U.S. thrifts that failed in the 1980s, a period when lawmakers deregulated the industry in hopes it could work itself out of a financial hole.

The strategy backfired, with the toll especially heavy in Texas and California, where deregulation went the farthest.

Reiterman reported from San Francisco and Reckard from Washington, D.C.

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