David Paul, Others Allege
Feds Broke S&L Promises
By RICHARD B. SCHMITT
Staff Reporter of THE WALL STREET JOURNAL
Ever since federal regulators took away his savings-and-loan a few years
ago, David Paul hasn't had a very wonderful life.
His wife dumped him for a hotel magnate. His $9 million island mansion
and yacht, the "Grand Cru," were liquidated to pay creditors. He was
sued, over and over again, and fined for lying to regulators and defrauding
investors.
But now things may be looking up. Back in court, Mr. Paul is suing the
U.S. government, alleging that it illegally seized his thrift, the former
CenTrust Savings Bank of Miami, and cost him a pile of money. This
summer, his case is set to go to trial in federal court in Washington,
even as
he is serving an 11-year sentence in federal prison for racketeering in
connection with CenTrust's demise, which cost taxpayers a pile of money
-- $1.4 billion.
And, to the outrage of the many prosecutors,
regulators and others who regard Mr. Paul as a
prototypical 1980s S&L rogue, some legal experts
think he stands a pretty good shot at winning.
A decade after Congress bailed out bankrupt thrifts
to the tune of more than $480 billion (including
interest), a new S&L mess is emerging, and it is
stranger than ever. This time, the thrift operators
are the ones looking to clean up.
The thrifts claim the government broke promises
made to them when they agreed to acquire a
number of insolvent institutions in the 1980s. At the time, the government
didn't have the money to liquidate the sick thrifts and pay off insured
depositors. So it offered prospective buyers a profusion of tax breaks
and
accounting gimmicks that enabled them to keep the ailing institutions afloat.
In essence, the government enabled the thrifts to pretend to have capital
they didn't have.
Industry losses, of course, only increased, and the fictional capital and
other tricks came to be seen as one reason that the thrift disaster got
so out
of hand. As part of the mammoth thrift rescue of 1989, Congress did away
with the pretend capital. Many of the thrifts that had benefited from it
dropped dead or ran up huge losses. Thrift executives howled that, by
changing the rules, the government had ruined their institutions. In a
1996
test case, the U.S. Supreme Court ruled that the government in fact had
breached contracts with the thrifts, triggering a litigation explosion.
Friday, payback may begin. Federal Judge Loren Smith, of the U.S. Court
of Federal Claims, is expected to hand down the first damage award in one
of the suits. The case was filed by Glendale Federal Bank, now part of
Golden State Bancorp, a California thrift controlled by Ronald Perelman.
Already, Judge Smith has hinted that he intends to make a substantial
award, and has criticized the government's arguments for minimal or no
damages as having "little or no basis in law, fact or logic."
Glendale, which barely staved off insolvency in the early 1990s, has asked
for up to $2 billion. Ultimately, some experts have estimated that the
suits
may add a total of $30 billion to the final bill for bailing out bankrupt
thrifts.
That's galling enough to many veterans of the thrift battles. But what
rankles
them further is that, of the 125 or so suits filed, a third were brought
by
people connected with institutions that failed; those institutions cost
taxpayers $8 billion to liquidate, federal bank records show. Beyond that,
a number of the people who are now plaintiffs were sued by regulators for
mismanagement or fraud. Some officials at the defunct thrifts pressing
claims were, like Mr. Paul, convicted and sentenced to jail.
For instance, the parent company of City Federal Savings Bank has sued.
The Bedminster, N.J., thrift collapsed in part because of generous lending
on such projects as a grandiose multi-use development next to some oil
refineries. One of its executives was convicted and jailed for his role
in a
loan-kickback scheme that at the time was called the worst in state history.
Regulators still have a suit pending against City Federal's parent, alleging
mismanagement. City Federal's failure cost taxpayers roughly $1.7 billion.
Another plaintiff is James Fail. In 1990, the Arizona insurance executive
was the focus of a U.S. Senate investigation into whether he adequately
disclosed the criminal history of one of his companies when he applied
to
purchase a bunch of the failing thrifts in 1988. The government sued
alleging fraud, but Mr. Fail prevailed in 1995. Last month, the claims
court
held that the government improperly backed out of deals it cut with him
when he acquired his ailing thrifts. His institution didn't fail; his damages
trial
is coming up this summer.
"Those who picked up these failed savings-and-loans have truly had a
heyday, and they are continuing to have it," says Howard Metzenbaum,
former Ohio senator and S&L industry critic who is now chairman of
the
Consumer Federation of America. "The American taxpayer ought to wake
up every morning and cry all day long."
Lawyers for the thrifts say the courts can easily separate any damage done
by management from that done by the government, making sure their
clients are compensated only for the latter. "The thrifts were still harmed.
If
there were other problems ... we are not going to get that," says Rosemary
Stewart, a former thrift regulator. She now represents a trust controlled
by
the wealthy Hunt family of Dallas in its suit over the 1990 collapse of
Southwest Savings Association. Southwest's collapse cost taxpayers $556
million.
The Federal Deposit Insurance Corp., which helped pay for the cleanup,
is
also in court, trying to make sure that, if any money is awarded, it goes
to
pay off the costs regulators incurred in shutting down the insolvent thrifts.
The agency has attempted to kick out some of the investors from the suits,
but so far Judge Smith, a Reagan appointee who recently penned a
law-review article titled "The Morality of Regulation," has refused to
allow
it.
Figuring out what the thrifts should receive is a tricky calculation, even
in
cases of apparently healthy thrifts that were conservatively managed,
compared with some of their peers. Glendale, for instance, is seeking
hundreds of millions of dollars in "lost profits," citing as a major precedent
a
case involving the U.S. Forest Service in which an unhappy licensee sued
the government for pulling out of a deal to market rights to Smokey Bear.
The government asserts that the lost profits are overly speculative, and
contends that many of Glendale's problems were self-inflicted. At a hearing
last September, government lawyers questioned whether Glendale suffered
any damage at all, calling the thrift's case a "house of cards" and "madness."
Mr. Paul's claim to being a victim of the government also has some people
fuming. Mr. Paul got his start developing garden apartments. He acquired
a
stake in a moribund Florida thrift, Dade Savings & Loan, in 1983, and
got
some of the accounting sweeteners the government was handing out to
thrift buyers in those days. Dade became CenTrust, which grew into an $9
billion-asset enterprise and a symbol of S&L excess.
The thrift became a big customer of junk-bond guru Michael Milken and
briefly parked some of its bonds illegally with a branch of Bank of Credit
& Commerce International, the rogue bank that was convicted of
laundering drug money a few years back. Mr. Paul, the chief executive,
collected Old Masters and fitted the executive washroom with gold-plated
fixtures, no small achievement for a thrift that rarely had an operating
profit,
excluding securities gains.
In 1990, regulators seized CenTrust. Mr. Paul subsequently was convicted
of or pleaded guilty to 97 crimes, including putting the mayor of Miami
Beach on his office payroll to ensure favorable treatment of a variance
he
sought to build a dock for his boat. The FDIC later won a civil suit against
him for misapplying bank funds. All told, he personally owes Uncle Sam
about $65 million.
Today, in court papers, Mr. Paul claims he did taxpayers a major favor,
which has gone unrecognized, in acquiring the underwater Dade Savings.
He says the government would have spent more than $500 million to
liquidate the thrift had he not taken it on. At a minimum, he says, he
deserves the interest the government earned as a result of his forestalling
Dade's ultimate demise, an amount he variously estimates at between $200
million and $400 million.
The government says Mr. Paul isn't entitled to a penny. It says the stock
he
used to acquire Dade in the early 1980s was inflated or worthless, and
amounted to "fraud in the inducement" of the original deal, according to
court papers. In any event, it claims that he should be made to forfeit
rights
to any recovery because of his myriad admitted crimes.
In 1996, a U.S. district judge in Miami overseeing his criminal case held
that Mr. Paul couldn't keep any of the money he might recover from the
suit. But Mr. Paul's lawyers successfully argued to an appeals court that,
depending on the size of any award, confiscating the money could amount
to a prohibited "excessive fine" under the Eighth Amendment, so the issue
is up in the air.
The possibility that the government might now have to write a check to
Mr.
Paul is "outrageous," says Allan Sullivan, a former assistant U.S. attorney
who prosecuted Mr. Paul. "I can't imagine any scenario under which he
should be allowed to walk away with an additional dollar in his pocket."
Nonetheless, the jailed investor has put together a crack team, including
Thomas D. Allen, a defense lawyer best known for representing American
Airlines in suits stemming from a 1979 crash near Chicago's O'Hare
International Airport and auditors sued in connection with the collapse
of
Continental Illinois National Bank in the early 1980s. Mr. Paul has retained
as an expert a prominent economist from the Milken Institute, a Santa
Monica, Calif., think tank founded by the former junk-bond king; the
economist is prepared to testify that the government would actually have
made a profit on CenTrust's high-yield portfolio if it hadn't panicked
and
saturated the market.
Mr. Paul, 60 years old, currently resides in a federal prison camp in
Edgefield, S.C. By telephone, he declined to comment on his case. But his
troubles haven't cramped his ability to make it hard for the government
to
get at the money, should he win. He has assigned any proceeds from the
suit to two adult sons, his ex-wife and a bevy of lawyers for legal bills.
The
FDIC has gone to court in a separate case seeking to set aside all the
transfers as a "fraudulent conveyance" intended to avoid the fines and
penalties he already owes. A trial in that case is on for December.
Brian Bieber, a Coral Gables, Fla., lawyer for the former Mrs. Sandra
Paul, who subsequently married the owner of the fabled Fontainebleu
Hotel, says the assignment to his client was fair compensation for her
having used her own money to help fund his marathon legal proceedings
and being generally supportive during trying times. "There is no price
anyone can put on what a wife brings to a marriage," he says.
Mr. Allen, meanwhile, says Mr. Paul has been unjustly vilified. He says
that, despite his conviction and prison term, no court has found Mr. Paul
personally responsible for all the losses that CenTrust suffered, and that
the
fines he has been hit with are "a whale of a lot less" than the losses
Mr.
Paul suffered personally.
CenTrust's collapse "wasn't caused by David Paul," Mr. Allen says, adding
that the pending suit by his client is quite straightforward. "Our theory,"
he
says, "is based on the benefit to the government."