Examination Of The UFG-USAT Network
FDIC COMPLAINT NOTES
On January 18, 1991, a class action complaint was filed by the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC), against numerous persons and corporations involved in both the buying and issuance of junk bonds and involved in savings and loans.
Charles Hurwitz and the United Savings Association of Texas (USAT) (once the largest in Texas controlled by Hurwitz from late 1982 until late 1988 when it was seized by the Federal government), are mentioned in the suit thought Hurwitz is not named a defendant. The complaint alleges Hurwitz and Michael Milken, Drexel Burnham Lambert and other executives in Drexel, as well as other corporate figures engaged in a scheme to train S&L’s of cash to finance various takeovers.
The complaint tells how Drexel raised money for Hurwitz to buy United Financial Group, the holding company which owned 100% of United Savings. Drexel and Michael Milken together owned 8% of United. Hurwitz owned 23%. Hurwitz and Drexel were two largest stockholders in United during the takeover of Pacific Lumber.
United bought nearly $1.4 billion on Drexel issued junk bonds in companies involved in takeovers during 1985-1988. In turn Milken raised $1.8 billion for Hurwitz takeovers.
Hurwitz entered into secret agreements with Milken and others such as Golden Nugget casinos. Golden Nugget’s GNOC bought Hurwitz-issued junk bonds, funding the takeover of PL, and by these agreements United bought bonds for golden Nugget’s takeovers. This arrangement was repeated with other defendants such as Charles Keating, Columbia Savings and Loan.
United Savings Association of Texas (USAT) is named as one of a group of 6 S&L’s used in this manner now controlled by the FDIC.
This is not the end of Hurwitz’ exposure to suits and indictments regarding the takeover of PL. Knowledgeable sources consider this a first step by the FDIC, RTC and SEC in a continuing investigation.
Of those closely related to the takeover of PL – Milken, Boyd Jefferies, Ivan Boesky and Drexel have plead guilty to charges of fraud similar to their actions during the PL takeover. Hurwitz remains, as yet uncharged.
1. UFG-USAT History
United Financial Group has its roots in the formation of Southwestern Group Financial (Del) in 1970. SGF had 5 S&L subs including Abilene SA, which were merged into a single subsidiary, United Savings Association of Texas in 1978. The following year Kaneb Services acquired SGF in a merger.
SGF sought a buyer for its S&L sub at the same time that it expanded its acquisitions of smaller institutions with the mergers of World Savings, Parker Square, and Wharton County S&L’s into USAT during 1981. News accounts tell of a failed attempt to sell USAT to Daniel Ludwig in 1980.
In Late 1981, Kaneb changed the name of its S&L holding company to United Financial Group and distributed UFG stock to Kaneb’s shareholders as a
special dividend. Hurwitz-controlled Federated Development Co held Kaneb stock in its sub Federated Reinsurance Corp and therefore received its first UFG stock in this distribution. By February 1982, FDC-FRC reported owning 7.86% of UFG-USAT.
In June 1982, UFG-USAT announced the signing of a letter of intent to merge with First American Financial, Texas and its S&L sub Houston First American Savings. Media accounts cite Hurwitz as the engineer of this merger.
FAF, Tx was a subsidiary of PennCorp Financial, controlled by Milken intimate Carl Lindner through his American Financial Corp and by Lloyd Bentsen. Penn Corp had announced in February 1982 its intentions to merge into Associated Madison and American Can Corp both run by Gerald Tsai.
Prior to that merger a loan agreement was signed between FAF,Tx and PennCorp bringing $10 million in new capital into Houston First, and the promise of more millions to stabilize its cash flow. Shortly after this loan agreement PennCorp distributed FAF, Tx’s common stock to PennCorp’s stockholders as a special dividend as Kaneb had done with UFG-USAT stock only three months earlier. PennCorp maintained indirect control of 607,448 shares to satisfy a warrant for PennCorp stock held by AFC’s sub Great American IC.
In April 1982, FDC-FRC-MCOH filed a joint 13D with respect to UFG-USAT. In May, Drexel agreed to underwrite MCOH’s Zero(2007), completing the sale to Executive Life IC in July, netting some $13.5 million for MCOH. In August, MCOH lent funds to FDC-FRC to purchase UFG-USAT stock bringing their joint holdings to 23%. The UFG directors meeting in August saw Barry Munitz elected to the board and a unanimous agreement to merge with FAF, Tx signed in late August.
By October a plan to merge the subsidiaries USAT and Houston First was completed for FHLBB approval. In November FDC-FRC-MCOH began buying FAF, Tx shares followed in December by an agreement to merge UFG and FAF, Tx. The merger agreement was between FDC-FRC-MCOH and AFC and thus it can be presumed that FDC-FRC-MCOH controlled the destiny of UFG and AFC controlled the destiny of FAF, Tx. FDC-FRC-MCOH bought 60,200 shares of FAF on the open market from November 23, 1982 through March 4, 1983. On December 27, 1982, MCOH agreed to buy AFC’s warrants for 603,448 shares of FAF, Tx and did so on March 14, 1983. The actual merger occurred in April 1983.
a. Details Of The UFG-FAF, Tx Merger
The FAF, Tx shareholders, including FDC-FRC-MCOH, received 26.22% of UFG’s shares. These shareholders were PennCorp’s shareholders prior to PennCorp’s sale to Associated Madison et al. Therefore the old PennCorp shareholders, with the exception of those who sold their shares to Hurwitz or others, came to make up about a third of New UFG-USAT’s shareholders. FDC-FRC-MCOH tendered 746,998 shares of FAF, Tx and received, by the formula, 1 share of UFG for .7 shares of FAF, Tx.
FAF, Tx shareholders list:
|Name||FAF Shares %||UFG %||Post Merger|
|American Fin Corp||603,448||20.18||5.28|
|Barry H Sterling|
|Daniel J Di Sipio|
|Stephen a Silverman|
|Wayne C Winters|
|William W Lyon|
|Mary A Grigsby|
|Lloyd M Bentsen III|
|Louis B Susman|
A total of 2,092,000 shares of FAF, Tx were tendered, valued at $23,016,000. The post merger shareholders of the new UFG-USAT were FDC-FRC-MCOH at 20.85% and Union Oil Co of Ca at 3.71%.
The FAF, Tx Preferred holders, PennCorp sub Pennsylvania LIC held all 2500 shares of First American’s Series A Pfd. FA Series A controlled the vote of the board of FAF, Tx by ceding the power to the Series A holder to block the vote of the common shareholders. 275 shares of FA Series A were traded for 275 shares of UFG Series A Pfd and the remaining 2225 shares of FA Series A were traded for a UFG Senior Promissory Note with the principal amount of $13.35 million.
The FAF, Tx noteholders, PLIC also held a $9.5 million Sinking Fund Note which was converted to a second UFG Senior Promissory Note with a principal amount $9.5 million.
UFG also assumed two other loans. One for $10 million from PennCorp and the other for $2.3 million from PennCorp sub Mass Indemnity and LIC. As PennCorp merged into what eventually would become Primerica, PennCorp was composed of its prior insurance subsidiaries and thus the Pfd and UFG debt would accrue to Primerica.
b. Hurwitz’ Other Banking Experiences
Main Bank: Hurwitz served on the board of directors of the Bob Lanier controlled Main Bank prior to its sale to Connally and the BCCI figures Mahfouz and Pharaon in 1977. Lanier controlled San Jacinto (prior to its sale to Southmark), Fidelity Bank Houston, Port City Bank Houston, Pasadena S&L, Diran Center Savings, University S&L (which hired Connally after his bankruptcy, a sub of Entex Inc, Houston from may 1977 to December 31, 1985) and was a director of Center Savings.
Surety S&L: FDC made a bid in 1977 to purchase Surety when it had been seized from the control of Beebe associate Larry Parker. Hurwitz’ application to the FHLBB was denied because of a fraudulent presentation of the value of FDC’s distressed real estate offered as FDC’s equity in the takeover. This event sorely impressed the Bank Board which would, eleven years later, deny Maxxam’s offer to restructure UFG-USAT based upon Hurwitz’ untrustworthiness.
Security Capital-Ben Franklin SA: In 1981 Walter Mischer sells Ben Franklin SA to Security Capital Corp. FDC-FRC takes a large position in SCC and through 1982 attempts to engineer a takeover of SCC. It ends in a greenmailing in early 1982.
Public Service Co of New Mexico-Republic Savings Bank FSB: uncertain until further researched
Charter Bank: Charter is a Lanier bank whose directors include E Trine Starnes, Barry Munitz, and Andrew Alexander of Weingarten Realty Inc. The shareholders include Jim Bath who was a trustee for Mahfouz and associated with the CIA’s operations Atlantic Aviation, owned by Edward DuPont and Summit Aviation, owned by Richard C. DuPont. Another director of Charter was Aurelio Madrago of MCOR. Charter was formed from a 1978 merger with the former Republic NB.
2. Control Of UFG
Contemporaneous to the merger, Carl Lindner (then controlling FAF, Tx) and Saul Steinberg (then controlling Imperial and Gibraltar) were in conversations with Milken about how to use the newly de-regulated S&L’s to finance the expansion of corporate control by financing takeovers through the purchase of Junk Bonds. Milken had built strong associations with a number of insurance and savings associations holding companies. Lindner offered his insight into the manner of taking control of large corporations.
Since Milken was conferring with Hurwitz about the Zero(2007) simultaneous to the UFG stock purchases by Hurwitz’ entities and the preparation of the merger with Lindner’s FAF, Tx leading to the subsequent sale of AFC controlled FAF, Tx shares to Hurwitz, it is tempting to conclude that Milken and Hurwitz, together, built the UFG-FAF, Tx merger for purposes consistent with Milken’s plan.
a. The Tests For Control
If this analysis is correct, Hurwitz controlled the destiny of UFG-USAT in actual fact. Hurwitz, his directors and officers were the leaders of the transformation of UFG-USAT which was co-engineered by the direct and constant influence of Milken and Drexel. Hurwitz’ officers were in direct control of the investments in securities and real estate. The officers included ex-officers from First City NB, Jenard Gross and longtime Hurwitz investment operative Ronald Huebsch.
The FHLBB sets the rules regarding the definition of control which includes tests for stock ownership ratios, board control, and a broad test a bank examiner calls presumptive control.
1) FDC-FRC-MCOH’s FHLBB Applications Re: Control
Soon after FDC-FRC purchased its first shares of UFG-USAT in early 1982, it applied to the FHLBB to purchase more than 10% of UFG-USAT but required that FDC-FRC not be defined as having control of UFG-USAT. The application was rejected. The FHLBB changed its definition of control, increasing the minimum percentage of shares owned as a test for control from 10% to 25%. The time period suggests this was part of the Garn-St Germain Act signed into law mid-October 1982. Again in June 1983, FDC-FRC-MCOH applied to the FHLBB for permission to purchase more than 25% of UFG-USAT. One year later the FHLBB approved FDC-FRC-MCOH’s application with several conditions. The primary one being that FDC-FRC-MCOH would be responsible for maintaining the networth of USAT, pro-rata to FDC-FRC-MCOH’s stockholdings up to 50% and in its entirety if FDC-FRC-MCOH were to go above 50% ownership. MCOH’s Annual Reports tell us that starting in June 1984 MCOH went into negotiations with the FHLBB on the “Networth” issue. FDC-FRC-MCOH and their successor corporations never exceeded the 25% level of ownership. In October 1987 Hurwitz claimed to never have entered into the agreement with the FHLBB to maintain networth.
It is interesting to note that Drexel revealed its ownership of 7.2% of UFG-USAT only a few months after the FHLBB conditional approval of Hurwitz’ application to purchase more than 25% of UFG-USAT.
2) Control From The Merger
Terms of UFG Series A Pfd provide for the election of less than 40% or as few as 4 directors to the UFG board until the loans to UFG are less than $5 million.
Terms of UFG’s $13.35 million Senior Promissory Note to PLIC are for a payback of ten equal annual payments of $1.35 million starting on January 1, 1989. (Ironically this was the day after the FDIC seized USAT from UFG.)
Terms of the second Senior Promissory note to PLIC were for a payback of ten equal annual payments of $950,000 starting December 1, 1989.
Payment of the loans and the Pfd was controlled by the merger agreement to come only from UFG’s, the holding company, funds and not from USAT’s funds. This covenant necessitated one of two alternatives for UFG: earn funds from other assets, distinct from USAT or cause USAT to pay a dividend to UFG. USAT was the principal asset of its parent UFG. USAT had never paid a dividend to its parent.
3) Nu-West And Series B Pfd
Shortly after the UFG-FAF merger, Nu-west of Florida and UFG-USAT enter into a trade of UFG Series B Pfd, $700,000 in cash, $16 million in notes and the assumption of $2 million in debts for 7 tracts of land. One of the tracts was under a contract for sale contingent upon the sale to UFG-USAT. Nu-West had the right to name a number of directors in the event that UFG defaulted on the payment of dividends from the Series B Pfd. UFG defaulted following the seizure of USAT but N-West has not taken advantage of this power and instead is trying to force UFG into bankruptcy.
b. The Stockholding Test
In 1984 Castle & Cook in C&C v Hurwitz stated that Hurwitz was a control person of MCOH which in turn was a control person of UFG-USAT based upon stock ownership.
1) UFG Series C Pfd
UFG issues 755,000 shares of its Series C Convertible Pfd in June 1984. It is valued at $10,244,000 in March 1985. FDC-MCOH bought 726,526 shares at issuance representing 15% of UFG common upon conversion in June 1987. Series C was replaced (prior to its conversion date) by Series D in June 1987, which was replaced (prior to its conversion date) in June 1988 by Series E.
2) The MCOH-Drexel Option
In December 1985, Maxxam issued warrants for 250,000 shares of Maxxam common to Drexel with an exercise price of $15 per share. The alleged October dispute between Hurwitz and Milken regarding the number of warrants to be issued to Drexel resulted in the number being reduced from 500,000 to 250,000 for a difference of 250,000 shares of Maxxam common. The 250,000 warrants were valued by Maxxam at $906,000. One other change in the fees for the placement of the Zeros resulted in another difference amounting to a savings of $265,000 for Maxxam. The total difference was $1,171,000 in Hurwitz’ favor.
Hurwitz controlled 23.5% and Drexel held between 7-9.7% of United Financial Group with its subsidiary United Savings Association of Texas (UFG-USAT). In December 1985, MCOH bought a put-call option for 300,000 shares of UFG-USAT from Drexel. The price of the option was $683,000 in cash and a conversion price of $8.59 per share. The price of UFG common, on the day the option was purchased, was $6.50. The difference in price multiplied over 300,000 shares was $627,000. The total difference was $1,310,000 in Drexel’s favor.
The Maxxam warrants may never have been exercised. They can be traced through Maxxam.s public filings until June 30, 1990, but no public record of the owners or evidence of conversion has been found. Maxxam simply ceased to mention the warrants after the conversion date passed.
The UFG-USAT option, however, was exercised by Maxxam, on August 9, 1990, as was required by the option contract, when Drexel was in bankruptcy. The loss to Maxxam was about $2,500,000 (plus the cost of the option) since UFG-USAT common was nearly worthless. Of course, the FDIC had seized USAT by this time.
It is tempting to conclude that the UFG-USAT option and the Maxxam warrants are related by virtue of the timely balance of Drexel gain from the UFG-USAT option and Drexel loss from the reduction in the number of the warrants issued by Maxxam as a fee in the PL transaction.
3) UFG Stock Ownership In March 1986
Records show UFG stock held by
|Cede and Co (Trust)||43.02%|
Oddly Drexel is known to have held 9.7% in this era with MCOH holding and option for 3.67% from Drexel. With 43% in trust and thus in all probability held by non-voting shareholders, to control UFG requires 1/2 of the remaining 57% or 28.5%. From the above it is obvious that Hurwitz, Milken, Gross and Kozmetsky controlled UFG with Hurwitz controlling Kozmetsky and Gross.
Another interesting shareholder was William Ted Phillips (1.12%) of Phillip and Jordan, Knoxville, Tenn, who was indicted in 1988 for defrauding the US government on government contracts.
Considering all sources of stockholdings attributed to Hurwitz or Drexel the figures would be
% Common Total Total
12/31/85 /option /Conversion
FDC-MCOH 23.3 26.97 41.97
Drexel 9.67 6.0 6.0
Totals 33.0 33.0 47.97
c. The Directors Test: Post-merger UFG-USAT Directors
Hurwitz had hired Munitz, placed him on UFG’s board and tasked him to prevent Hurwitz from clearly and unarguably gaining control of UFG-USAT. To Munitz this meant continuing negotiations with the FHLBB and developing UFG-USAT’s internal decision-making structure and board membership to mask Hurwitz’ actual control.
Following the UFG-FAF merger the directors consisted of three groups with distinct characteristics.
The first group, the pre-merger UFG-USAT directors, were those directors who had survived the 1979 merger of SFG into Kaneb (none), those who survived the UFG-USAT spin-off from Kaneb (one) and those who survived from the first board formed after the spin-off (eight). This group, with the majority having served less than four months prior to the advent of Hurwitz, was leaderless, and had not developed strong working relationships.
The second group, the Hurwitz directors, were those associated with Hurwitz and who could be said to be under his control. FHLBB rules require 50% or more of the directors under a persons control before that person could be said to be a control person by this test. Hurwitz was careful to avoid establishing this type of control but succumbed in late 1987 when the exodus from the board overcame planning. The second group’s influence increased as it expanded its membership with the addition of the new officers to the board and as the first group suffered from attrition in late 1985. The second group formed the leadership group within UFG-USAT, controlling UFG’s Executive Committee and USAT’s Investment Department from their inception in 1984.
The third group, the PennCorp directors, were those associated to PennCorp, which, by virtue of its UFG Series A Pfd ownership, placed four directors on the board.
The directors present on the board following the merger were
1) Group One: Pre-merger UFG-USAT Directors
James R. Whately: the sole survivor from the Kaneb days, Whately was a director of Kaneb Services, joined the UFG-USAT board in 1979 and remained through at least 1992. He served on the Executive Committee.
C.E. Bentley: was the President of Abilene SA which was merged into USAT in late 1977. He joined the board in 1981, served as chair from 1983 until 1985 and as President and CEO in 1984 when Hurwitz replaced him in those roles. Bentley resigned when things were jumping into high gear in November 1985 and Hurwitz replaced him as Chair. He served on the Executive Committee.
B.D. Holt: was the CEO of B.D. Holt Co, a Texas distributor of Caterpillar equipment (Affinito sat on Caterpillar’s board) and a director of First Bank of Corpus Christie. He joined the board in 1983 and left with Bentley. In late 1984 FDC sold its sub FRC to Holt Corp.
T.C. Campbell: was a private investor and a director of the Bank of Commerce, Abilene. He joined the board in 1981 and resigned with Bentley.
Barry B. Putegnat: was the President of Model Laundry and Dry Cleaning Co. He joined the board in 1981 and left with Bentley.
L.L. Duckett: a lawyer and a 20% investor in an SA previously merged into USAT. He joined the board in 1981 and left with Hurwitz in 1988.
Edgar H. Keltner Jr.: a lawyer and director of Southland Royalty Co. He joined the board in 1981 and left with Hurwitz.
Charles A. LeMaistre, M.D.: a cancer specialist at the U of T and a director of Houston Natural Gas Corp. A well respected and connected doctor who joined the board in 1981 and left with Hurwitz.
James A. Coles: was the CEO of Imperial Corp of America and a director of TICOR Mortgage Insurance Co (TMIC). He joined the board in 1981, served as CEO and President in 1983, and left with Hurwitz.
Imperial Corp was controlled by Milken intimate Saul Steinberg who, in 1982, broke Imperial Corp into two operations Imperial and Gibraltar. Imperial became the focus of a takeover attempt by a reputed mob family from Chicago before control was established in 1984 by Milken through Columbia S&L. Gibraltar was sold to Hurwitz intimate J Livingston Kosberg who transformed it as Hurwitz was to transform USAT. TMIC a sub of TICOR was seized by the California Insurance Commissioner in 1987. TMIC insured $140 million in USAT loans. TMIC was liquidated.
2) Group Two: Hurwitz Directors
Charles Hurwitz: The Black Hat. Joined the board in 1983 as part of the UFG-FAF merger agreement. He had been placed on the FAF, Tx board following the agreement with AFC to merge UFG and FAF,Tx. He resigned in April 1988. He served as President and CEO in 1985 giving way to Jenard Gross in 1986. He was chair from Bentley’s resignation until his own resignation. He served on the Executive Committee directing the strategy for USAT’s transformation.
George Kozmetsky: He joined the board at the same time, in the same manner as Hurwitz, and left with him in 1987.
Barry A. Munitz, Phd.: The White Hat. Joined the board in 1982 when he was recruited away from the University of Houston to serve in many Hurwitz entities as the architect of internal corporate communications and liaison for governmental relations. He served as President of the Executive Committee from its inception until its demise in 1988. He resigned in 1992 to clear his path to become the Chancellor of the California State University System.
Lawrence J. Trevino: He was the Comptroller in 1983, served on the board in 1984 then he resigned.
James L. Pledger: a lawyer, now the Texas Bank Board Commissioner. He was on the board and Secretary to the board only in 1983 and rejoined UFG-USAT as VP and Secretary during 1985 and 1986.
Gerald R. Williams: He was recruited from the First City National Bank, Houston to serve on the board from 1984 through January 1986 and to serve the board in various capacities at USAT including Executive VP, CEO and President. He served on the Executive Committee. UFG loaned him $181,000. The First City NB’s connection to UFG-USAT and Hurwitz includes the recruitment of other USAT officers such as Michael R. Crow, Bruce F. Williams, who served as VP and Treasurer, and perhaps James R. Walker who was recruited from a large Texas bank’s holding company and served USAT in marketing and branch administration. First City was under Vinson-Elkins control, John Connally, Wlater Mischer and WRI’s Bernard Weingarten served on its board, Khalid bin Mahfouz was a large stockholder and Ahmed Mannai borrowed from First City to finance his holdings in UFG-USAT’s affiliate, Houstonian/Livingwell. Maxxam had a large investment in First City in 84 and 85 and MCO had an oil purchase agreement with First City. Williams served on the Executive Committee and as a director of the finance subs.
Michael R. Crow: recruited as was Williams from First City to serve on the board in 1984 and again in 1988. He also served as Senior VP and with Williams and Gross took his turn at CFO or CEO of USAT. Crow also borrowed funds from UFG. Crow served a director of the finance subs.
Jenard M. Gross: He was President of Gross Investments and resigned to become CEO and Chair of USAT in 1984. He also owned Gulf Coast S&L until 1984. He was a consultant to USAT from mid-1984, joined the board in 1985, replacing Williams, and served as UFG-USAT CEO and President until he was forced to resign under FHLBB pressure in November 1988. He also served with Hurwitz on the board of one of USAT’s major investments, the Texas and Florida based Weingarten Realty Inc. He left the UFG-USAT board with Hurwitz. After he left he restarted his business and began with business dealings involving Kosberg and Southmark. Gross had a loan from USAT in excess of $750,000. Gross served on the Executive Committee and as a director of the finance subs.
Arthur S. Berner: from Inexco Oil Co. He served as Senior VP, Corporate Counsel from 1985 to 1987 and Secretary to the board when he was a member in 1988. Berner served as a director in the finance subs.
Paul N. Schwartz: a longtime Hurwitz board member, he replaced Hurwitz on the board. He now serves on Hurwitz’ racetrack board in Houston.
3) Group Three: PennCorp Directors
Barton Borman: was the CEO of PennCorp and Chair of both FAF, Tx and PLIC. He joined the board in 1983 and left with Hurwitz.
Wayne C. Winters: was the President of FAF, Tx and previously with American S&LA. He joined the board in 1983 and left in 1986. He was not replaced by PennCorp.
Stephen R. Silverman: a lawyer. Joined the board in 1983 and left with Hurwitz.
Barry H. Sterling: a lawyer. Joined the board inn 1983 and left with Hurwitz.
d. The Presumptive Control Test
1) Formation Of The Executive Committee
In early 1985, UFG-USAT formed an Executive Committee to determine USAT’s restructuring and investment strategy. The original members are Hurwitz, Munitz, Bentley, Whatley and Williams. Two members of the Executive Committee resign within a few months of each other. Bentley resigns in November 1985 and Williams in January 1986. Munitz is President of the Committee for its entire history.
2) Development Of Strategy: The Transformation Of USAT
In 1984 UFG-USAT set upon a strategy of MBS, CMO, brokered CD’s sales, and Junk issuances to raise funds to buy Junk.
Drexel’s MBS sales to USAT began with the start of Drexel’s sales in the summer of 1984 when USAT bought $250 million in MBS’s and quickly increased to $6.5 Billion in 1986. In the Fall 1988 USAT lost $100 million in MBS’s.
Additional sales of $1 billion in CMO’s were sold in January 1986, $200 million more in March and $575 million more in April 1986 through USAT Mortgage Securities Inc.
Jumbo Certificates and Telemarketing, brokered CD program began in November 1984. On December 31, 1986 negotiated or brokered CD’s represented 47% of the deposits or $1.5 billion.
The effect of the strategy was to change the ratio of dollars spent on MBS’s and Corporate Securities from one out of every five dollars spent in 1984, to two out of three in 1985 and 3 out of 4 in 1986.
Junk Bonds represented 97.4% of all corporate securities held by USAT in 1986. It had a huge Junk Bond portfolio which was described by Louis Ranieri as “80% Bologna.” Ranieri described the investment decision-makers as wheeler-dealers.
The amounts USAT had involved in the trading of investment securities including junk bond, risk arbitrage, CMO’s and MBS’ are
1983 $ 507 million
1984 $ 1,395 million
1985 $ 6,069 million
1986 $18,922 million
1987 $15,768 million
when USAT came under restrictions for maintaining networth.
3) Parent Only -The Deals That Made The Dividend
At the end of 1985 UFG reported its income as $60 million and the sources of this income as $20 million borrowed, $32 million as a dividend from USAT and $8 million as what UFG calls “other.” The use of the funds are listed as $56 for Investment Securities and $1 million as payment for dividends on UFG’s Pfd stock.
The dividend from USAT was the first and only dividend USAT was to pay its parent UFG. USAT is made to declare the largest net gain in its history which it attributes to three events. The net is in excess of $50 million and its sources are the sale of Castle & Cook stock for a $7 million gain, the sale of $500 million in loans it received from the merger with FAF, Tx for a gain of $12.4 million and the sale of 20 branch offices to Independent American SA for a gain of $81.5 million. USAT also reported gains of $12.4 from the sale of MBS’s and $33.3 million from the dividends or profit from sales of investment securities.
The dividend provided capital from which UFG attempted to make a profit by which to pay its officers and employees, such as Barry Munitz; and by which to paydown its debt and to pay the dividends on its preferred stock. UFG’s debt and pfd dividends due could only come from its own funds and not those of USAT thus making the dividend a necessity if UFG was to meet its obligations.
a) Castle & Cook
b) Sale Of The loans
c) Branch Sales
In early 1984 UFG-USAT contracted with Salomon Brothers and Goldman Sachs to sell up to half of USAT’s 90 branches. In September 1984, UFG-USAT sold 20 branches to Independent American SA. The sale of 20 branches to IASA traded $647.9 million in deposits for $550.2 million in longterm notes payable. This sale built USAT’s networth to allow the issuance of a dividend to UFG and to allow the purchase of large amounts junk bonds. This sale is not listed in Goldman Sachs records as a sale by Goldman. The records of Salomon Brothers are not available to us on this issue.
From 1984 through 1988 USAT disclosed several other branch office sales either which were completed (with IASA and Guarentee Federal), or applied for and rejected by the FHLBB (with Sunbelt and North Park).
Home Savings Assoc bought 6 branches in San Antonio on December 31, 1985.
4) Formation Of Investment Department
The Investment Department was formed in July 1984 “to co-ordinate the investment of brokered CD proceeds in corporate securities…The emphasis will be on corporate bonds and Mortgage Backed Securities…and in addition the group plans to launch an investment advisory service for small savings and loan associations.”
Ron Huebsch was hired to be the VP of the Investment Department which served the Executive Committee.
Ron Huebsch left the Fairfield Fund in 1969 to join Hurwitz’ Summit Marketing & Research as Portfolio Manager. That year the Fairfield Fund was accused by the SEC of inside information abuses but claims to have been entrapped by the SEC. Huebsch left SMR in 1972, to join F S Smithers for one year. During that year the NYSE cited Smithers for Debt/Capital ratio violations and Smithers was fined $10,000. In 1974 Huebsch rejoined Hurwitz as Portfolio Manager at Summit Insurance Company of NY, a sub of SMR. He also served as a consultant to Federated Development Company. In 1975, he left SICONY as SICONY is declared insolvent due to high risk taking as cited in Lennon v SGI, SMR, FDC, Hurwitz and Oster. The allegations in this action included the breach of fiduciary responsibilities to SICONY and the fraudulent use of corporate funds causing SICONY to pay $2 million to its parent Summit Group Inc.
In 1976, Huebsch became a director of Federated Reinsurance Corp and served as Vice President of FRC from November 1977 forward. During the years 1980 through at least 1982 he was President of Federated Securities Ltd.
Glen Kassan, in a deposition claimed Huebsch worked for FDC during the PL takeover era 1984-1985 and acted as advisor to Maxxam’s investment managers. Kassan, when discussing his role in the PL purchases cites Hurwitz, Rosen and Huebsch, a member of FDC, as his advisors.
In 1987 Hurwitz “thinks” Huebsch is with FDC.
5) Formation Of Investment Committee
In early 1987 UFG-USAT reports that the investment portfolio managers are supervised by an investment committee. The committee was made up of senior management which would include Gross, Gerald Williams (until January 1986) Crow, Huebsch and Bruce Williams. The finance subs were run by Gross, Crow, Berner, Williams, James L. Wolfe and the various Wilmington Trust-to-Centrust interlocking directors. Gross was a real estate developer, the Williams’ and Crow were bankers, Berner was a lawyer and Wolfe a CPA. Leaves one to conclude that the decision-making resided with Hurwitz and Huebsch. The team, we are told, generated millions “in sales of government backed mortgages and corporate instruments…(which UFG-USAT) plans to increase…” Within the year the “market downturn” resulted in “a sharp decrease in profitability.”
6) Junk Issuances
In April 1985 the first junk issuance is made through a finance sub of USAT called USAT Finance a sub of United Financial Equities Inc. These are DARTS Pfd underwritten by Drexel.
Finance Subsidiaries, April 1985 USAT Finance formed and issues $75 million in DARTS (Dutch Auction Rate Securities, Pfd). In June USAT Finance, Finance II and Finance III begin selling junk securities through Drexel.
In November 1986, $200 million in Auction Market Pfd are sold through USAT Finance II and III.
7) USAT’s Junk Bond Investments
In 1984 UFG-USAT bought $5 million in Drexel junk.
The first known purchase is by United Houston Financial in April 1985. It bought $50 million in Picken’s Unocal Junk Bonds.
In 1985, UFG-USAT bought $280 millon in Drexel Junk, 56% of its total junk purchases for a total of $500 million in junk purchases. Another reference shows Drexel as underwriter for 37.5% and lead underwriter for 56% for a total of 93.5% of the junk purchases in 1985. USAT’s total in corporate securities is $363.2 million at the end of 1985 of which only $27.5 million are investment grade.
In 1986 it buys $688 million in Drexel Junk, 40% of the $1.750 Billion total. By the end of 1986 USAT claims to have made $75 million from the sale of MBS’ of which it bought $6.5 Billion during the year. It also claims to have earned $180 million from its investment securities which are 97% junk, with a total of $3.2 Billion bought that year. USAT booked a $118 million loss in 1986.
In 1987 it buys $321, 24% of the $1.338 Billion total. In 1988 it bought $58 million.
In January 1989, half of all the junk held by the 3000 insured thrifts are in the hands of 5 thrifts, all insolvent, all seized.
3. USAT’s Investments In The Texas Network
In all the 10K’s that USAT has filed, we find three major investment that they made during the period of time when Hurwitz controlled it. In 1984 and 1985, they made investments in Houstonian, later called Livingwell, Weingarten Realty, and Equus Transportation. We have never been able to locate Equus Transportation by a search of the sources available to us. We have extensive information about Weingarten Realty with a comparison of the accounting methods that were used in our contention to inflate the value of the Weingarten investment for the sake of, in 1984 especially, showing a large profit. A lot of activity occurred within USAT to make heavy investments in 1984, and all three of them are likely to show that these investments were overvalued for the sake of the dividend that they intended to pay themselves at the end of 1984 which in fact occurred.
The Weingarten investment discussion is already pretty much together. We can at least demonstrate the major questions that could be asked about that and someone who is more knowledgeable in accounting procedures and practices could tell us if it is stinky as it smells or whatever the term might be.
In any case, the investment in the Houstonian which we know much more about than we know about the Weingarten investment. The public record is much thicker on Houstonian/Livingwell. Some parts of it were subject newspaper accounts and so we have that information as well. Investment does not compare to the Weingarten in-vestment, at least to the appearances on the UFG books, that Houstonian/Livingwell investment is marked by a distinct lack of interest of USAT and the Board of Directors. Something that is unique. In the Weingarten investment, USAT placed two Board members of the USAT Board on the Weingarten Board. In that case, it was Charles Hurwitz and Genard Gross. From our knowledge of other investments that Hurwitz has made, he is like to have compatriots on the Board of Directors, such as Drexel Burnham Utility shares where Ezra Levine sat; we can think of the normal practices of Hurwitz has had when he took of MCO and Simplicity. We can see what the pattern is.
In this case, we should have seen someone from USAT sitting on the Board Directors for the size of investment that they have made, considering that others who had made smaller investments had positions on the Board of Directors. It is unique in that way.
In mid-August 1984 UFG-USAT completed a purchase of 36% of Weingarten Realty Inc. WRI, based in Houston was, according to UFG’s 1984 AR, “probably the finest shopping center developer in Texas & among the very best in the US…one of the Southwest’s largest shopping center developers.”
Jack Trotter, Douglas and Ken Schnitzer (Ken, a director of WRI and Capital National Bank), and Andrew Alexander (a director of Charter Bank, WRI and First City NB) are listed as among the major shareholders. Other board members include Stephen Lasher, Sen VP with Rotan Mosle Inc a sub of __________. First Exec’s CFO and a director is Russell Lasher. One of Foothill’s officers is a Lasher.
The Weingarten’s, Falik’s and Alexander’s are cousins and in-laws and are associated as directors with Texas Commerce Bank, Grenway Bank, First City NB, Houston Southwest Bank and “a NY investment banking firm.” Schnitzer shares voting power on shares held beneficially for various Weingartens, Faliks and Alexanders.
UFG gained its shares by purchasing them from various Falik’s, Weingarten’s and others in a private sale.
WEINGARTEN REALTY, INC. (WRI)
(From UFG Annual Report’s and 10-K’s)
August 31, 1984: 107200 shares for $45,088,680.
September 4, 1984 According to UFG’s 8-K, UFG bought 102,250 shares for $42.9 million in cash or $420 per share. According to WRI’s 10K83, “there is no active market..no information with respect to trading prices..is available.” Asets minus debts divided by number of outstanding shares equals $208.72 per share.
Mar. 13 In the Annual Report (AR) for 1984 from UFG we find WRI on page 3:
“…(T)he Company (UFG) purchased a 36% interest in (WRI), probably the finest shopping center developer in Texas & among
the very best in the US.” (Date purchase agreement: August 17, 1984)
And on page 4:
“United purchased 36% of the stk of WRI one of the Southwest’s largest shopping center developers. The two companies compliment each other, in that WRI has the expertise in land development and United has the
raw land & lending capabilities”
And on page 21;
“The company conducts real estate development activities either directly through investment in real property held for development or indirectly through investments in entities which, in turn, own land
for development and have responsibility for day to day development of the projects. The company’s investment in real estate at Dec. 31, 1984 was $170.7 million compared with $92.2 million at Dec. 31, 1983. The increase in real estate reflects a $45.0 million investment in WRI and new equity investments in various commercial and residential joint ventures. As of December 31, 1984, the company had investments in 80 real estate projects compared with 95 at December 31, 1983. The locations of these projects remain confined to the major markets in Texas, California, Florida and New Mexico.”
Under “Notes to consolidated Financial Statements” pg. 28,
sub-heading `Real Estate’:
“Real Estate…is carried at the lower of cost or estimated net realizable value.”
And under “Investments on Affiliate”, pg. 28:
“In 1984, United Financial Corporation (UFG) a wholly owned subsidiary of USAT purchased 35% of the outstanding common stock of WRI. The fair value of the equity in net assets exceeded the cost of the investment by $62,200,000 at the purchase date. Accordingly, the fair values of the identifiable assets were reduced by this negative goodwill amount. The investment in WRI is included in real estate…and is accounted for by the
On page 34:
“Investment in affiliate-WRI, $44,968,000 (1984)”
Jan. 31 In the AR for 1985 from UFG WRI is not as prominent. No mention specifically is made until page 25.
“Real estate operations increased $9.0 million to $16.2 million in 1985 due largely to an $8.1 million gain on the partial sale of WRI”
On page 33: subheading “Investments in Affiliate” to “Notes
to Consolidated Financial Statements”:
“In 1984, UFC..purchased 35.4% of the OTS of WRI and accounted for the investment in the equity method. During 1985, UFC reduced its investment to 19.8% by selling WRI common stock at a gain of $8,052,000 which is included in real estate operations. The investment was accounted for by the cost method in 1985 and continues to be classified as real estate.”
And page 39 in note “10. Real Estate”:
“Investment in Affiliate-WRI,
Feb. 06 In the UFG 10K86 things change significantly. WRI is first specifically referred to on page 37 under “Non-Interest Income”:
“Gain on sales of investment securities in 1986 included $30.8 million in gains on sale of corporate debt, $38.3 million of income on equity securities and $25.4 million of gains on sales of WRI common stock .”
“In 1985, the gain on sale of investment securities of $37.9 million included gains of $18.5 million on sales of corporate debt securities, $7.6 million of income on marketable equity securities and on $11.8 million gain on a partial sale of WRI common stock.”
The `Notes’ on page 46, sub-heading “Investment Securities” tells us:
Investments…are carried at cost.
No other mention is made. Balance sheets have been adjusted to reflect the transfer of the WRI investmentment from real estate to investment securities. Figures provided for the 1985 `partial sale’ of WRI show a gain of $8,052,000 in the AR-85 but a gain of $11.8 million in the 10-K-1986.
Note also the mathematical oddity in AR-85 wherein the WRI investment reduced from 35.4% to 19.8% yet the asset reduced from $44.968 million to $33.765 million.
Under the accounting methods which we are told are employed this reduction should be to $25.152 million or less.
Given the correction made in 10K-86 in gain on sale in 1985, then the altering of the classification of investment in 10K-86 from real estate to security investment, one wonders about this venture.
NOTE: WRI’s 1986 Annual Report dated March 1987 lists WRI Board of Directors as including Jenard Gross and C. Hurwitz from UFG.
Walter Mischer is an investor in a company that owns part of Houston’s Yellow Cab company.
What we see in the Houstonian/Livingwell investment is USAT trying to take advantage of a company that was going to grow rapidly so that the hope would be that the stock would rise whether it be some other kind of opportunities that would arise to increase the value of the equity that USAT held. For instance over a period of time, when USAT first purchased a position in the Houstonian to one that could have shown a rise was also during 1984 and the rise occurred was because of the conglomeration that was formed of fitness spas and other types of clubs were acquisition by Houstonian which was the purpose of the investment that USAT made with them in the first place.
The Houstonian represents, perhaps, a bold opportunity taken by USAT in order to take advantage of someone else’s cooking their books in advance of USAT cooking theirs so that the inflation that would be shown would not be attributable to USAT’s practices of USAT’s accountants but the practices of the Houstonian accountants which was Arthur Anderson.
The purpose of the investment of USAT was to show a profit in 1984 and maybe in 1985 when they changed their holdings in 1986 from preferred stock to common stock. That also allowed an opportunity to show a gain because there must have been some special deal. I suppose that if we looked closely at the 10K’s and other documents we would see that USAT got a very good price for its preferred shares in terms of common stock so that they would be able to show a gain. It should be noted that a year later these shares were pledged as collateral for a loan, which in itself an interesting item to speculate about. In any case, what we see here is USAT taking a position within the Houstonian which we could allege not show their urge to take advantage of the fraudulent situation that was going on within the Houstonian for the benefit of their own balance sheet.
Jim Bath,a Houston airplane company owner(Skyways International, Atlantic Aviation and Buffalo Airways); CIA asset; front man for rich Saudis; associated with Reza Pahlavi, the Shah’s son, and business partner with Lan Bentsen, the senator’s son, and George W. Bush, the President’s son; borrowed from Lamar Savings and Mainland Savings;a stockholder in Charter NB with Barry Munitz and others
Tom Fatjo, With Browning-Ferris until 1976, built Houstonian Hotel, served as director and Chair from 1983. Also a director of First Republic Bank of Fannin.
Bob Lanier,a longtime friend of Charles Hurwitz; owner of Main Bank in the 60’s prior to its sale to John Connally and BCCI figures Khalid bin Mahfouz and Gaith Pharaon; Hurwitz also a director of Main Bank; Lanier is a director and shareholder in Charter NB with Barry Munitz, E Trine Starnes, Jim Bath and Joe Russo.
Kenneth O Melby, from the first spa group purchase came to Houstonian with Watson and Hemelgran. Together they formed Paramount acceptance Corp. Melby is a significant stockholder in the Houstonian.
Roger Ramsey, came to Browning-Ferris from Consolidated Fibers. He left to join Fatjo in 1976. Consolidated was spun-off shortly afterward. He was a director of both Interfirst Bank of Fannin and First Republic Bank of Fannin.
Joe Russo,noted Houston developer, a Kappa Sigma alumnus; good friend of George Bush and Lloyd Bentsen; owned Ameriway Savings in 1983; minority owner of UPI until 1988; borrowed from Lamar Savings; managed and owned stock in the Houstonian, an important investment of Hurwitz’ USAT.
Kenneth and Douglas Schnitzer,Kenneth, a noted Houston developer;business associate of Walter Mischer;owned BancPlus Savings;allegedly associated with mobsters;both were shareholders in the Houstonian(along with Joe Russo and Ahmed Mannai among others) and Weingarten Realty(along with Jack Trotter and others), important investments of Hurwitz’ USAT.
Ellison Trine Starnes Jr,Houston con man and son of a famous evangelist;borrower at Mischer’s Allied Bank;second largest borrower at Silverado;associate of John Riddle;borrowed from Carroll Kelly’s Continental Savings;one of the biggest contributors to the Contras;a stockholder in Charter National Bank with Bob Lanier, James Bath, Barry Munitz (longtime Hurwitz crony) and Joe Russo.
Jack Trotter,Houston investor and close associate of Walter Mischer;headed Lloyd Bentsen’s trust; business partner of Jim Bath; an investor in Weingarten Realty with Hurwitz’ USAT and the Schnitzers. Trotter was the Secratary of Energy and his association with Mischer is as co-chair of Allied Bank.
Robert L Waters, built the Houstonian Estates condos.
Houstonian had a history from 1983 when it was first formed as a corporation until 1989 when it declared bankruptcy. During that period of time we find that the Houstonian becomes an investment of a middle eastern figure named Ahmed Mannai.
Houstonian’s name was changed to Livingwell in the middle of 1985 when it reincorporated itself from Texas into Delaware. The history of the Houstonian is roughly that it began as a real estate venture in three parts brought together as Houstonian, Inc. They went through a period of expansion during 1984 when they increased the number of investors, upping the holdings of the Mannai through Elstead Investment Company (EIC) and bringing in United Financial Corp. UFC and others were issued a special series of convertible prefferred stock in order to include their participation. After the inclusion of UFC as an investor, Houstonian ceased to being a real estate company. UFC deal included unloading on the UFC the remaining condominiums and undeveloped land that the Houstonian owned.
From then on there began a period of expansion in which it purchased other existing health club chains such as Elaine Powers, to increase the number of its clubs to 376 over the next two year period. The original purchases of clubs which began in 1984 were financed through EIC and UFC investments among other sources of capital. Then in 1985, the first junk bond issuance occurs in September, just a few months after the Houstonian reincorporated into Delaware as Livingwell. And also in 1986 and 1987 junk bond issuances through Drexel were made. In most cases this was to either expand by purchasing other chains of clubs or refinance existing debt.
The members of the Board of Directors of the Houstonian, Inc. are also of interest. These included several figures from another corporation called Browning Ferris Industries (BFI) which is a waste disposal corporation which now has entities all over the world. BFI was begun by Thomas J. Fatjo, Jr. He began BFI and expanded it over the years and a conglomerate fashion. He left abruptly int 1976 with a couple of other persons who worked closely with him. They formed the Board of Directors of Houstonian in 1983. He was busy building the partnerships which were later merged into the Houstonian, the Houstonian Estate condos, the Houstonian Hotel and the Livingwell Spas.
What was interesting is that BFI had offices in Saudi Arabia, Kuwait, and Qatar. Therefore, Fatjo was exposed to Mannai and to Milner, because when the partnerships begin, Milner and Mannai are an integral of them and Milner was included on the original Board of Directors of the Houstonian. So we can surmise then that one of the possibilities is that Thomas Fatjo from BFI meets with Mannai is for some reason no longer interested in being the head of BFI and with the Vice-Chairman, Roger A. Ramsey, leave BFI to begin the real estate development in Texas .
In 1976 Browning-Ferris admits spending $105-110 million illegally. Two months later Tom J Fatjo Jr and Roger A Ramsey resign as CEO, COB and Vice Chair to start their own company.
In the Spring 1976 the Kuwait Oil Compny announces a pipe line contract with Sante Fe International. Five years later rumors of a merger between the two are the subject of an insider trading scandal of grand proportions that surfaces in 1981 and in 1984 reveals the role of A. R. Mannai.
Oct. 18,1983 Houstonian, Inc. formed by Tom J. Fatjo, Jr., Roger A. Ramsey, Robert L. Waters. Fatjo and Ramsey are directors of the First Republic Bank of Fannin. Ramsey was a director of Interfirst Bank of Fannin. Fatjo, Ramsey and M. J. Berninger, all of Browning-Ferris had formed three joint ventures with developer Waters and Michael J Milner, a front man for Ahmed Mannai. The Houstonian was formed a conglomeration of these ventures. Robert L Waters may be related to Louis Waters a director of Browning-Ferris and Interfirst Bank of Fannin.
Dec. 31,1983, 5,080,000 shares issued.
Jan. 27,1984 320,000 warrants issued to investors who pledged assets for a $2 million in letters of credit from banks.
Mar. 17,1984 Fatjo (34.1%), Ramsey (24.8%), Waters (9.9%), Marcus (6.4%), Tierney (5.0%), Milner (4.0%), equals 77.8% or 4,199,446 shares of 5,080,00 issued and outstanding. Milner shares said to be 197,500 owned by Fitness
Apr. 06,1984 Houstonian/Livingwell issues S-1. Houstonian issues 2 million shares of common at $8.00 per share. Incidentally the WSJ told about Interfirst suffering from loans to oil concerns becoming non-performing. The Bass family held 5% of Interfirst.
During the summer Houstonian forms a national network of fitness clubs. In September the Houstonian announces the first of a series of purchases of fitness chians. Houstonian acquired 82 clubs in 23 corporations named Sap Lady, Spa Fitness and International Fitness Centers. The “Southeastern group” kept the same management. Houstonian paid with 1,250,000 shares of Houstonian stock and $10,098,190 in cash for the outstanding stock in the 23 corporations. The management was promised a bonus of $10,000,000 more if earnings goals were met. The principal shareholder in the 23 corporations was Ron Hemelgarn
On September 1984 Elstead Investment Co, a Texas corporation, filed a 13D with respect to The Houstonian Inc for the entire issue of 12.2% Series A Pf purchased with a $7.9 million loan from First City National Bank of Houston. Elstead also purchased $5.1 million in notes payable to an affiliate for $1.5 million in securities and $3.6 million in cash. Elstead Partners is a named defendant in FDIC v Milken.
In late September United Financial Corp., a subsidiary of United Savings Association of Texas (UFC) bought all 60,000 shares of the Series B Convertible Pf at $70 per share and warrants for 1,500,000 shares of common at $1.20 a warrant. This total is $6,000,100. This was part of a bigger deal between the Houstonian and USAT which totalled some $14 million. Besides the securities USAT bought 3.7 acres of undeveloped land and 17 of the Houstonian’s condo units with the proviso that the Houstonian would receive 50% of the net profits experienced by USAT from the sale of the condos. Interestingly enough Hurwitz, Kosberg and Bush reside in the Houstonian.
Simultaneously, A revolving credit loan the Houstonian had with Interfirst Banks of Dallas and Fannin was extended from $12.5 million to $30 million.
Nov. 13,1984 ELSTEAD files first amendment to its 13D. Mannai’s name had been hidden behind Milner’s and not disclosed as the sole controlling person of Elstead.
On September 16 the WSJ announced that Texas Commerce Bancshares, Allied Bank, First City, Interfirst, Merchantile Texas and RepublicBank were in trouble because of non-performing real estate loans.
Dec. 28,1984 Houstonian and ELSTEAD parent Criterion Capital merge.
Dec. 31,1984 7,559,067 shares outstanding.
Feb. 09,1985 ELSTEAD Investments, Ahmed Mannai files 13D 2nd Amendment for 41.2% of Houstonian. 2,421,438 shares directly, 55,302 (Mannai) indirectly; 987,500 of Pf. and 100,000 warrants.
Bad news continues from Interfirst which announced $400 million in losses from bad energy loans.
Houstonian announces more deals in acquiring two sets of fitness cnters. The first was unnamed in accounts but may have been 21st Century Health Spas. The cost was $15,500,000 in cash and 1,774,750 shares of Houstonian. The bonus for meeting earning goals was up to $5,729,959 in cash or stock worth up to $8,468,041.
The second group was Elaine Powers a subsidiary of Zilebr Ltd who was paid with 68,752 shares of Houstonian’s Series C Pf and a bonus of stock worth $15,000,000. Zilber also bought 50,000 shares of Series D Pf for $5 million and loaned $10 million for a nine month period which converted into a longterm loan and 3.25 million shares of common at $4. During the first quarter of 85 Houstonian shares were tradeed between 6 1/2 and 7 and 7 and 7 3/4 in the second quarter.
At the beginning of their acquisitions the Houstonian owned 13 clubs. By December 1985 it had bught 368 clubs, closed 15 and openned 23 more. The dynamic of fitness salons requires constant promtion and contract sales in order to provide adequate cash flow. To keep cash flow up requires the closing of clubs which are unprofiattable, the renovation of clubs and the openning of new clubs. The highest sales come from the openning or re-openning of clubs which afford a level of hopla needed to inspire the sale of two-year contracts. By early 1987 there were only 297 clubs and the 10K claimed claimed their ontentions to open 50 clubs in 1987 and another 100 in 1988.
Part of the financing for the xpansion of Livingwell involved a revolving credit line from a number of Texas banks. The original loan was from the InterFirst Bank of Fanin in 1984. It was extended in March 85 to $30 million and InterFirsrt Bank Dallas joined in. By the end of 1986 InterFirst, suffering from bad loans will merge with RepublicBank, upon whose Austin board Kosmetsky sat.
Apr. 04,1985 Tom Fatjo (COB), Ramsey (VC), Milner (Pres.),Verender (VP), Waters (CFO-Tr.) are directors.
The WSJ reported Interfirsts debt being downgraded due to bad loans.
Jul.,1985 Houstonian, Inc. (TX) reincorporates name to Livingwell, Inc. (Del).
in July Houstonian changed its incorporation from Texas to Delaware and changed its name to Livingwell, Inc. This re-incorporation also encompasses a merger and a re-organization of the numerous general partnerships holding the stock. It must have been frightening for everyone including in lawyers. Munitz claimed not tyo understand the Houstonian structure.
Sep.1985 Livingwell, Inc. issues $16.1 million in 12% Conv. Subs. (2005). Underwriters included Eppler, Guerin & Turner (See Spc.)
In September Livingwell issued its first series of junk bonds. The amount realized was $6 milllion and probably was used to pay the loan to Zilber.
In December USAT trades its 60,000 shares of Series C Pf for 60,000 shares of the Seies D and converts its 1,500,000 warrants for 1,000,000 shares of common at $4 per share. This brings USAT’s investment to a value of $18 million.
Livingwell posts a $3,121,000 profit for 85.
In March the WSJ reported that MCorp (now Main Banks parent), Interfirst and Texas Commerce join 60 other banks in admitting to failure to report large cash transactions since First NB of Boston a sub of Bank of Boston Corp plead guilty to money laundering.
Livingwell stock traded from 8 to 8 3/4 this quater.
Apr. 26,1986 ELSTEAD, Zilber & USAT convert Livingwell PF stock to common. USAT now holds 11.9% due to dilution. The Series D stock was converted for a total of 2,362,500 shares of common with $1,102,500 as additional consideration.
May 05,1986 Livingwell issues $32 million in 13.375% First Sen. Subs. (96) and $20 million 13.1256 Sen Subs (01) underwritten by Drexel. Actual issuance was @ 14.125% for First and 13.375% for Second. The First was indentured with MBank Houston (once Main Bank Houston) and the Seconds were indentured with Allied Bank. Allied Bank also received warrants for Livingwell stock. The buyers were Pacific Asset Holdings and Jessup and Lamont.
From April through July the news for Texas banks continued in a bad vein. Republic Bank sought more collateral from the embattled Hunt brothers accusing First City Bank of Houston of urging other banks not to lend to the brothers. The stressed RepublicBank was saved from insolvency by large securities investments bringing in new money.
First City itself was sufferring from the resignation of 11 of its 33 directors, including Connally, for insider and substandard loans. Interfirst put up larger loan reserves and forced the son of a director to put up collateral for an outstanding loan. This could have been Waters.
Livingwell lists its debts rom the acquisitions as Zilber, Melby, Hemelgran’ Newtowne enterprises, a sub of Benficial Capital, Beechmont Partnerships and Great Lakes Leasing.
Aug.,1986 Paramount Acceptance Corp. formed. The sources of funds included the $30 million credit line which was increased to $45 million in early 1987 and later colateralized with USAT’s Livingwell stock, a $30 million cash purchase of Paramount’s preferred by Livinwell, the contribution of 250,000 shares of Livingwell by Hemelgran, Watson and Melby for all the outstanding stock of Paramount. By the end of the year Paramount would buy the installment contracts from Livingwell for $86,575,000 in cash.
In December RepublicBancorp merges with Interfirst.
In 1986 Livingwell stock went from a second quarter high of 9 to a fourth quarter low of 3 1/4 as profits plummetted from the 1st quarter gain of $2,750,000 to a fourth quarter gain of $864,000.
Mar. 17,1987 Mannai filed 13D, 22.9% to 22.7%.
Apr,1987 Livingwell sells $20 million Ext. Senior notes (1987) to Pacific Asset Holdings, L.P., gives Drexel 125,000 shares of common (warrants).
In 1987 new infusions of capital are needed to staunch the mounting losses as the first quarter of 87 proved to be disastrous for Livingwell.
Apr. 15,1987 8K filed.
Apr. 27,1987 PAH files 13D, 0% to 16.7%.
Jun.,1987 Zilber, Mannai and USAT pledge Livingwell stock for a bank loan to form Livingwell affiliate Paramount Acceptance Corp. The banks were reelling from bad loans and scandals and demanded collateralization for Paramounts revolving credit loans and so USAT and the others used their Livingwell stock to satisfy this demand.
June 6 USAT owned 11.4% of Livingwell.
Jun. 081987 Ron Hemelgarn files 13D, 0% to 5.5%.
Jul. 17,1987 PAH files 13D, 15.9% to 13.3%.
Aug. 25,1987 PAH files 13D, 13.3% to 13/4%.
On October 2nd Livingwell announced that a large amount of their receivables were bad debts forcing losses all around. The failure of Livingwell and its finance affiliate to pay their indebtedness was also announced. Subsequent filings show the rats leaving the sinking ship.
Oct. 05,1987 H/L files 8K, other materially important event. Reveals that their installment contracts have been determined to be invalid and must be cancelled. These contracts were concentrated in a group of 50 of its 300 fitness clubs. Livingwell was so badly hurt that it did not file another 10K and bankrupcy soon followed.
Dec. 09,1987 H/L files 8K, other materially important event.
Dec. 30,1987 8K filed.
A March 88 edition of the WSJ told od a lawsuit filed against Paul Randall Watson for his misdeeds. Mannai took control of HFund which held Houstonian assets other than the spas and other affiliates.
At this timne Arthur Anderson was Livinwells accountants, a role they also played for First Republic Bank of Dallas and MCOH.
Nov. 10,1989 H/L files 8K, Bankruptcy/Receivership financial statements.
The method that Houstonian/Livingwell used in order to inflate their books comprised of two practices which have to be called fraudulent. The first was that they produced contracts that were invalid in the sense that ten of million of dollars of them may not even have had real buyers but had been faked. Actually about 50 of their clubs throughout the southeast, they sued one of their Board of Directors, Paul Randall Watson, in 1989, for fraud in the creation of these contracts. The second method that was used in defrauding their stockholders and others by inflating the value of
the contracts that they had regardless whether they were legitimately drawn or not. What they did was create a finance affiliate named Paramount Acceptance Corp. (PAC), which I think is a fancy name for a collection agency. What Paramount did was purchase from Houstonian/Livingwell the contracts for the services for their spas and exercise salons. The way this worked was that these contracts were created by a sales force hired by Houstonian/ Livingwell and the sales force was encouraged through the usual methods, probably to use high pressure sales techniques. A certain number of contracts which would not actually perform. But the contracts represented, no matter what percentage of them performed, represented income in the future, not immediate income. So what they did was to sell the contracts to Paramount and therefore they were able to move the cash from the future into the present. It was with this money that they were able to pay the large salaries when these large salaries were due to the officers and directors of Paramount Acceptance because of the performance contracts that these same individuals had in running the salons in the southeast so that a very interesting trap, if you want to call it that, which Houstonian merges with this group of salons in the southeast with a performance contract of $10 million more upcoming in the next 5 years if certain earnings marks were met and these earnings marks were met and the money had to go to these people.
In 1985, for instance, they were due, let us say, $3 million more than they were due the prior year for their performance on earnings so the contracts which they created sufficient funds in the present tense to be able to pay those bonuses, so Livingwell had to bring in the money from the future to pay the present, thus, creating a bind for themselves in the future in terms of their capital needs to provide the services for which the contracts would have required. So the bind was therefore that once they gave these performance contract to these people in the southeast and once they realized that their performance could be faked, they created Paramount Acceptance in order to hid that and to forward the money into the present tense so that it could be used to cover in 1986 the problems that they were facing.
The main problems that they faced were that in order to make any money at selling these contracts, you had to make it in the first or second quarter of the year, the third quarter was barely __________________________ and the fourth quarter was usually a loss. Since the cash flow was dependent upon the contract sales and contract sales were seasonal there was a natural tendency to be broke by the end of the year and have to be scrambling for money. So the sale of the contracts to Paramount served the purpose of leveling out the cash flow, at least that was their reasoning.
Additionally, to the lack of fluctuation, people seeking body treatment and body swimming programs during the post-Christmas season, I would imagine, the first quarter the year, along with that natural tendency for most of the sales to be in the first half of the year and even the loss to be experienced in the second half of the year, is the natural curve for each individual location so that was noted was that the new clubs and newly renovated clubs were the ones who were making money for a short period of time. So they began to close clubs and open new ones and to renovate on a regular basis. A very costly proposition. Especially if they were to make good on all the contracts. Closing a club meant means ending the contracts prematurely and thus, loosing additional funds that were due on those contracts. And especially if they had already pre-sold those contract to Paramount, the closing of the club would mean that they would owe Paramount money. I believe that occurred a number of times. So that there began to be a deficit running in the opposite direct with Paramount by the beginning of 1987.
Another interesting thing is the start of Paramount itself in 1986, required a $30 million loan which I think was increased to $45 million within the year. And there was another $15 or $30 million that went from Livingwell to Paramount in order to purchase the stock in Paramount and in order to fund Paramount. So somewhere in the neighborhood of $60 to $70 million was gathered within Paramount to be able to purchase from Livingwell the contracts so that they could forward the cash. Those loans to Paramount came through a group of banks. That group of banks prob-ably included banks that the principals were also directors of or at least associated with. It seems clear that this little cloud here is to what banks the principals in Livingwell actually were related to. It seems to me in studying the record, that they inflated the role within these banks or they took advantage of them to some extent.
Apparently, the Paramount loan was unsecured or was secured with the contracts. In early 1987, probably due to a combination of events, one being Livingwell beginning to loose money and therefore Paramount loosing money, and also the _____________ of both the oil and real estate industries in Texas. The banks began to ask for collateral or increased collateral for doubtful loans. The $30 million loan to Paramount would have to look doubtful when it proved not to be making any money. Its parent was not making any money and the collateral was proving to be very doubtful indeed. So USAT and two other investors were forced to collateralized those loans with their stock and that I think is the conclusion in the sense of this bazaar investment of USAT.
With the exception that would not measure the individuals that were harmed by this process. People engaged in these programs, signed contracts, paid up front fees, to receive services and if we searched we would find that this organization which closed clubs and renovated clubs and hyped the contracts, were probably not delivering on those contracts. Have not been able to find anything specific as yet but I imagine that I will.
So not only did they have the opportunity to show a loss to USAT from this ______________ but could show a loss to the general public from this investment by USAT. So it is a doublly bad investment on the part of this federally insured S&L association.
d. The Remington Hotel
The Remington Hotel and Southmark
e. Cinco Ranch
and Mischer, American General, Strauss, Kosberg and Gibraltar. A $34 million purchase of commercial land in 1984
f. Westin Lakes
g. The Warwick
and Carolyn Hunt, Rosewood, Mecom, Rothschilds Inc, Texas Commerce Bank
h. Couch Mortgage
purchase of $50 million in unsecured mortgages as part of a $140 million purchase. Scandal uncovered in 1984
i) Real Estate Investments
4. USAT And The Daisy Chains
The term “Daisy Chain” is used in several ways.
A set of business enterprises engaged in deals to show false profits for each other using techniques such as “land-flips”;
A set of S&L’s trading loans or loan participations to hide otherwise reportable losses, or trading assets such as branch offices and deposits to falsify networth;(Rep Henry Gonzalez claimed that there were as many as 26 Texas S&L’s in this category comprising three to five chains with one including financial institutions in Louisiana, home to Beebe).
A set of business enterprises engaging in securities deals, including junk bonds, where the prices are fixed for both the buyer and the seller.
A Daisy Chain of loan participation identified by the FHLBB included Sunbelt SA (Ed McBirney) , Western Federal SLA, First City SA, Federated SLA (Brady,Tx), MultiBanc SA, Texana SLA (Texarcana), Independent American SA (Tom Gaubert), Alamo and Summit SA (John H Roberts Jr). Others, Such as Vernon (Don Dixon), Ben Milam SLA , Savings Capital Corp (Jarrett Woods), W F Properties (Jarrett Woods) and Mercury SA of Texas (J B Haralson) which had been seized earlier; or had not been seized by August, 1988; may have been included.
Then there was the 100 or so savings institutions and banks identified as associated with Beebe which formed a separate ring of interlocked financial institutions.
In 1985 Gaubert formed East Texas First PAC which included Sunbelt, Vernon, IASA, Commodore and North Park for the purpose of gaining political influence over regulators.
From 1984 through 1988 USAT disclosed several branch office sales either which were completed (with IASA and Guarentee Federal), or applied for and rejected by the FHLBB (with Sunbelt and North Park).
USAT disclosed loan participations with IASA.
5. USAT’s Participation In Milken’s Networks
Milken is said to have created a set of S&L’s, a Daisy Chain, for the purpose of dumping junk bonds. These, as listed in the FHLBB suit against Drexel, were Columbia (Spiegel), Lincoln (Keating), Centrust (Paul), Imperial (Gouletas), Western (Empire) Savings (Dallas)(Knapp and Jarrett Woods) , Southmark’s San Jacinto Savings (Grosz), Pima, Merabank, Guarentee Federal, Gibraltar (Kosberg and Strauss) and USAT (Hurwitz). Milken’s Daisy Chain of corporate controllers such as Lindner, Carr, Hurwitz and others benefitted from the use of their membership in the insured institutions daisy chains, receiving profits from the takeover game.
b. USAT’s Subsidiaries
and Centrust, DuPont
THE CENTRUST-UFG/USAT CONNECTIONS
In checking CenTrust Bank, CenTrust Capital Corp., CenTrust Finance Corp., CenTrust Finance Corp. II, CenTrust Savings Bank and CenTrust Trust annual reports and 10-K filings for the years 1983 to 1989, we find more than two dozen different directors listed.
Among the various directors’ background descriptions listed in the CenTrust material we find:
RAY RAVED, who owns a % of London Trust PLC–bond buyer from LT PLC?
EDWARD L. ABBOTT of Acacia Mutual Life Insurance Co.,
WALTER P. BLASS, President of CenTrust Mortgage
WILLIAM T. MCIlwain, Executive CFO of Far West Savings & Loan
*DAVID FONTELLO, Director of USAT Finance, Inc.
**LARIO MARINI, Wilmington Trust Co.
***ANGEL CORTINA, JR., CPA with Deloitte, Haskin & Siels
No other directors in CenTrust have noteworthy affiliations listed.
*USAT Finance, Inc. records are not available to cross reference.
**In checking USAT Finance, Inc., II and III’s, 10-k’s for 1986, we find Lario Marini listed as a director of both of these wholly owned subsidiaries of USAT.
***In the “Dingell Report” (page 237), Paragon Holdings, Ltd. is listed as a purchaser of $68,500,00 face amount of Zero Extendible Notes known as “takeover bonds” in Maxxam’s takeover of Pacific Lumber Company. Cortina is known to be President of Paragon Holdings, Ltd. but records are unclear as to Paragon’s relationship to CenTrust, though the addresses are the same. It appears that a relationship does exist. In the Proof of Claim filed by the FDIC and the RTC on 11/14/90 in the United States Bankruptcy Court (“S.D.N.Y.”) action entitled In Re The Drexel Burnham Lambert Group, Inc., et al. on page 42, it is stated:
“In November of 1986, Drexel underwrote $135 million in Auction Market preferred stock for two wholly owned subsidiaries of USAT, USAT Finance, Inc., II, and USAT Finance, Inc., III.”
In the SEC’s News Digest, the listing of the new issue of
preferred stock in the amount of $62.5 million for each of USAT Finance, II and III, appears as newly registered on 9/9/86.
It should be noted that Maxxam Group, Inc. held nearly $1 million in CenTrust preferred stock on 12/31/84. (Another Drexel underwriting.)
BCCI is said to have purchased in 1985 or 1986, 28% of CenTrust common stock, secretly, through Independence Savings of Encino, California and its controlling stockholder Ghaith Pharaon. Additionally, in 1977, Pharaon and fellow Saudi businessman Khalid ben Mahfouz control 90% of Main Bank of Houston with partners John B. Connally and Frederick Erck. Connally and Erck control First City National Bank. In 1988 Connally joined the Maxxam Board of Directors.
BCCI through Pharaon buys 28% of CenTrust in 1985-1986.
CenTrust places two directors on USAT subsidiaries in 1986.
David Fontello on USAT Finance, Inc.
Lario Marini on USAT Finance, Inc., II, and
USAT Finance Inc., III.
USAT Finance, Inc., II and III, issue $135 million in preferred stock through Drexel in 9/86.
Maxxam buys CenTrust issued preferred stock; CenTrust buys Maxxam, MCO and PALCO issued junk bonds all underwritten by Drexel.
Centrust was a REIT from 71-76. Milken involved?
c. IFB Co
6. USAT’s Connection To Hurwitz’ Common Arbitrage Operation
a. The Common Arbitrage
On December 31, 1985, both UFG-USAT and Maxxam held ABC and Beatrice securities. From 1986 or earlier through 1987 or later, Ron Huebsch ran the FDC controlled, common arbitrage operation for MCOH ($35 million), Maxxam ($70 million), PL and UFG-USAT ($150-200 million). During that same period Huebsch served as VP for USAT’s Investment Department. It is not likely that this unit existed prior to the PL takeover. But it is likely that it was attached to UFG or USAT in some fundamental way such as office space, equipment, staff etc.
When USAT was seized by the FDIC (December 30,1988), FDC incorporated Bering Corp (January 1989) which replaced the arbitrage unit inside USAT in its role for UFG. UFG’s 10K 1988 describes Bering as a wholly-owned subsidiary of FDC. Standard and Poors on Maxxam shows a January 1, 1989 agreement between MPI and Bering for investment management.
In its 10K 1989 it tells us that Munitz is the chair of Bering. Bering manages the investment accounts of FDC, Maxxam and the subsidiaries of each of these companies. Elsewhere, Gary A Jacobsen is identified as its President. He was a director of FRC from at least 1979 through 1982.
In November 1984, Maxxam bought 12% of Transcontinental Services Group stock in which UFG-USAT later established a position.
On November 9, 1984, Maxxam, through its sub Maxxam Properties Inc, purchased in a private placement, 3,469,540 common shares and warrants to purchase 100,000 additional shares for a
total of 12% of Transcontinental Services Group (TSG) NV. The holding was valued at $9,600,000.
On March 31, 1986, Maxxam held 1,081,570 shares of TSG plus the 100,000 warrants valued at $3.14 million and $1.66 million respectively.
In April 1986, MPI completed the sale of 3,700,000 shares of TSG for a pre-tax gain of $1.8 million.
In December 1986, UFC, a sub of UFG-USAT acquired 6.24-7.24% of TSG increasing through May 1987.
OTHERS WHO HAD ENGAGED IN BUSINESS TRANSACTIONS
WITH THE COMPANY AND UNITED SAVINGS OF TEXAS
Nu-West Florida Land purchase
Weingarten Realty, Inc. Stock purchase/sale
Houstonian then Livingwell, Inc Stock purchase/loan
Equus Transportation Stock purchase
Couch Mortgage Co. Mortgages purchase
Penn Corp. Financial ) Stock purchase
American Financial Corp. ) for merger with
First American Financial )
Security General Corp. ) UNCOL lateralized mortgages
Associated Properties,Inc. ) sold to USAT with Couch
Mortgage. See above.
Triplow Co. (Houston developer) Joint venture
Barry Lotz Joint venture
Transcontinental Services Grp. Stock purchase
Salomon Bros. Branch sales, MBS
Goldman Sachs Branch sales
Drexel Burnham Lambert Junk bonds, MBS
Paine Weber MBS
First Boston MBS
Bear Stearns MBS
Independent American SA )
Guarantee Federal S&L * ) Completed or attempted
Sunbelt S&L ) branch sales
North Park S&L )
*sub of Pacific Realty Corp, Dallas
7. The Typical Insider who Commits Fraud
He is a pillar of the community who contributes to charities, a civic leader and a crook. He is a male officer, director or majority stockholder who either commits his crimes alone or in association with a few close associates or employees. He is often a flamboyant outgoing businessman who runs his bank as if it were a sole proprietorship, he singlehandedly exercises control over the institution. The schemes may be complex or simple depending upon his ingenuity but they usually involve a continuing series of related transactions that extend over a period of time.
Longterm connections have existed between organized crime and banks so that organized crime can launder funds.
The S&L’s were doomed by the adverse spread between the high cost of funds and the low interest rates paid on old mortgages. The S&L’s had to seek much higher yielding assets to invest in. Some tried real estate and failed, some sold mortgages as CMO’s and some invested in junk bonds. USAT did it all.