Federal Deposit Insurance Corp. investigators probing the collapse of Penn Square Bank in Oklahoma City have given federal prosecutors evidence of 30 instances of fraud and other potential criminal law violations.
A federal grand jury that has subpoened Penn Square Bank records is expected to issue indictments by the end of the year, a spokesman for the U.S. Attorney's office in Oklahoma City said yesterday.
Evidence turned over to the prosecutors by the FDIC links the illegal actions at the bank to transactions totaling about $70 million -- the bulk of which involves misapplication of bank funds.
The criminal investigation of Penn Square began shortly after the bank was closed July 5 after banking examiners uncovered $50 million in bad loans.
In addition to the matters referred to the U.S. attorney's office by the FDIC referrals, the office of the Comptroller of the Currency said it uncovered several instances of potentially criminal conduct during its final examination of the failed bank.
In a letter to Rep. Benjamin Rosenthal (D-N.Y.), acting comptroller Doyle Arnold, said his office uncovered a scheme that might have shifted the entire risk of "speculative deals" from the borrower to the bank. Arnold said the scheme may involve falsification of bank records.
Rosenthal's Commerce, Consumer and Monetary Affairs subcommittee is one of several congressional panels investigating the Penn Square bank failure.
Neither the FDIC nor the comptroller has named names, but a federal source said one apparent violation uncovered by the FDIC occurred in December 1980 when the bank bought back a bad loan that it sold to other banks.
Major banks bought more than $2 billion in Penn Square loans--many of which went bad. The banks say they had no indication the bank was making risky loans or that it was in trouble until the late spring of 1982.
In a letter to Attorney General William French Smith, Rosenthal complained that the Justice Department has not treated evidence of criminal violations found by bank regulatory agencies "with sufficient importance nor accorded them sufficient attention."
The Comptroller of the Currency gave the Justice Department evidence of possible criminal law violations at Penn Square as far back as February 1978, Rosenthal said. No action was taken by Justice and no followup was made by the comptroller, he added.
"I am personally convinced that more vigorous Justice Department prosecution of criminal acts by bank officers, directors and insiders would have a dramatic deterrent effect on future misconduct at other financial institutions," Rosenthal wrote Smith.
The FDIC uncovered the potential criminal violations as it pored over bank records in an attempt to sort out the bank's assets. After the bank failed, the FDIC took over and will try to sell as many of the Oklahoma City bank's assets as it can to pay off creditors.
Among the creditors are the FDIC itself -- which paid off all deposits up to $100,000 -- as well as credit unions and savings and loan associations and others who had about $250 million in uninsured deposits in the bank.
Most of the alleged criminal violations uncovered by the FDIC occurred in late 1981 or 1982. Federal regulators testified at congressional hearings this summer that the bank went on a speculative lending spree between September 1981 and last April, when the comptroller of the currency started the examination that led to closing the institution.
A list of alleged criminal law violations referred to the Justice Department was provided to Rosenthal by the FDIC.
The list identifies the amount of the alleged violation, when it occurred, the number of individuals involved and the law that was broken. The report, which Rosenthal included in his letter to Smith, does not name names.
An earlier memo from Kenneth Smith, the FDIC official investigating Penn Square loans, to the FDIC's Penn Square liquidator James P. Hudson, said the list of criminal referrals probably will grow. "Because of the widespread involvements of Penn Square's lending patterns, there is no way we could project as to how many such referrals will eventually be written," Smith said.
Among the violations cited was an incident in July 1982, when an unnamed Penn Square official "tried to screw up the files," one federal source said.
The Penn Square failure was the third largest in U.S. history and shook up the nation's financial system.
Major banks such as Continental Illinois, Chase Manhattan, Seattle First and Michigan National bought hundreds of millions of dollars of bad loans from Penn Square. As a result, Continental Illinois and Seattle First reported huge second quarter losses and officials at Continental, Chase, and Seattle First have lost their jobs.