When the National Bank of Washington sold a piece of land in Prince George's County to four friends of bank Chairman Luther H. Hodges Jr. in 1985, no one at NBW thought the transaction would wind up being scrutinized by federal regulators five years later.

"Everybody thought we were heroes for getting it done," Hodges said recently of the deal, in which NBW took over about 86 acres and then sold the property because of a loan default.

The land is near what is to be the end of Metro's planned Green Line. Federal regulators were "on top of the bank to get rid of it," a banking source said. The bank recouped the loan and an additional $1.4 million from the sale of the property.

But the partnership that bought the property from NBW for $3.75 million sold it two years later for more than double the price -- making more than $4 million for Hodges's four friends and business associates.

Dissident directors of the bank later alleged in lawsuits in U.S. District Court that while the bank lost no money on the so-called Green Line deal, it was one of several transactions that reflected a pattern of management problems at NBW before its collapse last year.

NBW, the capital's oldest financial institution, was taken over by the federal government last August and sold to Riggs National Bank.

The bank's failure followed two years of boardroom battles, as well as bitter and costly litigation between the bank's management and dissident board members, who represented more than 20 percent of the bank's stock.

In the aftermath of the bank's failure, federal regulators looking for ways to recover lost funds are reviewing the mountain of lawsuits filed by disgruntled former directors and shareholders.

The Federal Deposit Insurance Corp. estimates that NBW's demise will cost the bank insurance fund about $303 million. Although that is much less than the original $500 million the FDIC predicted, it is still one of the most expensive bank failures ever.

In the lawsuits, management contended that the dissident directors had tried unlawfully to control the bank, while the dissidents said that the bank had been mismanaged. Two key figures who criticized management in court papers, dissident director Robert B. Washington Jr. and shareholder Wafic Said, declined to elaborate on their legal claims. Said owned 24 percent of the bank's stock and appointed two of its directors, Ziad Idilby and Richard S. Bodman.

Until recently, many of the specific allegations in the suits have been shielded from public view because documents in the case were sealed by the court at the request of both sides. Thousands of pages of those documents were recently unsealed at the request of The Washington Post, but much more remains under seal, including the testimony of certain directors and officers of the bank.

While many of the issues in the suits have been settled out of court or dismissed on technical grounds, the remnants of the litigation are providing rich fodder for a number of federal agencies looking to collect whatever they can in NBW's costly death.

The federal regulators who are poring over the extensive court record of the NBW lawsuits declined to comment on the specifics of investigations regarding NBW. Banking sources said that in addition to the FDIC, the Securities and Exchange Commission and the Comptroller of the Currency are looking into various NBW boardroom transactions. And the FBI is looking into allegations of embezzlement at the bank, sources said.

In the litigation, unhappy investors, who were also directors, alleged a series of bad management and boardroom decisions, including the Green Line decision and the determination to invest more than $12 million in a Louisiana bank that allegedly enriched directors who were friends of Hodges.

"Hodges and several of his cronies have abused their positions ... by engaging in self-dealing business transactions ... solely to enrich themselves and their friends and associates at the expense of NBW and have thus placed their personal financial interests above their duty to the corporation," the dissidents alleged in the recently unsealed papers.

The majority directors of the bank, including Hodges, have denied any wrongdoing, arguing in court papers that there has been no "substantial claim of director wrongdoing" and that any loans to directors were "transactions at arm's length that did not harm ... {the bank} or confer improper benefits on the directors."

Hodges has long contended that director Washington, who was the co-managing partner of the law firm of Finley, Kumble, Heine, Underberg, Manley, Myerson & Casey, brought allegations against him and other directors as a smoke screen to divert attention from the $10 million loan the bank made to the law firm.

Finley, Kumble had borrowed the money from NBW nine months before the law firm was put into involuntary bankruptcy. The bank had charged off $7 million of the loan before it was taken over by federal regulators.

The suits filed by the dissident directors also alleged that Hodges and the majority of the directors on the board took steps to entrench Hodges in his job and to dilute the voting stock of directors and shareholders who opposed him.

As part of a settlement agreement with Said, Hodges resigned as chairman of NBW in January of last year after failing to find a buyer for the bank. Hodges received a $1.5 million "golden parachute" payment when he left the bank.

Those involved in the litigation are careful to avoid saying that the alleged mismanagement and improper dealings directly caused the collapse of NBW. They do say that the actions contributed to weakness that ultimately hampered the bank's ability to survive.

Many of the allegations concerning director dealings were dismissed in civil court proceedings because of legal technicalities. But the entire record is being studied by federal banking regulators. What follow are descriptions of selected bank transactions they are reviewing.

Green Line Deal The so-called Green Line deal is one of the actions that dissident director Washington has said was not in the best interest of the bank or its shareholders.

In 1985, after Joseph E. Smith & Sons Inc. defaulted on a loan on the Branch Avenue property, Hodges suggested several of his business associates as possible buyers and NBW arranged a sale to the group for $3.75 million. The bank lent the four investors -- James Moshivitis, Craig Wall, Henry Faison and local real estate attorney Robert W. Linowes -- the money to acquire the land and to cover interest payments.

The sale of the property was reported to the NBW board, but the board did not vote on the transaction, according to Hodges.

At the time of the sale, the bank's appraisers said the property was worth about $5.76 million. However, bank officials have said that estimate was based on the uncertain prospect that Metro's Green Line would end at the Branch Avenue property and that the bank would make improvements to the land.

The Green Line's last station is planned to be just north of Branch Avenue, but there are still no federal funds for the stop and no projected date of completion of the line.

Two years after the partnership bought the land from NBW, it sold it for $8.15 million.

As for the partnership more than doubling its money in two years, Hodges asserted that "everyone knew it would someday be worth more. ... NBW did a very attractive deal."

According to court documents, Hodges never revealed the extent of his relationships with the four partners. However, other bank officials said it was common knowledge that he was close friends with the four. Hodges's friendship with Wall goes back to high school days in North Carolina.

Hodges also has investments with Wall and Faison in North Carolina and South Carolina. In depositions, Hodges declined to say what the investments with the latter two entailed. Hodges said in an interview that in the midst of the Green Line deal, he realized that he had not disclosed to the bank that he and Wall, a customer of the bank, had investments together.

Hodges is in a real estate partnership with Moshivitis that owns several Washington properties. In 1989, a Hodges investment with Moshivitis had increased in value and Hodges had not put up additional money to cover the increase, a situation that violated the bank's code of ethics, Hodges said.

But Hodges said he took care of the matter. "I paid it off," he said. "It was not a big deal."

Hodges denied the allegation that he received additional investment interests of nearly $200,000 from Moshivitis as a quid pro quo for the Green Line land sale. "It was an arm's length deal," he said.

The Louisiana Bank Investment In early 1988, war was breaking out in the boardroom of NBW. Bodman and Idilby, the two directors who represented Said's interest on the board, were unhappy with the bank's performance and Hodges's management. One of the bank transactions that increased their ire was an NBW investment in a Louisiana bank.

The deal was brought to the board by investor Peter Del Col and attorney Douglas W. Hawes. Both were members of NBW's board of directors.

NBW director Washington alleged that information regarding the interests of Del Col and Hawes was withheld from other NBW directors when they decided to invest more than $12 million of the bank's money in Royal Windsor Holding Corp. The entity was a holding company for Jefferson Guaranty Bank, a failed bank outside of New Orleans.

Del Col and Hawes had bought nearly 50,000 shares of Royal Windsor common stock for $1 a share as organizers of Royal Windsor -- about 15 percent of the common voting stock.

NBW subsequently bought 5 percent of the common stock at $10 a share for nearly $500,000 and $6.2 million worth of a separate issue of preferred stock. In addition, the bank lent Royal Windsor $6 million.

The transaction was completed in early 1988, but the full details of the deal were not disclosed to shareholders in the bank's proxy statment until 1990. Attorneys at Gibson, Dunn & Crutcher, the bank's outside counsel at the time, said they did not have responsibility for the proxy statements.

Kathleen W. Collins, the bank's outside general counsel with the law firm Dow, Lohnes & Albertson, said the holding company didn't think it needed to be disclosed because it wasn't "material," meaning it would not influence the bank company's stock price.

A source on the board at the time said that board members knew about Del Col and Hawes's interest in the deal. And bank records show that the board voted unanimously in favor of the deal, with Del Col and Hawes abstaining because of their involvement.

The 1990 proxy statement revealed the details of their involvement and added that Hodges purchased 15,000 shares of stock at the same price the bank paid.

Federal regulators approved the bank's investment in the failed Louisiana institution. But at the time of the approvals, NBW said that it would sell half of its stock and debt interest in Jefferson to another bank. It was then unable to do so and the regulators later criticized the investment.

"The transaction was done totally under the scrutiny of the regulators," Del Col said. "Every aspect was reviewed by the FDIC, the Fed and the Louisiana State Banking Commissioner, plus the Justice Department. Everybody looked at it."

Del Col and Hawes, with the support of Hodges, told other bank directors that the Louisiana deal could be a good one for NBW. At the time, the FDIC was recapitalizing the bank with a fresh $57.5 million. NBW officials thought they could clean up the bank and sell it later at a multiple of its value.

"The bank was going to make a lot of money on it," one director said.

But banks in Louisiana are struggling like banks elsewhere, and the FDIC, having inherited NBW's problem assets, is stuck with trying to collect about $12 million advanced to Royal Windsor by NBW.

Washington and the directors representing Said thought the transaction amounted to "feathering the nests of Del Col and Hawes," said one source close to the board. "What were they doing putting that much money into a bank in Louisiana?"

Even Hodges said that his decision on the investment would be different today. "In hindsight, I wish we hadn't made the loan," he said. "It was imprudent to take on so much, but every director was fully aware of the Del Col and Hawes interests."

Director-Related Loans Allegations about questionable dealings by NBW directors that were revealed in the recent unsealing of court documents come to light at a time when a small group of critics are questioning the widespread legal practice in the industry of lending money to directors and paying them fees for their services.

Banks historically have invited directors on their boards in part for the business they could bring to the bank in both deposits and loans. NBW "didn't do any more director loans than anybody else in town," Hodges said. "We put investors on the board and invited director loans within reason."

According to court documents, several loans to NBW directors' companies were criticized by the Office of the Comptroller of the Currency (OCC), which regulates national banks.

In one case, a loan to the real estate brokerage and finance firm Smithy-Braedon Co. was criticized and then downgraded to a more serious category of "classified" by the OCC, indicating an increased risk of loan default. Edmund B. Cronin Jr., chairman of Smithy-Braedon, was a director of the bank at the time and was on its loan committee.

When the OCC classified the loan, Hodges said he went to Cronin and told him Smithy-Braedon would have to pay off the loan, possibly by moving it to another institution, or he would have to resign from the loan committee. Cronin moved the loan to another bank, Hodges said.

Court papers allege that Cronin, who could not be reached for comment, repaid the NBW loan only to avoid further questioning.

Another loan that director Washington alleged showed poor management of the bank was a loan to Materials Research Corp., a New York semiconductor firm. Sheldon Weinig, chairman and part owner of the firm, was an investor in the group that in 1985 bought the majority share of NBW from the United Mine Workers union. In turn, Hodges was on the Materials Research board.

The counterclaims brought by Washington alleged that Hodges pressured NBW officials to make a loan to Materials Research that was later criticized by regulators and that Hodges's relationship to MRC was not fully disclosed to the NBW board.

Hodges denied that he ever intervened in the loan process. "That's stupid," he said. He added that "everybody knew I was a director" of Materials Research.

"I begged one time for MRC to let NBW participate in a loan for them along with Chase Manhattan," Hodges said. "We were trying to build commercial loans."

In 1987, when the semiconductor business experienced a downturn, federal regulators did criticize the loan, Hodges said. But when Materials Research was sold to Sony Corp. in 1989, the loan was paid off, he said.

"The bank never lost money on a director loan except Finley, Kumble," Hodges said, referring to the $7 million loss from the NBW loan to the defunct law firm where Washington was co-managing partner.

In another director-related loan, NBW loaned about $2 million to John B. Coleman, who was at the time the owner of Washington's Ritz-Carlton Hotel. Coleman was a friend of NBW shareholder Said.

The loan to Coleman was supposed to be secured by a second mortgage on the hotel. But, Hodges said, "We just didn't get it done as secured." Shortly after the unsecured loan was made, Coleman declared bankruptcy. NBW lost about $1 million.

"We lost a lot of money doing business with him," Hodges said. "We were stupid."

From the regulators' standpoint, there appear to be limits on liability for good-faith errors in judgment. The OCC can levy civil penalties or preclude people from working in the banking industry. But the agency, which declined to comment on the specifics of its NBW probe, would bar people from banking only if they had willfully disregarded banking laws.

"It's hard to hold people liable for stupidity," said OCC spokeswoman Ellen Stockdale. "Someone may have been making dumb decisions without taking illegal actions."

Legal Risks

The inquiries by bank regulators into questionable NBW loans are not the only ongoing legal problems faced by former bank executives, some of whom could find themselves personally liable for the bank's "commercial paper" program, sources said.

The death blow to NBW came last summer when it defaulted on $25.8 million of its parent company's commercial paper, debt that is similar to bonds and pays a fixed interest rate. A number of investors in the commercial paper have filed suits against the bankrupt bank's estate for selling them the securities just before the bank failed.

The SEC is investigating the handling of NBW's commercial paper and has notified attorneys for several former NBW officers that it has come to an initial conclusion of wrongdoing, according to legal sources. The SEC declined to comment on the investigation.

As the process moves forward, the defunct bank company is looking to recover funds too.

Robert B. Ott, an attorney for bankrupt Washington Bancorporation, NBW's parent, has set aside $50,000 in legal fees to investigate eight or nine transactions, mostly involving loans to developers that were done at the parent company level, he said. Attorneys are looking for evidence of abuse by bank company executives in an effort to determine whether the holding company was defrauded in any of the deals.