One day in late 1983, a subsidiary of a small savings and loan company in rural Carroll County, Md., plunked down $137,500 to purchase half of a company that sold a credit card protection service from phone banks in Las Vegas and elsewhere.

By nearly all accounts, the investment in Action Line Services Inc. was, in hindsight, a major financial blunder and signaled the beginning of disaster for First Progressive Savings and Loan Association Inc. By the time Action Line filed for bankruptcy in 1984, First Progressive had sunk $1.3 million into it.

After First Progressive stopped putting money into Action Line, Old Court Investment Corp., a subsidiary of another savings and loan association, put up about $160,000 to cover Action Line losses, according to Action Line bankruptcy records. Its parent company, Old Court Savings and Loan Inc., is the troubled Baltimore thrift that sparked a crisis in the industry this spring. First Progressive merged into Old Court last November.

Although the Action Line investment involved a small amount of money relative to the $10 billion state savings and loan industry, it exemplifes the kind of risk a Maryland savings and loan company was willing to take in an effort to make a lot of money quickly.

The Action Line purchase also illustrates the difficulties faced by the state and the Maryland Savings-Share Insurance Corp. (MSSIC), the now-defunct private firm that insured most state thrifts, in policing the growing industry.

A ranking state savings and loan regulator said the state was not notified ahead of time about the purchase, as required by state regulations. It is unclear whether MSSIC, which worked closely with state regulators, knew about it in advance, although a former Action Line official said that at least one officer of MSSIC was aware of the sale.

At the time of the purchase -- which was made by a wholly owned subsidary of First Progressive, Monumental City Service Corp. -- Action Line was nearly $1 million in debt and was fighting a fraud suit filed by the companies that run the worldwide Visa credit card program.

Action Line officials "wrote checks with no money in the bank" and First Progressive honored them, for a total of $1.3 million, Barry S. Glass, an accountant for First Progressive and later Action Line, said in a court proceeding.

First Progressive's losses from Action Line were particularly harmful because the thrift was already having financial problems.

"You had a company not doing well, buying one doing worse and then allowing it to overdraw its accounts," said a former top MSSIC official.

Now that First Progressive has merged with Old Court, Old Court ultimately may have to absorb at least part of First Progressive's Action Line losses, some financial officers say. Others, however, say that will not happen.

As Action Line's problems expanded, they embraced several businessmen now connected publicly to the dwindling fortunes of Old Court: Jeffrey A. Levitt, part owner of Old Court; Jerome Cardin, an Old Court minority stockholder and member of a politically well-connected Baltimore family, and Walter Otstot, a wealthy Ocean City developer and Levitt business partner.

The primary architect of Action Line was another Maryland businessman, Joel Katz, the operator of a string of telephone solicitation firms who pleaded guilty to a federal mail fraud charge, a felony, in 1974.

Katz, Action Line's president and owner, first approached First Progressive in the summer of 1983. Katz initially asked First Progressive to process Action Line's credit card slips and to loan it operating capital for 90 days, according to Michael G. Bosley, a former officer of First Progressive and later of Action Line. Both requests were granted, according to Bosley.

Then Katz started negotiating the sale of Action Line, according to Bosley. Katz acknowledged that Action Line was hard up for cash, but said its high-volume business made it potentially a big moneymaker, Bosley said.

Action Line offered a service to credit card holders: If their cards were lost or stolen, Action Line promised to notify all the credit card companies involved, saving the customer from making those calls. In return for that service, Action Line charged a fee that ranged from $89 for three years to $109 for "lifetime" coverage, according to papers filed by Visa lawyers in their lawsuit against Action Line.

Action Line employes called prospective customers who, if they subscribed to the service, were then asked to charge the service fee to their credit cards. Action Line staffers would obtain a customer's credit card number and the firm would deposit the sales slip bearing that number in a participating bank. Action Line's account with the bank would be given immediate credit for the sale.

However, according to filings in Visa's suit, many of the sales were invalid -- either because customers changed their minds and decided they didn't want the service or because Action Line used credit card numbers from customers who were never contacted. Because it took up to three months before notice of an unauthorized sale worked its way back to Action Line's various banks, Action Line often had already withdrawn the money credited to its accounts, according to Visa court papers.

Three banks had lost more than $700,000 this way by the time First Progressive's subsidiary purchased half of Action Line in mid-November 1983, according to Visa.

Bosley said in the Action Line bankruptcy case that Levitt, who was an attorney for First Progressive at the time, urged the savings and loan to buy into Action Line. Bosley said he opposed the purchase, but made it on orders from Levitt -- an allegation denied by an attorney for Levitt.

Bosley said that in a Nov. 15, 1983, meeting he strongly argued against the purchase of Action Line because of the Visa lawsuit and Action Line's sizable debts.

"I told [Levitt] it was the craziest thing I ever heard of in my life," Bosley said in a sworn statement in the bankruptcy case. "I said we had no reason to be in this kind of business. [Levitt] told me it was a great business. 'Maybe he [Katz] has got a gold mine.' That was his exact words. 'He's got a gold mine.' I said he's got a lot of debt out there, too . . . . "

Bosley said he finally persuaded Levitt to approve buying only half of the firm and Katz retained control of the rest.

The bankruptcy records show that Bosley received a $12,500 management fee from Action Line president Katz when the purchase was made. Bosley said in an interview the fee was for his work in arranging the sale. "I found out later [the fee] was not quite kosher," Bosley said. Bosley said he gave half of the fee to another First Progressive official, who said he gave the money to First Progressive.

Shortly after the purchase, Bosley said, he was transferred to Action Line against his wishes by Paul Freeman, then First Progressive's executive vice president and Bosley's boss. Bosley said when he asked Levitt about the transfer, Levitt said it was needed to strengthen Action Line.

Glass, the First Progressive accountant, also said in a sworn statement in the bankruptcy case that he told someone -- "probably Jeffrey Levitt" -- that Action Line's financial records were in "horrible shape." But, Glass said, when he brought that up, he was told the business "was . . . profitable, viable . . . and . . . the purchase was a good one."

Freeman, First Progressive's executive vice president at the time of the Action Line purchase, said he was opposed to any involvement with Action Line and tried unsuccessfully to block the purchase after he learned that Bosley had issued a check for the sale.

But, Freeman said, he rescinded his stop-payment order when he was told that Levitt approved the purchase. "I was countermanded in effect by Mr. Levitt," Freeman said. "There was nothing I could do about it after that."

An attorney for Levitt said Levitt played no role in the Action Line purchase and learned about it only after the fact. "The Action Line deal is not a Levitt deal," said Paul Mark Sandler.

Levitt served on First Progressive's board and as its secretary from 1975 until he stepped down sometime after he and another member of First Progressive's board, Allan H. Pearlstein, purchased majority ownership of Old Court in September 1982. Levitt remained as First Progressive's attorney, and his wife was named secretary of First Progressive and a member of its board. Pearlstein remained on First Progressive's board and as its president until the merger.

A former state official familiar with First Progressive's operations who asked not to be identified said: "If you asked [at First Progressive] who told you to do this or why did you do this, Mr. Levitt's name always came up."

It was at the Nov. 15, 1983, meeting with Levitt that a top MSSIC official, Paul V. Trice Jr., learned of the pending Action Line purchase, according to Bosley's sworn statement.

According to the statement, Trice interrupted Bosley's discussions with Levitt and asked Levitt if he had cleared the purchase with Charles C. Hogg II, MSSIC's president. "He [Levitt] said, 'I will take care of that,' " Bosley said under questioning from the court-appointed bankruptcy trustee, George W. Liebmann.

Hogg said in an interview that he did not learn of First Progressive's Action Line involvement until after the purchase was made.

Trice, also in an interview, said, "I really have no recollection of any such meeting."

Trice said that during that time he was not involved in MSSIC's supervision of Old Court and First Progressive. "I could have stopped by [Levitt's office]," Trice said. "It wasn't unusual for me to periodically say hello to people I use to work with." Trice was alluding to his work as president of Old Court from the fall of 1982 until mid-January of 1983.

Action Line suffered from mismanagement and lax financial controls, including allegations of improper and excessive expenses, according to documents filed in the bankruptcy case and interviews with state officials and thrift officers.

At one point or another, Action Line rented three cars, a Mercedes-Benz, a Cadillac and a Porsche, for Katz, Action's Line's president, according to a claim in court against Katz by bankruptcy trustee Liebmann to recover more than $16,000 in payments Action Line made for the car rentals.

Katz declined to comment on those expenses, citing the pending investigation of Old Court.

Rodger Rosen, First Progressive's controller who was in charge of overseeing Action Line for the thrift, was fired after his boss, Freeman, concluded that Rosen charged Action Line for more than $13,000 in allegedly improper expenses, including nearly $10,000 that Rosen wired to a Las Vegas bank account, according to sworn statements in the bankruptcy case by Bosley and accountant Glass.

Rosen, in an interview, denied the allegations, saying his expenses were legitimate. He said he wired the funds to Las Vegas at Bosley's request to pay a debt of Action Line's Las Vegas office. Rosen said he was fired because First Progressive needed a "scapegoat" for Action Line's problems.

" . . . Money was flowing out all over the place," Bosley said in his sworn statement. "You had expenses in California, Las Vegas, Dallas [where the firm had offices]. You had Joel's Katz expenses, his travel expenses . . . he had an IRS judgment against him for $1,250 a week, plus he got $1,250 a week salary, plus his wife got some, his daughter got some, plus his travel expenses. He had like $600 or $700 a month on his Diner's Club card. Of course everybody in his family was using his Diner's Club card. He charged it off as a business expense."

"I had an astronomical payroll," Bosley added. "In Las Vegas alone, my payroll was running me somewhere close to $9,000, $10,000 a week . . . . "

In March 1984, First Progressive's subsidiary -- under pressure from MSSIC -- sold its interest in Action Line for $100,000 to Otstot Enterprises Inc., a firm run by Walter Otstot, an Ocean City developer. Otstot has been described as Levitt's "deal maker" in Ocean City by a state official and has received substantial fees and loans from Old Court, according to court and land records.

Bosley said Levitt "told me that Walter was going to work with me." Otstot put about $450,000 into Action Line, according to Bosley.

An attorney for Otstot, citing the pending investigation of Old Court, declined to answer questions about Otstot's involvement with Action Line.

In late May 1984, Otstot gave up his interest in Action Line, according to Bosley's sworn statement. But Otstot continued to help finance Action Line, Bosley said. In one instance, bankruptcy records show, this was done with the assistance of the Baltimore law firm of Cardin & Cardin.

Bosley said he first learned the law firm was representing Action Line on May 25, 1984, in a meeting he had with two members of the firm, Jerome Cardin and Stephen Fader.

On July 13, 1984, Old Court Investment Corp., an Old Court subsidiary, issued a $25,000 check in Otstot's name, and Otstot in turn made the check payable to an escrow account of the Cardin & Cardin firm. The firm subsequently disbursed the funds to pay for Action Line-related expenses.

Cardin and Fader could not be reached for comment.

In August and October 1984, Old Court Investment Corp. made two other disbursements totaling $135,000 to Leon Rudd, a lawyer who replaced Cardin & Cardin as Action Line's attorney.

According to bankruptcy trustee Liebmann, Rudd's records show that the $135,000 was disbursed for Action Line-related expenses.

Rudd could not be reached for comment.

Whether First Progressive was ever repaid for the $1.3 million it sank into Action Line remains unclear. Levitt's attorney, Sandler, said he is not sure, but believes it was. Paul Freeman, First Progressive's executive vice president and managing officer at the time of the merger with Old Court, said he is not aware that First Progressive was reimbursed.

A state official with access to MSSIC records said it appears that MSSIC forced First Progressive to write off the $1.3 million Action Line debt in July 1984, which gave First Progressive a negative net worth, meaning its liabilities were greater than its assets.

Levitt and Pearlstein, a partner in Old Court, later pledged $600,000 in certificates of deposit, the state official said, but that only raised First Progressive's net worth somewhat before its merger with Old Court.