Talks to End Stalemate on S&L Sale Begun

The attorney for the state conservator of the troubled Merritt Commercial Savings and Loan Association advised top officials of the Hughes administration a month ago that in his opinion the state had ample reason to sue Merritt owner Gerald S. Klein to recover "very substantial losses" caused by Klein's "gross mismanagement" of the thrift.

In an 11-page letter detailing some of the Baltimore thrift's real estate ventures and what he called "self-dealing" by Klein, Robert J. Thieblot advised state officials that they should prepare a civil lawsuit in the event that a prospective acquisition by the Chase Manhattan Corp. fell through. Any such lawsuit would attempt to recover money from Klein to pay for any losses incurred by the state, which has insured depositor accounts to $100,000.

Neither Klein nor his attorney, Zelig Robinson, could be reached for comment on the letter.

Disclosure of Thieblot's letter came as state Senate President Melvin A. Steinberg (D-Baltimore County) began intense private negotiations to end the General Assembly's stalemate over a proposal by Chase to acquire Merritt and two other thrifts. One provision of the deal would give four Merritt properties to Klein.

On Wednesday, Steinberg torpedoed the deal when he said he could not "in good conscience" support the arrangement that had been proposed by the giant New York bank and Gov. Harry Hughes.

Late tonight, the Senate approved a bill that would facilitate the Chase takeover, but without a $25 million state payment to the bank that is a key provision of legislation backed by the governor and that has been approved in the House of Delegates.

Also today, Steinberg began pressuring stockholders of Chesapeake Savings and Loan of Annapolis and Friendship Savings and Loan of Bethesda to accept less money for selling their associations to Chase than had previously been agreed to.

Thieblot's letter about Klein, the primary stockholder of Merritt, goes to the heart of the argument raging here on the Chase deal. The letter appears to buttress the views of some lawmakers who oppose a provision in the transaction under which the state would relinquish to Chase its right to sue Klein for civil damages over his operation of the thrift. The letter has been reviewed privately by several key state government officials.

The letter and other documents obtained today by The Washington Post shed new light on the views of the attorney for the conservator concerning Klein's management of Merritt and reservations about the proposed sale held by the people the state hired in May to manage the thrift.

The letter, sent to Melville Brown, the director of the Maryland Deposit Insurance Fund, with copies to Hughes' secretary of economic development and chief legislative aide, alleges that Klein "breached his fiduciary duties he owed to Merritt . . . . "

"We believe he may have practiced extensive self-dealing, taken unreasonable fees and dividends, diverted corporate opportunities . . . forced Merritt to enter highly speculative transactions without Merritt having sufficient (and in some cases any) basis for believing they were sound, and procured unsound appraisals for the purpose of inducing Merritt to enter transactions it should have avoided, and to lend sums in excess of regulatory limits," Thieblot said.

The letter alleges widespread insider dealing by Klein, repeated violations of state and industry regulations governing loans and deposits, imprudent loan practices that Klein insisted upon despite opposition by the thrift's board of directors, and payment of exorbitant fees to Klein and his law firm.

"We believe," concluded Thieblot, "Klein's wrongful activities will cost Merritt, and ultimately its depositors or those who . . . make the depositors whole, millions of dollars."

Benjamin Bialek, Hughes' chief legislative officer, said tonight, "We considered [the Thieblot letter] with all the other elements involved in the Chase transaction, but the benefits [outweighed] the speculative recovery of any civil lawsuit."

Among other things, Thieblot's letter charges:

*lion "eventually found its way to Klein's pocket." Chase officials have maintained that Klein is effectively bankrupt.

*Klein "may have charged Merritt hundreds of thousands of dollars in unearned (legal) fees and that he personally and entities that he controlled also received large 'management fees' from Merritt for supposedly directing real estate transactions to it which Klein had engineered."

As an example, the letter said Klein received $500 a week in legal fees for the "alleged management" of the sprawling Chesterfield housing project in Anne Arundel County. Chesterfield is one of four properties Klein would keep as part of the Chase deal.

*$16,000 in Merritt funds were spent to furnish a room at Klein's law office, and a Merritt subsidiary paid for two Mercedes-Benz automobiles at a total cost of $93,000.

*During the first quarter of 1985 there were overdrafts totaling about $355,000 to "entities Klein controlled."

*Merritt, under Klein's direction, "loaned far too much money with far too little underwriting. Appraisals were either non-existent, inadequate, or suspiciously inflated."

*Klein insisted, over the objections of his board, "that Merritt continue to make speculative loans at a time when Merritt's liquidity was dangerously low."

*Klein "controlled every aspect of Merritt's operations" and is "personally" responsible for Merritt's losses.

The Chase proposal to acquire Merritt and the other thrifts has become entangled in Chase's demand for a $25 million payment from the state to cover a portion of the losses it expects at Merritt. Steinberg's intent is to force down the sales price as a means of encouraging Chase to reduce the payment.

"I don't care what profit the stockholders get, but if they get a profit, the state can't contribute to it," said Steinberg. "I'm not going to put up money that's going into their pockets."

The Senate's vote late tonight approving the bill facilitating the Chase takeover of the troubled thrifts -- without the $25 million state payment to Chase -- was 42 to 4.

The Hughes-sponsored measure that would authorize the state to make the $25 million payment was overwhelmingly approved by the House on Thursday.

Chase's offer for Chesapeake and Friendship has been criticized by many legislators as too lucrative for the stockholders of those thrifts. The $3.8 million bid for Chesapeake would pay the thrift's 180 shareholders $35.42 per share, almost four times what they paid when the thrift became a stock corporation in 1983.

Friendship's two stockholders would receive $20 million worth of long-term, low-interest mortgages, whose current value is somewhat unclear.

Maxine Adler, a local lawyer who represents Chase, said, "We're firm on the terms of our deal." Chase officials have insisted that the $25 million payment from the state relates only to the bank's assessment of possible losses it might incur at Merritt and not to its purchase of the other two thrifts.

Steinberg said he will attempt through negotiation to reduce the selling price of the three thrifts by the full $25 million.

Although that appears unlikely, one senator predicted that Steinberg would be "the hero of heroes" if he succeeds in a substantial reduction, because the Senate would in all probability approve a renegotiated transaction.

"We can put Chesapeake and Friendship into receivership, so anything they [the stockholders] get beats putting a nail in their foot," observed Sen. Thomas P. O'Reilly (D-Prince George's). "So they'll probably go for it."

Also today, a Senate committee voted to deauthorize about $56 million in capital construction projects previously approved by the legislature as a means of protecting the state's AAA bond rating from any possible losses in the five-month-long thrift crisis.

The goal, said Sen. Laurence Levitan (D-Montgomery), is to demonstrate to New York bond rating houses that the state is taking measures to offset the possible losses and any costs associated with the legislature's approval in May of $100 million in bonding authority to help thrifts meet federal insurance requirements.

"We are all concerned the state will lose the AAA rating," said Levitan, who said the legislature may reduce Maryland's annual building program by $10 million a year over the next four years.