A sweeping official investigation into the causes of Maryland's savings and loan crisis blamed the debacle today on greedy thrift owners whose excesses were nurtured by "captive" regulators and went undetected by "all levels" of state government.
In an hour-long speech to the General Assembly and a 457-page report based on a six-month examination, Special Counsel Wilbur D. Preston Jr. cast a broad net of blame for the crisis that brought the $9 billion industry to the brink of collapse in May and still affects more than 100,000 depositors.
"It is a history without heroes," Preston told the legislature.
More than half of Preston's report is devoted to case studies of eight associations that together represented "all that was bad about Maryland savings and loan associations."
One of them, First Maryland of Silver Spring, made more than $13.7 million in loans to businesses controlled by First Maryland President Julian M. Seidel and other officers, the report said. The two officers at another Montgomery County thrift, Friendship, established a parent company that "was used to divert" about $3 million to benefit the officers, according to the report. Neither Seidel nor the other thrift's officers could be reached for comment.
Preston, who has already referred allegations of criminality at one savings and loan association -- Friendship -- to Gov. Harry Hughes, said he expects additional criminal referrals before March 1 when his investigation will be concluded. Preston said individuals in both the private and public sectors could be involved.
The special counsel also predicted the state could reap "very substantial recoveries" from potential civil suits he will recommend.
Though senior Maryland officials, including Hughes and Attorney General Stephen H. Sachs, were criticized for the failures of their staffs to detect the brewing disaster, Preston found them considerably less culpable than the state government's senior savings and loan regulator and his counterparts in the private corporation that insured the thrifts.
"There is no sensible excuse" for the failure of the state Division of Savings and Loan Associations and the Maryland Savings-Share Insurance Corp. (MSSIC) to halt the industry excesses that dated as far back as 1978, Preston said. In that year, government examiners uncovered a pattern of abuses, including extensive insider trading, at a Carroll County thrift controlled by two individuals who examiners concluded "should not be permitted to operate a savings and loan association."
Despite the damaging report, neither the examiners' boss, savings and loan division head Charles H. Brown Jr., nor senior MSSIC officials took any action, said Preston. The two thrift officers, Jeffrey Levitt and Allan Pearlstein, later would run Old Court Savings & Loan of Baltimore -- whose problems triggered the industry crisis in May.
MSSIC and the division were so frightened that punitive action by them would cause a depositors' run, "they literally allowed persons in control of savings and loans to do anything," added Preston.
Neither Brown nor the former head of MSSIC could be reached for comment.
"It is my conclusion," Preston continued, "that there was no regulation of the savings and loan industry in Maryland. It was an unregulated industry . . . . The virus spread until it affected the associations that held approximately 50 percent of the $8 billion insured by MSSIC."
In addition to the well-documented abuses at Old Court, Preston's lengthy report described in detail the by-now-familiar pattern of insider dealing, excessive fees and misuse of depositors' funds at seven other thrifts: First Progressive Savings and Loan of Carroll County, which later merged with Old Court; Merritt Commercial Savings & Loan of Baltimore, Community Savings & Loan of Bethesda, Sharon Savings and Loan of Baltimore, Ridgeway Savings and Loan of Catonsville, as well as Friendship and First Maryland.
"These were not savings and loan associations in the classical sense but were real estate investment trusts operated for the benefit of a few people including those who controlled the associations," said Preston. "Insider deals were rampant among the high-flying MSSIC associations."
"No distinction was made between the money of depositors and of directors," he continued. "Fiduciary duty was an unknown term."
Preston also dismissed the arguments of senior MSSIC and division officials that state laws did not given them enough power to stem the abuses.
"Although additional statutes and regulations would have been helpful, both MSSIC and the division had ample power to regulate the savings and loan industry," Preston said. "Both, however, chose not to exercise their substantial authority."
Preston described MSSIC, the division and its parent Board of Savings and Loan Association Commissioners as protectors of the industry. MSSIC and the division, said Preston, "were little more than industry captives."
The Preston report, which was authorized by the legislature and governor in May, also severely criticized one of Baltimore's most prestigious law firms, Venable, Baetjer & Howard (now Venable, Baetjer, Howard & Civiletti). The firm, a pillar of the Baltimore establishment, simultaneously represented MSSIC as its general counsel and Old Court, its subsidiaries and its owners.
MSSIC directors, the report said, insisted they were never told of the conflict, which violated an internal ethics memorandum prepared by Venable, Baetjer & Howard.
One Venable partner, Gerald Katz, was a partner with Old Court President Levitt in a Harford County commercial real estate venture. The property was sold to a developer whose purchase was financed by the thrift, and Katz earned $184,000 from the sale.
Venable's managing partner, Jacques T. Schlenger, also served as counsel to Jerome Cardin, one of Old Court's three owners, the report states.
In a written statement issued today, Venable said it had conducted its own investigation into its role and had "uncovered no venal activities by anyone in our firm nor was any action of any lawyer here illegitimate or the cause of any loss on the part of any depositor . . . . We don't claim that we were perfect or that we might not have done some things differently if we had them to do over."
Benjamin Civiletti, a senior partner at Venable who served as U.S. attorney general, said tonight his firm represented Old Court and its principals "on tax advice and structuring advice of joint ventures," and not on loan matters.
"I think that if all the facts get out . . . our clients and the public will understand that they lawyers didn't cause the harms or injuries, that they gave legal advice."
Though the Preston report is, on the whole, a general indictment of the industry and the state that regulated it, the special counsel did praise savings and loan division examiners who he said "time and again . . . presented ample evidence of wrongdoing, including criminal misconduct, to the director and his deputy."
But division director Brown and his deputy William S. LeCompte Jr. -- who is currently serving as acting director -- took virtually no action, Preston said, because they were "paralyzed by the fear" that sanctions would bring down the industry.
The savings and loan division, Preston's investigation found, was largely responsible for the ignorance of senior Hughes administration officials about abuses in the industry. Division director Brown "actively misled" his boss in the Department of Licensing and Regulation and the governor.
The Preston report largely exculpated Hughes for his role, though the governor's staff is criticized for not being more aggressive in following up an October 1984 memo to the governor warning him of "an extraordinary amount of self-dealing" at some thrifts.
The memo, from Hughes adviser George Liebmann, was routed through bureaucratic channels to division chief Brown, whose reply was "at least, understated," the report said.
"The failure of the governor's staff to respond directly to Liebmann, a former staff member, was, in hindsight, a mistake," said the Preston report.
"The administration's handling of the Liebmann memorandum is an example of the fact that the Hughes administration has had insufficient staffing to deal with significant problems as they arrive."
In addition, the report obliquely criticized Hughes' chief of staff Ejner J. Johnson for not immediately providing the Liebmann memo and accompanying replies to Preston during Johnson's initial interview with Preston.
Similarly, an assistant attorney general who served as counsel to the savings and loan division and its parent body is faulted for taking a narrow view of his responsibilities and not practicing the type of "aggressive and preventative law" that the report said is encouraged by his boss, Attorney General Sachs.
The assistant, John C. Cooper, "believed that his role . . . was generally limited to reviewing documents for legal form and sufficiency and giving advice when requested." Cooper, the report said, never reviewed examinations of any thrifts, and never forwarded any concerns about troubled associations to Sachs. Cooper could not be reached for comment.
The legislature collectively is blamed for being too "responsive" to industry appeals for broader investment powers and less regulation. "The legislature consistently enacted legislation created by industry-dominated boards or commissions and often bowed to the influence of special interest groups representing the savings and loan industry," Preston said in his speech.
Reacting to the Preston report, Sachs accepted responsibility for Cooper's failings. "But I have to put it in perspective," said Sachs. "We are not the regulators."
Hughes, in a one-paragraph statement released by his press office, commended Preston for an "extremely thorough and objective" report and said he would give his "total support" to Preston's legislative recommendations for stricter regulation of the industry. That legislation is expected to be filed next week.
Responding to the criticism of the legislature, Del. Patricia Sher (D-Montgomery) said, "We don't have the staff like the congressmen to go out and investigate these things . . . . If the regulators are lying to you, who are you supposed to rely on?"
Preston noted that though the collapse of a similar privately insured thrift system in Ohio precipitated the Maryland crisis, the disaster here was "inevitable." With the rapid growth of Maryland thrifts, he said, the ultimate cost to the state could have been far higher had the crisis been delayed by a year or two.
"Such a Ponzi-like operation must collapse and Maryland's would have collapsed eventually of its own weight. We can be thankful that the Ohio crisis accelerated the demise of MSSIC," he said.