An article yesterday incorrectly identified John J. Mason and Luther H. Hodges, both former chairmen of National Bank of Washington, as defendants in a set of lawsuits regarding the bank's commercial paper program. Neither was named as a defendant in the suits, and neither was an officer or director at the bank holding company at the time the company defaulted on obligations to commercial paper holders. (Published 8/24/90)
Until National Bank of Washington ran into financial trouble, some Washington investors thought that "commercial paper" was a special type of bank deposit that was as safe as a federally insured bank account.
But these days the holders of this short-term debt issued by the bank's parent are calling themselves the only true victims of the collapse of National Bank of Washington, and they are waging a legal battle against the bank, its officers and its parent firm to get back millions of dollars that they say were stolen.
Since Washington Bancorporation -- parent of National Bank of Washington (NBW) -- defaulted on its commercial paper, a ream of lawsuits has been filed in U.S. District Court.
The lawsuits all charge that the bank defrauded some of its depositors by investing their money in the risky, uninsured commercial paper without the depositors' permission.
"The real story here is what's happened to people like us," said Richard Kabat, who lost $440,000 when the bank defaulted on its debt. "I put my money in an account just like all the other depositors of that bank. But I can't get mine back."
Kabat said that he deposited his funds in an NBW money market account. But when the bank company defaulted on its commercial paper, he received notice that he was a creditor of the company because his money was invested in the high-risk commercial paper.
"I never gave them the authority to do that," Kabat said. "Now, I'm sitting here watching all the other NBW customers withdraw their money, and I have to spend my money on lawyers."
Caught in the commercial-paper squeeze are National Security Adviser Brent Scowcroft, real estate developers James Clarke and J.W. Kaempfer, and businesses like Mattress Discounters and Mutual of New York. In all, Washington Bancorporation owes more than $25 million.
Following the default, several commercial paper holders filed lawsuits against Washington Bancorp. to recover their funds. But the company's Chapter 11 bankruptcy filing earlier this month derailed those lawsuits, because a company in bankruptcy court is protected from its creditors.
To remedy the situation, a whole new set of lawsuits has been filed against the bank itself and against individual bank officers, who are not protected by the bankruptcy laws. The new lawsuits name former bank officials John Toups, John J. Mason, Luther H. Hodges Jr. and Donald Coleman, among others.
"We intend to see this through," said Louise Pulizzi, spokeswoman for Clarke's Hyman Construction Co., which is owed $4 million. "Someone has to be held responsible for what's happened."
The Securities and Exchange Commission is conducting a formal investigation into the bank's commercial paper program.
Sources said last week that the U.S. Attorney's Office and the Federal Bureau of Investigation have joined the SEC in questioning bank officials about how the program was handled.
Among the questions under review are whether the bank defrauded its customers by putting their funds in risky commercial paper and whether the bank gave preferential treatment to WorldCorp., the Herndon-based charter airline that had its commercial paper redeemed the day before the bank defaulted. WorldCorp. officials declined comment.
It may be months, even years, before the results of the investigations are made public or the lawsuits are settled.