Arizona Daily Star from Tucson, Arizona • Page 20

1982 THE ARIZONA DAILY STAR TUCSON, SUNDAY, FEBRUARY 28, 1982 2 capital infusions set off series of scandals PAGE FOUR SECTION -V I State and city of Scottsdale investigators laid siege to the luxury development and found that McCombs and Ballard also had left a raft of bills unpaid. The city of Scottsdale filed charges against the men for nonpayment of taxes and building-code violations. And the state attorney general's office filed a petition for involuntary bankruptcy against the Santa Fe Corp. on behalf of the state Department of Revenue and other creditors. The bankruptcy petition listed debts of more than $430,000, including $184,000 in state sales and income taxes.

It wasn't the first time Ballard had faced financial troubles several years before, one of his firms faced bankruptcy proceedings in California for debts incurred in connection with projects in San Diego and Hawaii. McCombs and Ballard never made it to Scottsdale City Court or to U.S. District Charles Morgan lv a- Southwestern Bank got two injections of capital during its nine-year lifetime, and those shots triggered a string of events reminiscent of a late-night TV thriller. The plot unraveled with a mysterious death, purported land sales involving a movie star, fraud lawsuits, fugitives fleeing the country, and a forgery or two. The first infusion of capital came in December 1976, when the bank's board of directors agreed to transfer control to investors willing to buy 30,000 shares of newly issued stock for $360,000.

In the ensuing nine months, a man who figured in the transaction was found dead of a gunshot wound. Two lawsuits alleging fraud were adjudicated. And the attorney who allegedly masterminded the scheme to take over the bank had his license to practice law suspended after the Arizona Supreme Court reviewed his handling of another case. He eventually resigned rather than face disbarment for the bank deal. The second capital injection came in the summer of 1978, when the bank issued 21,672 shares of new stock to a group called Pinafore Inc.

The Pinafore group's principals Lawrence E. McCombs and Albert Ballard are believed to have fled the country in 1979 after they were summoned to appear at court hearings unrelated to the bank. Suspicions were aroused when their signatures showed up on a proxy a document delegating voting rights cast in a 1980 bank shareholders' meeting. A state investigator determined that one of the signatures, and possibly both, was a forgery. Morris Herring, the bank's founder, says McCombs and Ballard approached him four years ago with an investment proposal.

The men were known then as the principals of Intercontinental Development Co. and the Santa Fe two Nevada firms developing luxury-townhouse subdivisions on the plush McCormick Ranch north of Scottsdale. They adopted the name Pinafore Inc. as the entity to buy the bank stock, although Pinafore isn't registered with the Arizona Corporation Commission. In a May 1978 agreement, McCombs and Ballard pledged to contribute $360,000 in capital in return for 25,000 shares of bank stock.

The agreement provided that Herring would be retained under a two-year contract as chairman of the board and chief executive officer of the bank, and would have an option to buy one-third of Pinafore's stock. As earnest money, McCombs and Ballard deposited a $100,000 cashier's check and opened an account at the bank. Shortly after the agreement was signed, Herring says now, the two men tried to back out of the deal. To get them to fulfill the contract, Herring says, he had to tap their account at the bank. With that money plus the $100,000 cashier's check, McCombs and Ballard thus became the reluctant owners of 21,672 shares of stock, at a cost of $12 a share.

The two men first came under the scrutiny of Arizona officials in early 1979, when dozens of owners of the new Scottsdale townhouses filed complaints with the state Registrar of Contractors. The complaints detailed numerous construction defects in the homes, including sagging ceilings, cracked floors, missing or unworkable light switches and leaky roofs. near Stanfield known as the Red River Land Co. "All of these representations were false," the attorney general's office said. Once Kali signed an agreement to buy the stock, he gave the bank two worthless checks.

One was for $36,000 in earnest money, and the other was for $360,000 to buy the stock. Both checks were provided to Kali by a Western Title escrow officer named Charles Morgan a man who would be found dead a few months later. The checks were made good in mid-December 1976 by Dr. Nathan Shiff, a partner in Kali's investment group who obtained a $360,000 loan from another bank. At the same time, Kali and another member of the newly constituted board of directors began drafting a $13 million letter of credit to a trust account of which Shiff was the beneficiary.

The proposed letter of credit was drafted when Banco's assets totaled only $7.7 million, the suit said. When regulators were told of the proposed $13 million credit extension to Shiff, they issued a cease-and-desist order prohibiting the bank and its directors from extending credit in excess of $5,000 to any insider of the bank. And the state attorney general's office began an investigation into Kali's takeover of the bank. One of the people interviewed in the inquiry was Morgan. Shortly after it was revealed that he had issued the bad checks to Kali, Morgan lost his job at Western Title and began negotiating to buy Statewide Escrow Service.

That required a state license, and authorities made use of that lever to enlist his cooperation in the Banco investigation. In May 1977, Morgan gave secret testimony to the state attorney general's office. Bruce Babbitt, attorney general at the time, offered to provide protection for Morgan, but he declined it. One month later, Morgan's body was found lying about 10 feet from his car parked along the Ajo Highway, 40 miles west of 'V -ZS 'J 4 Gilbert Ward and his daughter, Sherie, hold worthless stock Investors' dreams for future defaulted with Southwestern An anonymous "gentleman from Mexico" personally delivered the proxy to Southwestern Bank. Court in Phoenix.

They reportedly fled the country, and weren't heard from again until Southwestern Bank's June 1980 shareholders' meeting. A proxy that purportedly bore the signatures of McCombs and Ballard was cast at that meeting. State officials were notified later about the curious circumstances surrounding the proxy's delivery, so they seized it and asked the Department of Public Safety to examine the handwriting. The handwriting experts concluded that McCombs' signature was a forgery, and Ballard's signature may have been forged. To find out how the bank obtained the proxy, the authorities went to Herring.

Herring explains that he had been in touch with the fugitives by telephone. Although they never left a phone number where they could be reached, he says, they would call him sometimes from Panama and sometimes from Venezuela, he thinks. As the June 1980 shareholders' meeting approached, Herring says, he told McCombs and Ballard of the importance of getting their votes so a quorum could vote at the meeting. "I said, 'How can I get it to you if I don't know where to mail At that time, I had done extensive traveling in Latin America. I had been in communication with them when I was in Latin America.

I believed them to be in Latin America, but I didn't know if it was Venezuela or Panama or where. "So on a stopover in Panama," Herring says, "I left an envelope with a proxy in it to be picked up at the airport." Herring says he doesn't know who got the proxy or if it was ever given to McCombs and Ballard. But he does know that an anonymous "gentleman from Mexico" personally delivered the proxy to Southwestern Bank. The proxy was cast at the 1980 meeting. At a January 1981 meeting of the bank's board of directors, a representative of the state Banking Department informed the board members that the forgery had rendered the results of the 1980 meeting invalid, thus creating three vacancies on the board.

The members then voted to appoint bank president Steve Rigg, bank attorney Robert O. Lesher and Morris Herring's brother, Raymond, to fill the seats. After the proxy was declared invalid, Morris Herring says, he was contacted by McCombs and Ballard. They told him they would write a letter saying the proxy was authorized by them, he says, but they never did. The bank's next official contact with Pinafore came at the August 1981 shareholders' meeting, where the group was represented by Phoenix attorney Gary Robinson.

Robinson urged the shareholders to reject a proposal to issue more stock to raise capital, and said Pinafore would try to raise the $2 million needed to keep the bank alive. It never did. When contacted for a response to the allegations against McCombs and Ballard, Robinson said he was merely filling in for another attorney when he attended the shareholders' meeting last August. He said he didn't know much about Pinafore, and didn't know how to reach McCombs and Ballard. "As far as I know, they're out of the country," Robinson said.

I haven't heard from them in months. They aren't very communicative." The attorney general's office also became involved in the bank's earlier attempt to recapitalize. In June 1977, Herring and two other former bank directors filed a lawsuit to nullify the results of the 1976 stock sale to a group called First International Bancshares. One month later, the state filed a civil lawsuit alleging fraud in that transaction. The state's complaint claimed that Tucson lawyer David Kali embarked on a fraudulent scheme in 1976 to take control of what was then known as Banco Internacional de Arizona.

The purpose of the scheme, according to the suit, was to procure financing for the purchase of a central Arizona ranch co-owned by John Wayne. If Kali could obtain a buyer and the financing, he stood to collect a $2.4 million finder's fee, the suit said. In the course of negotiations to buy the bank stock. Kali falsely represented that First International Bancshares could attract at least $2 million in capital to the bank, the suit said. The $2 million would come through his investment group, and an unspecified amount would come from Wayne and Louis Johnson, the other owner of the ranch Western Title signed an agreement in which it promised to refrain from engaging in any fraud or issuing any check without sufficient funds.

Kali agreed to repay part of the money he was alleged to have received as kickbacks for three loans totaling $167,000 made while he was chairman of the board. He also agreed to arrange repayment of those loans to the bank. By signing the consent agreements, Kali and Western Title neither admitted nor denied any of the allegations contained in the attorney general's complaint. The agree-, ments also contained a provision for the two defendants to reimburse the state for the cost of the investigation. Kali also paid professionally for his involvement in the bank.

In September 1977, the Arizona Supreme Court had suspended him from practicing law for two years because of his handling of a loan transaction unrelated to the bank. Three years later, the Supreme Court accepted his resignation in lieu of disbarment, according to a bar association newsletter. He admitted to "unethical professional conduct," the bar said. The third defendant in the state's suit alleging fraud was Dan Kujawa, who served as president of the bank during the Kali takeover. He was accused of knowing that the checks Kali used to buy the stock were worthless, concealing that from the bank's board of directors and drafting the proposed $13 million letter of credit.

Kujawa took his case to court and won. Maricopa County Superior Court Judge Stanley Goodfarb dismissed the case against Kujawa in February 1981. "To attempt to make Kujawa the villain in this drama reduces it to absurdity," said Goodfarb, who characterized Kujawa as "a bank president who did the best he could in a very difficult situation." In his ruling, Goodfarb expressed searing criticism of the banking regulators' decision to castigate Kujawa when "far worse things had happened to (the bank) and it had sustained greater losses from prior apparent mismanagement." "Even though both the FDIC and the stat? banking department would like to forget it, both gave their blessing to the Kali infusion of new capital," the judge wrote. Rather than provide assistance and information as requested, both (regulatory agencies) chose a detached and non-helpful attitude. Neither wanted the responsibility for closing a minority bank and therefore chose to put the pressure on the directors and Kujawa to do anything possible to get more capital," Goodfarb said.

Other sources familiar with the bank's operations have blamed Herring for inviting "Every time we got some good, solid local people willing to invest in the bank, Morris would immediately turn them off," Gomez said. what turned out to be trouble into an already ailing institution. They said Herring solicited investments from people he thought would allow him to retain control of the bank, and spurned offers from more-established local businessmen who would have usurped his power. "The only ones who could buy stock in the bank were those who were approved by and could work with Herring," said one former director who asked to remain anonymous. Another former director.

Rod Gomez, also blamed Herring for discouraging offers from investors who might have been able to set the bank on the right course. "Every time we got some good, solid local people willing to invest in the bank, Morris would immediately tum them off," Gomez said. Herring dismissed those charges as "another attempt (to) taint" him. First Bancshares and Pinafore were the only groups that came up with the cash to back up their offers, he said. Herring also pointed out that no one including regulators who approved the stock sales to new investors was able to foresee how the shots of new capital for the bank would backfire.

He laid the blame for repercussions of the stock sales squarely on the backs of regulators and law-enforcement officers, who Herring said weren't aggressive enough in their investigations of the bank's new investors. "Everything was whitewashed," Herring said. "It was whitewashed by the FDIC, by the superintendent of banks and by the securities division of the Corporation Commission. And who's the guy who suffered the most? "M.H., who took the heat." Morgan was found shot in the top part of the back of his head. He was wearing a bulletproof vest, a holster and a belt buckle that concealed a knife.

Tucson. He had been shot once in the head with his own Magnum revolver. The 39-year-old bespectacled Morgan was said to have led a double life in the year before he died. Some knew him as a quiet, devoted family man, active in the Masonic lodge. Others knew a different Charles Morgan and it was from those people that Morgan apparently was trying to hide.

In the weeks preceding his death, Morgan told several people that he feared a contract was out on his life. He disappeared 10 days before his body was found, and was reported to have moved from motel to motel during that time. Morgan was found shot in the top part of the back of his head. He was wearing a bulletproof vest, a holster and a belt buckle that concealed a knife. A $2 bill with seven Spanish surnames written on it, and a map of a large area southwest of Tucson were pinned to his undershorts.

His car contained several weapons, ammunition and a citizens band radio. A piece of one of his teeth was found wrapped in a white handkerchief in the back seat. Investigators found no fingerprints on the gun and no signs of a struggle, but pathologists detected gunpowder residue on Morgan's left hand, indicating he had fired a weapon. On Aug. 10, 1977, the Pima County Sheriff's Department closed its investigation into the bizarre circumstances surrounding the death, ruling it a suicide.

"We have found no evidence that anyone took part in the death but himself," a homicide detective said. Notwithstanding that ruling, those involved in the power struggle for Banco were unnerved by the death. "I had phone calls from friends telling me to quit jogging in the morning when we were going through this," Herring recalls. Meanwhile, the state Banking Department had forced Kali's resignation from the board. Kali and Shiff were negotiating with prospective buyers of their 30,000 shares of bank stock.

Testimony -began in the lawsuit filed by former bank directors Herring, Jim Corbett and Armando Alfaro to regain control of the bank. A counterclaim filed by the bank alleged that Herring was the one who engineered the stock sale to Kali in return for a portion of the real estate commission in the purported sale of the Wayne ranch. The counterclaim alleged that after Herring was ousted from the bank by Kali, he filed suit for the "improper purpose of discouraging the group of prominent local business people and others from negotiating the purchase of stock from Kali and Shiff and to permit Herring, Corbett and Alfaro to (buy the stock) at a depressed price and upon highly favorable terms in order that they could acquire control of the bank." In late August, the legal battle was resolved out of court. Superior Court Judge Lillian Fisher approved a settlement that provided for the sale of stock from Shiff to Herring, Corbett, Alfaro, Luis Valenzuela and Sherman Montgomery, all former Banco directors. The purchase price was $360,000, to be paid over five years.

The Herring group has since defaulted on those payments. Two plaintiffs named in the attorney general's suit also agreed to settle out of court. Benjie Sanders, The Arizona Daily Star quired the bank's management to disclose regulatory violations in the proxy statements. "In those reports, I seen those big wheels in there were borrowing money from themselves," says Ward. "Those loans were too big for that little bank.

I didn't like it." Similar sentiments were expressed in statements on file in Pima County Superior Court. In a lawsuit filed in 1977, shareholders were surveyed to find out who they thought should have control of the bank. Many of those statements reflect frustration and disillusionment. "The money I bought the shares with was earned with much sacrifice and hopes by all our family," wrote stockholder Manuel Mendivil. "It was money saved through many years; earned by hard toil in the fields.

With it, I wanted to teach my children about saving and investing for a better future. It's sad to say I seem to have taught them to mistrust their fellow beings." Reyes Vasquez wrote: "We thought that by now we would be receiving dividends. What a shock that this could get so much out of hand." The stockholders never did get any dividends, and some who tried to sell their shares found there no longer was a market for stock in a failing bank. So they settled in to wait for the inevitable. "I knew it was going to fold up," says Ward, a retired county highway worker.

"Any small company losing $100,000 a year ain't going to last." Ward and those like him are philosophical about their financial losses, saying there's no sense mourning an investment loss that was risky at the outset. What grieves them more is the loss of an opportunity for pride in ownership, the collapse of one of the few remaining locally owned banks in Tucson. "I used to dream of the time when I could drive past the bank and tell people, 'See that big bank there? That's mine. I was a promoter. I helped get it says Ward.

"But now when I drive by it, I don't tell no one it's mine." Continued from Page IB straps for as many minority members as we can so they can earn more and live better." The banks' original incorporators beat the streets for prospective stockholders, advertised the stock sale on a Spanish-language radio station, set up a mobile unit at Southgate Shopping Center on weekends, and even made a few recruitment trips to Phoenix and to small Southern Arizona towns. Each share cost $20.40 then, and most sales were in blocks of five to 10. "It makes me sick to think about it now," says one person who helped lead the fund-raising drive. "The income level of the people we were attracting wasn't all that high. Some of them saved and saved to buy a few shares to give to their kids, saying, 'Here, this will make you a millionaire when you're Enrique and Anselma Polanco bought five shares themselves and five for Eduardo.

Gilbert and Ramona Ward bought 80 shares and assigned 30 of those to their daughter, Sherie, and grandchildren Gilbert and Cathy. Lela Aldrich bought eight shares to give to her children and mother-in-law as Christmas gifts. Guillermo Camacho bought 10 shares for his son, Philip. Isauro and Dora Rodriguez bought five shares for their four children. For many, it was the first and last time they ever bought stock.

"We never had been involved in anything like that before," says Polanco. "I never had enough courage." Camacho, a pipefitter, says he and some of his friends who bought stock relied on the expertise of the banks' organizers. "There are very few of us who are knowledgeable about investments. A lot of us do well if we can balance our checkbooks." Most of the keep up with 1,800 shareholders didn't how the bank was run throughout its nine-year history. But proxy-solicitation state- every year, in ments mailed meetings, they troubles.

The for annual stockholders read about some of the federal government re.