By Matthew Hendley
By Monica Alonzo
By Monica Alonzo
By Monica Alonzo
By Stephen Lemons
By Jason P. Woodbury
By Dulce Paloma Baltazar Pedraza
By Ray Stern
The lack of formal state blessing to purchase shares of Arizona Escrow didn't pose much of a problem for Brewer.
"They never approved my purchase, but they didn't deny it, either," Brewer points out.
After Harshey bought the debt-ridden company for $150,000, he issued an equal number of shares to Brewer. Brewer then simply placed the stock in escrow with the company's attorney, Larry Wilk, who soon became Brewer's frequent social companion, court and state banking department records show.
With the ownership problem out of the way, Brewer and Harshey were free to get down to business. The first thing they did was change the name of the company to Charter Title. From then on, it was clear sailing.
Once Brewer and Harshey were in business, the banking department was more than happy to accommodate them in whatever way it could. Rather than taking a cautious approach to approving requests by Charter Title for additional branch offices, department files show several instances in which state regulators actually accelerated approval of new offices.
For example, on November 22, 1991, Stephen W. Brodine, assistant director of consumer credit, sent a memo to a department staffer directing her to make the effective date of a Charter branch license one week before it would actually be approved.
"I understand the license will be issued next week," Brodine's memo states. "Would you please back-date it to November 21, 1991."
In another instance, Shirley Gidney, the supervisor of the department's licensing section, ordered department staffers to "rush" through an application for Charter Title to open yet another branch office. Gidney's hurry-up order came two weeks before the state was forced to close down Charter Title.
When the state did receive tips that problems were brewing at Charter Title, the information was ignored. In December 1992, former Charter employee Frayda Pap told the department that there were major irregularities with Charter Title's accounting practices.
"They just blew me off," Pap says.
Another warning came last July when Pat Ihnat, Charter Title's corporate attorney, vice president and corporate secretary, resigned from the company and sent a copy of her resignation to the banking department.
Rather than contacting Ihnat to find out why she was leaving the company, banking department officials scribbled notes on her letter indicating complete befuddlement.
"Steve, what do we need to do? Anything?" Gidney scrawled.
"Nothing, as far as I know," replied Brodine.
The state's lax regulatory approach to Charter isn't too surprising, if you know how regulators handled the previous collapse of another title and escrow company--Continental Service Corp.
@body:There was no doubt that Continental Service was in violation of dozens of securities and banking laws and grossly insolvent by the time the state banking department released its May 24, 1991, bank-examination report to the firm.
The examination came more than three years after John M. Bulavinetz had purchased the company from Chase Bank of Arizona. By the time the state got around to checking on the new owner, it was too late.
A confidential banking examination obtained by New Times reveals that Bulavinetz transferred $5.8 million from Continental Service to another company in which he shared an ownership interest. At least $3.9 million of this money was illegally transferred from Continental Service's escrow accounts, the examination report states.
Rather than seizing the company immediately after the shortages were discovered, the state banking department quietly issued a cease-and-desist order. The order, not previously made public, directed Continental Service to stop moving escrow monies to the other company, and to recover the funds already transferred.
The order proved to be worthless.
According to an unusual lawsuit filed against the state banking department--filed, in fact, by a state-appointed consultant--Continental Service, while under the watch of state regulators, continued to improperly transfer escrow funds out of the company.
"In that case, the state oversaw an 18-month Ponzi scheme," charges James C. Sell, a Phoenix financial consultant hired by the state to liquidate Continental Service after the banking department seized it in October 1992.
The illegal transfers grew to $5.84 million, Sells alleges, before the state finally stepped in and seized Continental Service--18 months after issuing its cease-and-desist order.
"The state had done an investigation and had discovered what had occurred," Sells says. "Then they let [Continental Service] continue to operate under their overview for a period of 18 months. The net effect is that they created a whole new class of victims."
Sells is now seeking $2.3 million in damages from the state to cover losses suffered by unknowing members of the public, who unwittingly believed Continental Service was a solvent and reputable escrow company--while, in fact, it was illegally transferring money under the state's watch.
@body:The Friday before Columbus Day, Pam Eckman, an administrative bookkeeper at Charter Title, received a telephone call from an attorney representing Stephens Brothers Partnership, a Litchfield Park real estate investment group. The attorney was concerned about the location of $1.5 million in partnership funds that Charter Title was holding in escrow.
The money was supposed to be held in a Bank of America savings account, but it wasn't there. Court records filed by the state last month indicate the $1.5 million was transferred on July 7 to a Charter Title account at National Bank of Arizona, where it was mixed with other company escrow funds.