Mention the words "savings and loan failure," and most people think about the Charles Keatings of the world, the crooks and highfliers who knowingly bilked the poor depositors and left the federal government with an estimated $500 billion tab. But for every out-and-out thief, there were perhaps nine or ten less-witting accomplices--the S&L officers, directors, attorneys, appraisers and accountants whose negligence allowed the institutions to go under.

Some of these former "fiduciaries," or persons in positions of trust, knew what they were doing when they authorized loans for reckless or dubious real estate schemes. Others were simply in over their heads. Either way, under the law, they were all responsible for the decisions they made.

But as the result of a far-reaching shakeup at the Resolution Trust Corporation--the agency that was supposed to investigate the former fiduciaries of failed thrifts--many are escaping accountability for their actions.

Critics charge that the reorganization, hastily planned and poorly executed, was a political move by the floundering Bush administration to take the heat off Republicans involved in S&L failures.

As part of the reorganization, the RTC last month all but pulled out of Arizona, saying that its work here is mostly done.

That has outraged the attorney who once oversaw the RTC's efforts to sue former thrift professionals in Arizona. "It's your tax dollars going down the rat hole," says RTC lawyer Bruce Pederson. "And mine, too."

Although the RTC ultimately wound up with the financial remains of ten failed Arizona thrifts, civil lawsuits have been filed against officers, directors and other players of five of them--Western Savings and Loan, MeraBank Federal Savings, Southwest Savings and Loan, Lincoln Savings and Loan, and Sentinel Federal Savings and Loan.

Five others have escaped civil action so far, including heavyweights like Pima Federal Savings and Loan, which claimed $2.5 billion in assets when it was closed, and Sun State Savings and Loan, which claimed $1.1 billion in assets.

No suits have been filed against individuals involved with three smaller failed thrifts--First American, Security and Universal.

RTC spokespersons will not comment on the likelihood of any future civil actions involving the remaining S&Ls. "We investigate every failed thrift and we investigate all the professionals involved in each of those failures as a matter of policy mandated by law," says Felisa Neuringer, an RTC spokesperson in Washington, D.C. "We can't discuss individuals."

But in late January, the RTC attorneys assigned to handle professional liability cases in Arizona were transferred out of state, and their responsibilities were moved to the Denver office as part of the agency reorganization.

About 30 investigators were left behind to continue pursuing information for cases that have already been filed and to check out possible new leads.

Agency officials, including RTC chief Albert Casey, touted the reorganization as an indication that the agency's work is nearing completion.

"Why do [half of the Arizona S&Ls] have no suits, and Mr. Casey is telling the public that the RTC has finished its job and is scaling down, closing the Phoenix office?" Pederson asks. "In Arizona, most of the [failures] were rather large, and you would expect suits in every one of them . . . with the rough-and-tumble lending practices that were pretty pervasive throughout Phoenix in the mid-1980s."
Pederson says RTC attorneys used to characterize investigations for negligence or fraud at failed Arizona S&Ls as "shooting fish in a barrel."

But Pederson no longer has any say in the pursuit of civil cases.
Instead, he is one of the two RTC attorneys who were demoted and then branded whistle-blowers for testifying before Congress about the agency's anemic efforts to pursue former thrift fiduciaries.

@body:In March 1991, the RTC hired Pederson--a seasoned "professional liability" attorney with the Federal Deposit Insurance Corporation in Washington, D.C.--as part of a new program to aggressively pursue negligence claims against the former fiduciaries of failed S&Ls.

"I was very excited," says Pederson, a native Easterner who came to view his job in Wild West terms. "Here was probably the greatest financial scandal in our nation's history, and this was a chance to put on my white hat and see what I could do to clean up Dodge."
It was Pederson's job to set up the new Professional Liability Section in the legal division of RTC's Western regional office in Denver. He would oversee field offices in Phoenix, Denver and Costa Mesa, California, and hire nine attorneys to staff them. Their mission would be to investigate the failed thrifts, determine whether there was, indeed, negligence and judge whether it was cost-effective for the RTC to file lawsuits.

They would not be investigating the most notorious institutions--Colorado's Silverado Banking Savings and Loan and California's Lincoln Savings and Loan had already been handled by other federal agencies. The PLS attorneys would be taking a hard look at the second wave of thrift failures, among them Arizona S&Ls such as Pima Federal, Sun State and Security.

These would be complex cases requiring long preparation, and they would be worth the effort: Every dollar that Pederson's lawyers could recover through litigation or out-of-court settlements would be one less dollar yanked from the American taxpayers' pockets.

But the wrongs of the previous decade were not so easily made right. The guys in white hats, it seemed to Pederson, were outnumbered and outgunned.

He says the PLS was just getting started when RTC higher-ups in Washington, D.C., announced a major reorganization of the agency, which included closing down the Phoenix office by January 1993.

In the May 1992 shakeup, Pederson was abruptly removed from his position and, along with 15 of the country's most experienced professional liability attorneys, told his services were no longer needed.

Even before the PLS program was ransacked, Pederson says, it had been forced to fight pitched battles to bring civil complaints, including the one against Arizona Governor J. Fife Symington III for his alleged role in the failure of Southwest Savings and Loan.

John Beaty, then the RTC assistant general counsel over PLS, "was probably forced to sacrifice a lot of his chips in-house to get that [Symington] thing through," Pederson says. "He did not make himself popular with the agency leaders by continuing to recommend what he thought was right for the taxpayers."

The dismantling of the PLS set off alarm bells in Washington, especially among Senate Democrats who accused the Bush administration of backing away from a tough S&L program because of the approaching election. Several prominent Republicans, like Symington, they pointed out, had come under scrutiny by PLS attorneys.

RTC officials denied there was political interference from the Bush administration, explaining that the reorganization was an attempt to streamline the agency, to get rid of superfluous staff and to prepare for the day when the RTC, a temporary creation of the U.S. Congress, would cease to exist. When pressed for details, however, on why they had ousted so many experienced attorneys when there was so much work remaining to be done, they came up short.

Democrats on the Senate Banking Committee, who had begun hearing disturbing reports about the effects of the RTC reorganization on the PLS, scheduled a hearing last August and invited Pederson and two other attorneys to testify. The government employees blasted the reorganization as an attempt to undermine a successful, if controversial, program. When asked by one senator what the likely outcome would be, Pederson was blunt.

"The bad guys walk," he said. "They get off cheaply, or they get off altogether, because we are not allowed to do our job."
Jacqueline Taylor, whom Pederson had hired to head the Denver field office, told the senators that managers within RTC's legal division stymied the PLS, too. Even before the shakeup, she said, there had been a "consistent effort by the commercial legal department to hamper and delay the functioning of the PLS unit."

RTC officials dismissed the testimony of Pederson and Taylor as the complaints of demoted former managers. But their words made a strong impression in Washington. Vice presidential candidate Al Gore, for one, talked about the "two Denver RTC whistle-blowers" during a campaign appearance on the Larry King Live radio show. Last October they appeared in a segment on the CBS-TV news show Street Stories. And in November, Harper's magazine published a transcript of Taylor's testimony under the headline "A Second S&L Scandal."

Since their appearance before the Senate committee, say the two attorneys, they have been ostracized by RTC officials, segregated in separate office quarters, passed over for promotions and pressured to accept transfers to Dallas or Kansas City. Pederson notes that former office mates will pass them in the halls and "pretend like we don't exist." Taylor likens their experience to "the shattering of glass."

RTC supervisors in Denver decline to comment on Pederson and Taylor, referring all questions about them to Steve Katsanos, an RTC spokesperson in Washington. Katsanos denies the two attorneys have been singled out or harassed in any way.

But Pederson and Taylor insist their careers have been derailed--and a successful government program has been undermined--by a combination of election-year politics and bureaucratic rivalries. The two detrimental forces converged in early 1992, they say, just as the PLS was facing its first important legal deadlines.

@body:From the start, Pederson and his attorneys viewed themselves as an elite outfit, more dedicated, more experienced and, in fact, better paid than the average, time-clock-punching government lawyer. Pederson had been given permission to hire attorneys at the top government-service pay levels.

"We were able to hire very experienced litigators, and people who had a background in the private sector," says Pederson. "Compared to the lawyers already onboard at RTC, these people had a lot more savvy."
A career civil servant, Pederson had worked for four federal agencies since graduating from the law school at the College of William and Mary in 1980. During his stint at the Federal Deposit Insurance Corporation, he was considered one of the agency's experts on the issue of professional liability insurance coverage.

Taylor, a former vice president and general counsel at First Interstate Bank in Denver, had 15 years of legal experience in both the public and private sectors. She describes her professional liability work as "cutting-edge" law, a challenging, specialized area that demands both an understanding of corporate law and the ability to make sense of complex and sometimes bizarre commercial transactions.

"I loved my job," says Taylor. "I really did. It was fascinating. I had a very understaffed group here in Denver. But we were all really dedicated, and we worked really well together."
Suing former S&L officers and directors for negligence, however, was not a popular approach with leaders in the banking industry or with Republican lawmakers. Many members of the S&L boards were prominent and politically well-connected Republicans, which made a lawsuit embarrassing all the way around. Especially controversial were the suits targeting "outside directors"--that is, members of thrift boards who weren't professionally involved in the institution.

"These are not the Charles Keatings of the world," explains David Barris, executive director of the American Association of Bank Directors. "These are local physicians or educators, or the guy who owned the local grocery store, who never envisioned they would be facing this [liability]. They didn't directly benefit [from the S&L], other than being paid nominal fees to attend meetings. Many of these people are now elderly. Some don't have the resources to defend themselves."
RTC lawyers don't usually go after targets unless there is a source of funds to recover, counters Taylor, and most S&L directors were covered by insurance policies. Besides, she argues, even outside directors should be put on notice that they can't afford to go to sleep at the switch.

"Directors have a fiduciary responsibility," says Taylor. "They are supposed to be the watchdogs. They are supposed to review the findings of auditors and ensure that the proper policies are in place. Otherwise, what is the point of sitting on the boards?"
But Pederson says that even within the RTC legal division, there were people who shared what he calls the "industry mindset" about PLS suits--namely, Gerald Jacobs, then general counsel of the RTC legal division headquarters in Washington, D.C.

Jacobs could be considered an odd choice for that job: As a former real estate attorney in Phoenix, he had close ties to the S&L industry. According to a series of articles in the Washington Post, Jacobs once represented an Arizona development company that defaulted on $40 million in loans from Western Savings and Loan. In fact, Jacobs himself had once defaulted on a loan from the failed thrift. (Last August, Jacobs left the RTC, under fire for his Arizona S&L ties, returning to his post at the Phoenix law firm of O'Connor Cavanagh. Through a spokesperson, Jacobs said he is not allowed to discuss PLS litigation.)

Pederson says Jacobs often questioned the wisdom of filing PLS suits, and that he once told a group of PLS attorneys assembled in Washington that the lawyers should think long and hard before suing former directors and officers of failed S&Ls. "After all," Pederson recalls his saying, "these people aren't murderers."

In the early part of 1992, it was Jacobs who had to give the go-ahead before a suit could be filed. Beginning in December 1991, Pederson says, Jacobs began asking for more and more paperwork from the attorneys researching the professional liability cases. "He kept piling on requirements," recalls Pederson. "I called it the steeplechase. And after a while, these memos grew from a few pages to almost books, and even that wasn't enough."

The pressure from Jacobs came at a particularly busy time for the PLS attorneys. The statute of limitations for RTC's negligence lawsuits was three years. For many of the institutions the agency had taken over, the three-year mark fell in the first quarter of 1992.

Deciding whether to file a professional liability lawsuit involves organizing large numbers of documents, analyzing loans and investment transactions, figuring out who made which decisions and why. Paperwork on a single case can fill an entire filing cabinet. And the decision to file suit cannot be taken lightly, for the agency can be countersued by plaintiffs and lose money if the cases aren't strong.

The increasing demands, says Taylor, made it very difficult for her and her staff to meet their deadlines. They coped, she recalls, by working "hundreds of hours" of unpaid overtime. During the deadline frenzy of early 1992, it wasn't unusual for them to be in the office until midnight every night and to work the whole weekend.

"It was a massive task," says Taylor. "It was a mountain. I was very pleased and proud of the fact that we did it."
Taylor and her co-worker, PLS attorney Virginia McCrae, recommended lawsuits against six thrifts, involving several dozen defendants and hundreds of millions of dollars in damages. The RTC eventually filed suit against fiduciaries at four of the institutions--three in Colorado and one in New Mexico.

A month later, Pederson, Taylor and 14 other PLS attorneys would be rewarded for their efforts by being transferred out of the program.

In March 1992, RTC chief Albert Casey announced that a complete reorganization of his agency would take place in May. His plan was to reduce the agency's size by folding the 15 field offices and four regional offices into six RTC "supersites--Denver, Kansas City, Dallas, Atlanta, Costa Mesa and Valley Forge, Pennsylvania.

In response to questioning by the Senate Banking Committee, Casey said he restructured his agency in order to eliminate unnecessary layers of bureaucracy and to prepare for the day in 1996 when the RTC was supposed to expire.

But Pederson and some other RTC attorneys think he was trying to create an election-year impression that the Bush administration had been successful in cleaning up the S&L mess--so successful that it no longer needed such a large staff.

According to Casey's plan, the 16 PLS attorneys were to be "put back" into the FDIC. (It was decided when the RTC was formed that all staffers hired as permanent government employees would join the FDIC once the RTC had completed its work.) What made the "put back" order seem odd, however, was that RTC general counsel Jacobs had requested only a year before that Congress double the funding for his PLS staff.

Had the PLS attorneys managed to complete all of their work in the meantime? RTC spokesperson Katsanos points out that the "spike" of statute-of-limitations deadlines ended in April 1992, after which there wasn't as much for the PLS attorneys to do.

"A large number of PLS cases did manage to get filed in the first quarter of 1992," says Pederson. But he contends there were many more deadlines to come. His staffers had completed perhaps a fourth of their work, he says.

When RTC officials transferred the 16 PLS specialists, they had to reassign the specialists' cases. Attorneys who had less or, in some instances, no background in professional liability were thrust into circumstances in which they had to make immediate decisions. "It was like taking John Elway out of a game and substituting a quarterback from the local high school," says Pederson.

He believes the PLS suits were viewed as politically unwise by the Bush administration as it faced a difficult reelection. "A large number of prominent people were included in those suits--people like the governor of Arizona, Fife Symington III, who has very close ties to the [Bush] White House," notes Pederson. "What better way to slow up the program than to reorganize the RTC--for legitimate reasons--but then to suck the PLS program in with the reorganization, taking out the most experienced lawyers and replacing them with rookies from the commercial side?"

According to a report by the General Accounting Office, undertaken at the request of the Senate Banking Committee, the RTC reorganization resulted in the loss of about 40 percent of the PLS' trained staff, as experienced attorneys either left the agency or were transferred. The brain drain was most pronounced at the senior levels--as of June 1992, five of the seven most senior PLS managers were no longer in the program.

The GAO, a research arm of Congress, found no evidence that pressure from the Bush administration had anything to do with the RTC shakeup. But it also found "no sound management reasons why they would reorganize the [PLS] at that point in time," says assistant director Edward Stephenson. "The whole thing just didn't make any sense. It smelled to high heaven."

@body:The RTC is a temporary agency which was formed by Congress in 1989 to liquidate the assets of failed S&Ls. With billions of dollars worth of securities, real estate and other assets, the RTC became one of the largest corporations in the United States.

And like any other large corporation, the RTC had a need for a lot of lawyers. Its legal division not only provided legal advice to the business managers in complex real estate transactions, but also handled bankruptcies, probate matters and litigation involving former borrowers. The actual courtroom work was usually contracted out to private firms, but the preparation and management of these cases were handled by RTC staff attorneys.

When Pederson started work in Denver, the PLS maintained lines of authority separate from the much larger "commercial" legal section, the attorneys who worked with the business side of the agency. The commercial attorneys prepared litigation involving former borrowers, while the PLS attorneys handled cases involving the former fiduciaries.

PLS field attorneys, although they shared office space with their commercial-section colleagues, did not answer directly to commercial-section supervisors in the regional offices. Jacqueline Taylor, for example, reported only to Pederson, and Pederson reported only to John Beaty, the RTC assistant general counsel over the PLS in Washington, D.C.

"This program," says Pederson, "was customized for the high-profile work that we did. We were investigating a lot of politically prominent people, and the thought was to keep us insulated from political pressure."
But it didn't quite work out that way. From the outset, the independence of the PLS was challenged by other RTC managers who felt that the PLS field attorneys should be accountable to the regional offices. Pederson says that Jeffrey North, the Western regional counsel in Denver, "resented the fact that I didn't report to him."

"I was constantly being challenged with assignments from him, questions from him," says Pederson, "and efforts by him to drum up evidence that somehow this freestanding program wasn't working. So we had a lot of almost guerrilla warfare starting to emerge."
North was considered by Pederson to be the protg of Richard Aboussie, the RTC's assistant general counsel for litigation in Washington, D.C. Aboussie had tried to get Beaty to agree to have PLS attorneys report to managers in the regional offices instead of reporting directly to Washington--but Beaty resisted. (Both North, who left the RTC last June to go into private practice, and Aboussie declined to comment.)

All of this conflict over reporting lines may seem inconsequential to the outsider, but it is critical to federal employees: The person you report to is the person who writes your performance rating, and thereby influences your career. The real conflict, says Pederson, involved who would control the PLS--Beaty or Aboussie.

The two men had very different approaches to legal strategy. A former FDIC managing attorney, Aboussie had worked on the government investigation of Charles Keating's Lincoln Savings and Loan. In that case, FDIC attorneys sued Keating and associates for civil fraud and racketeering under the RICO (Racketeering, Influence and Corrupt Organizations) Act, which allows plaintiffs to recover treble damages.

Winning damages of more than $100 million, the Lincoln Savings case was a public relations coup for the FDIC. According to Pederson, who knew Aboussie when they both worked for that agency, Aboussie considered the Lincoln Savings case a "blueprint" for future RTC litigation. Beaty, a more low-key and cautious lawyer, saw negligence as the "bread and butter" of the PLS.

Not that the two causes of action are mutually exclusive, but they could occasionally conflict. Most S&L officers and directors are covered for negligence under insurance policies. But that coverage may be invalidated if the officer or director is found to have committed fraud. Although a RICO fraud suit can fetch higher damage awards, fraud can be more difficult to prove than negligence. Sometimes, even with a crooked S&L fiduciary, it is safer to go after him for negligence, especially if the target does not have a lot of assets.

In December 1991, the turf war in Washington was entering a conclusive stage. Jacobs promoted Aboussie to the position of associate general counsel, giving him authority over Beaty. A month later, Aboussie outlined a new organizational plan that was to be implemented in mid-April. Henceforth, the PLS attorneys would report to the regional counsels. The changes, says Pederson, "basically stripped John Beaty of all his power."

So when the choices were made about who would be transferred out of the PLS in April and May 1992, Beaty was no longer in a position to protect the people he had hired. Aboussie was in the driver's seat. Pederson says he and Beaty penned numerous memos on how best to handle the PLS in the reorganization, all of which were ignored by the commercial legal managers making the decisions. Beaty quietly left the RTC last May to take a job in the banking industry.

How were the decisions on who would stay and who would be transferred made? RTC spokesperson Katsanos would not comment, but the investigation by the GAO revealed the following: The decisions were made during a series of meetings held by senior legal division officials and supervisors from the regional offices, without input from PLS managers. No minutes were kept of the meetings, and RTC officials gave the GAO investigators conflicting information about the transfers. Some said they were based on job performance; others said no performance appraisals were made. Nor, apparently, were the workloads of individual attorneys considered, or even the legal staffing needs of the agency as a whole.

The decisions on whom to "put back" were so questionable that the RTC later had to reverse itself when the head of the FDIC refused to take the employees, arguing that they were still needed within the RTC. In the end, some of the attorneys got their old jobs back--but not Pederson or Taylor.

"In the meantime," recalls Taylor, "they were treating us just terribly. Bruce and I were ostracized to a building apart from the legal department, about five blocks away, and we had no secretarial support. [The commercial legal managers] opened our mail, even stuff marked personal and confidential."
Ostensibly, the building change was to be a very short-term situation while the two waited to be reassigned to the FDIC. But even after the FDIC refused to accept them as "put backs," Taylor and Pederson were relegated to separate quarters for several months. "They wanted to keep us away from information," says Taylor, "and punish us."

An August 6 memo from the RTC personnel office in Washington gave the two demoted managers the choice of transferring to RTC sites in Dallas or Kansas City. They were given this choice, they say, and 36 hours to decide, a few days before they were scheduled to testify before the Senate Banking Committee. Pederson says that after he complained to committee chairman Donald Riegle about the memo, an RTC official in Washington called them to say they had until November to decide, and they could choose to remain in the Denver office.

A few days before Thanksgiving, Pederson and Taylor were told they could return to the main building in Denver. Both had rejected the transfers to Dallas or Kansas City, figuring if they had to take demotions, anyway, they might as well stay in Denver.

The RTC denies that the reorganization has hurt its work. "I actually think our legal program is in much better hands as this consolidation goes forward," says Katsanos.

But Pederson and Taylor say the agency has been less aggressive in pursuing officers and directors since the reorganization. They say they know of no professional liability suits filed in Denver since they were ousted. RTC officials decline to say how many new cases have been filed in Denver. Records in U.S. District Court reveal that no new cases have been filed.

Passed over for RTC management jobs that have come up in the meantime, the two former supervisors are being given what they describe as "make work" assignments that could easily be handled by junior attorneys fresh out of law school.

"I don't do any litigation," says Taylor. "I work on residential real estate transactions. I write memos on contracts that other people have drafted, for the most part."
Pederson has been assigned to a special projects unit. "I've been told that my first project would be to compile an inventory of RTC properties with environmental problems," he says. "I have zero background in environmental law. I have nothing in my career track that has anything to do with that."

Katsanos bridles when the term "whistle-blower" is used to describe Pederson and Taylor. "I don't view a whistle-blower as somebody who is unhappy because of a job reassignment," he says. "They want to be bosses, they want to be supervisors, and that may not be in the cards for them. But that is not any form of retribution for coming forward and making their charges."

Taylor insists that she didn't testify because she lost out on a management slot. "I did this because I saw a travesty of justice going down," she says, "and I thought somebody ought to speak up."

Pederson and Taylor say they plan to wait it out in the Denver office, hoping the change from a Republican to a Democratic administration in Washington will end their disfavored status.

"It's a scary thing," says Taylor. "They have derailed my career through this process. I sleep well at night. I know I've done the right thing. But that's not going to pay my mortgage.


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