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Paper: Houston Chronicle Date: SUN 07/19/98 Section: A, Page: 1 Edition: 2 STAR Redwoods, not red ink, may have motivated FDIC againstHurwitz Documents show agency may have tried to hide truth in pursuing suit against financier By BOB SABLATURA, Staff Recently unsealed court documents suggest that attempts by federal banking officials to collect $250 million from Houston financier Charles Hurwitz may have more to do with redwoods in California than red ink on the books of a now-defunct financial institution. Officials with the Federal Deposit Insurance Corporation say they sued Hurwitz because he cost taxpayers millions of dollars by mismanaging the former United Savings Association of Texas. But the court documents, including an internal FDIC report the agency has fought hard to keep secret, suggest FDIC officials may have bowed to pressure from environmentalists and government officials and filed the lawsuit to force Hurwitz to turn over ownership of the Headwaters Forest in Northern California to the federal government. The forest of redwoods is owned by Pacific Lumber Co., which was acquired in the 1980s by Maxxam Inc. Hurwitz is chairman and chief executive officer of Maxxam. After the acquisition, the company enraged environmentalists by making plans to increase its harvesting of redwoods. In an attempt to preserve the forest, the largest privately held stand of old-growth redwood trees in the country, environmental activists on the West Coast conceived the idea of inducing Hurwitz to give up the trees in exchange for the debt the financier allegedly owed the federal government. The unsealed internal documents also reveal: FDIC officials brought the lawsuit despite their own assessment that it was highly unlikely the agency could win the case. FDIC officials specifically targeted individuals close to Hurwitz for prosecution. And in one instance, the unsealed documents show that FDIC officials decided against suing one highly respected person because it would make the agency look bad. The FDIC attempted to hide the fact that it was secretly financing another government agency's investigation and prosecution of Hurwitz and his associates, while claiming the action was "independent" of the FDIC case. The internal documents have been at the center of an ongoing legal battle by FDIC officials to keep them private. After U.S. District Judge Lynn N. Hughes unsealed the documents late last year, FDIC attorneys appealed the action to the 5th Circuit Court of Appeals and the documents were resealed while the matter was under review. When the appeals court declined to take any action on the matter, Hughes again unsealed the documents. After learning of his action several days later, FDIC attorneys appealed the unsealing for a second time and the documents were again placed under seal. The Chronicle obtained a copy of the documents during the two-day period that they were available to the public. FDIC officials say they cannot discuss the contents of the internal reports because they are again under seal, but say they are fighting to keep them secret, not because there is anything embarrassing in them, but because they contain sensitive information that can hurt their case if it becomes public. Similar internal reports are drawn up on every case brought by the FDIC and are presented to the FDIC's governing board. Upon approval, the reports become the agency's official memorandum authorizing FDIC officials to bring a lawsuit. FDIC spokesman David Barr said the internal reports spell out the agency's strategies in pursuing a lawsuit, and even reveal the amount of money the agency believes it can get to settle a case. "It is our game plan for the lawsuit," Barr said. "And that is not something you want to turn over to the other side". Hurwitz attorney Richard P. Keeton, a partner with Mayor, Day, Caldwell & Keeton, said federal officials have been maneuvering for more than a decade to gain possession of the redwood forest from Hurwitz but have not been able to come up with the money to purchase it. FDIC officials hoped Hurwitz would give up the redwoods as part of a settlement of the lawsuit, an idea that has become known as a "debt for nature" swap, he said. "The agency could not stand the heat that they were getting from Congress, the administration and from the environmentalists who wanted them to do something about Hurwitz ," Keeton said. "So the easiest force to apply was to bring the lawsuit." Barr acknowledged that his agency was aware that numerous environmentalists and members of Congress had an interest in seeing a debt-for-nature swap, but said it had no effect on the FDIC's decision to bring its lawsuit. "There was no political influence on us to file this case," Barr said. "There may have been some interest by politicians, but we did not see it as pressure." Hurwitz 's attorneys say their client has been unwilling to agree to such a debt-for-nature settlement because FDIC's claims of mismanagement of United Savings are simply not true and Hurwitz isn't liable for the S&L's losses. "There is no debt to swap," Keeton said. Hurwitz declined repeated requests for an interview to discuss the debt-for-nature proposal. He did, however, address the subject several years ago in a Chronicle opinion piece, saying the legal actions by federal officials represented a form of political harassment and an attempt to gain ownership of the Headwaters Forest without having to pay for it. "The bottom line is that the Headwaters Forest will not be traded for a debt that does not exist," Hurwitz wrote. "Nor will it be a pawn in any abuse of governmental power." Hurwitz and his companies have spent more than $20 million defending against claims brought by federal banking authorities. The events leading to the legal battle now being fought in a Houston courtroom began more than 15 years ago. The year was 1982 and Houston was experiencing the boom before the bust. In the midst of a thriving economy, Hurwitz , known as a corporate takeover artist, bought just under 25 percent of the financially troubled United Savings by purchasing stock in United Financial Group, the S&L's parent company. Hurwitz apparently wanted the S&L for the assistance the $3 .3 billion institution could provide him in financing his ongoing corporate acquisitions. For the next six years, as the Houston economy went from downturn to disaster, United experienced financial difficulties, racking up huge losses in its loan and securities portfolios. When federal regulators finally moved in and closed the institution in the waning days of 1988, United was an estimated $1.6 billion in the red. FDIC officials began investigating the failure of United soon after it closed. Since many of the potential claims against Hurwitz and others involved in United's management were subject to a two-year statute of limitations, FDIC officials asked Hurwitz to sign an agreement extending - or tolling - the statute of limitations while the investigation proceeded. Hurwitz , faced with the prospect of an immediate lawsuit against him, agreed to sign the tolling agreement in the hopes that he would eventually be cleared by the FDIC's investigators. Banking authorities first probed Hurwitz 's connection with Michael Milken, a Drexel Burnham Lambert Inc. broker known as the king of "junk bonds," a high-risk corporate note that became the favorite tool used to finance hostile corporate takeovers. Regulators were apparently suspicious because United bought large amounts of Drexel's junk bonds at the same time Drexel was arranging junk-bond financing for Hurwitz 's takeover activities. According to FDIC documents, United purchased approximately $1.8 billion in Drexel junk bonds and other Drexel-brokered securities between 1984 and 1988. During that same period, Drexel provided $1.8 billion in junk-bond financing to Hurwitz , an action FDIC lawyers later labeled an apparent "quid-pro-quo" arrangement between Hurwitz and the Wall Street firm. The same document, however, went on to contradict that characterization of the relationship between Drexel and Hurwitz. "There is very little, if any, evidence of fraud or self-dealing," the report stated. One Drexel-assisted transaction was Hurwitz 's $870 million takeover in 1986 of Pacific Lumber, a Northern California company that owned thousands of acres of forest, including 3 ,000 acres that later came to be known as the Headwaters Forest. After Milken pleaded guilty to six security-related felonies not connected to Hurwitz and went to jail in 1991, FDIC officials turned their attention to other aspects of Hurwitz 's involvement in United's failure. Court documents indicate they became especially interested in United's heavy involvement in mortgage-backed securities and Hurwitz's failure to pump additional money into the institution when it became insolvent. FDIC investigators faced a major hurdle in assigning blame for the failure on Hurwitz because - although he was chairman of United's holding company - he was never an officer or director of the failed S&L. The FDIC investigation dragged on until August 1995 when, after more than six years and 13 tolling agreements, Hurwitz refused to again extend the statute of limitations. The FDIC quickly filed a lawsuit against Hurwitz alleging mismanagement of the S&L and failure to recapitalize the institution. The lawsuit alleged that Hurwitz controlled the S&L, serving as a "de facto" director, if not its "de facto" chairman." One FDIC official told the Chronicle that Hurwitz 's refusal to continue the tolling agreements forced the FDIC to take action before the statute of limitations expired. "I guess he had some strategy in mind, but he left us no choice but to file a lawsuit," the official said. But court documents also show that the FDIC, prior to filing the lawsuit, was keenly aware of another development regarding Hurwitz and the failed savings and loan. After Hurwitz 's Maxxam Inc. completed its purchase of Pacific Lumber, the company began to step up the pace in harvesting its redwood trees, a move that angered environmental activists on the West Coast. By the early 1990s, the environmentalists were applying formidable pressure on members of Congress and federal agencies to come up with a plan that would save the redwood trees in the Headwaters Forest. While various plans were proposed that would bring the redwood forest under the control of federal or California state officials, money to purchase the property wasn't forthcoming. Then in 1994, more than a year before the FDIC lawsuit was filed, the debt-for-nature proposal was hatched by California environmentalists. The idea - to force Hurwitz to swap the redwoods for his debt to taxpayers as a result of United's failure - spread like wildfire among environmentalists and garnered the attention of the national media. Recent events make an ultimate debt-for-nature swap unlikely. Hurwitz 's companies recently agreed to sell the Headwaters Forest to the federal and California governments, which would assure its preservation. But during the period the FDIC was considering its lawsuit, debt-for-nature seemed very much a possibility. Prominent environmental groups, such as the National Audubon Society, the National Heritage Institute and the Rose Foundation in California began a concerted effort in mid-1995 to encourage members of Congress, White House administrators, officials with the Department of the Interior and FDIC officials to pursue a debt-for-nature swap. Court records show their efforts were successful in garnering support for the idea, and FDIC officials were kept apprised of their efforts. One such show of support came from President Clinton's top White House administrator. In a March 21, 1995, letter to the National Audubon Society, White House chief of staff Leon Panetta affirmed the Clinton administration's commitment to preserving the Headwaters Forest. "Budgetary constraints have made it impractical to acquire such an expensive tract of land through outright federal purchase," Panetta said in the letter, which was written on White House stationery. "Your suggestion to consider acquisition through a debt-for-nature swap or other land exchange is worth pursuing." Panetta went on to say that he asked a top official with the Department of Agriculture to follow up on the idea. The unsealed internal FDIC reports also reveal that the agency was aware - prior to filing its lawsuit - that the Clinton administration supported the idea of a debt-for-nature swap. "The Department of the Interior recently informed us that the Administration is seriously interested in pursuing such a settlement," FDIC attorneys wrote in the document seeking a go-ahead from the FDIC board to bring the lawsuit. Agency officials were also aware that they were being watched. "Any decision regarding Hurwitz and the former directors and officers of USAT is likely to attract media coverage and comment from environmental groups and members of Congress," the report states. FDIC lawyers also participated in several meetings with outside agencies to discuss such a debt-for-nature settlement prior to filing suit. Court documents show that one of FDIC's lead attorneys on the case met with Department of the Interior officials, and later attended a meeting with a top White House environmental adviser and numerous federal agency officials to discuss "whether or not a debt-for-nature swap had any legs," according to one participant. Hurwitz attorney David Griffith said FDIC's participation in these meetings clearly shows that FDIC officials were responding to political pressure from White House and congressional leaders. "Why else would they be at these meetings to discuss settlement of a lawsuit that had not even been filed yet," Griffith asked. FDIC officials claim their participation in these meetings was at the behest of Hurwitz , and not because of outside political pressure. According to a deposition of FDIC attorney Robert J. DeHenzel, one of Hurwitz 's attorneys called a Department of the Interior official and suggested that his agency discuss with the FDIC the possibility of resolving the potential FDIC lawsuit through a debt-for-nature swap. That conversation led the Department of the Interior to invite an FDIC attorney to a meeting to brief the agency on the status of the FDIC's case against Hurwitz . FDIC spokesman Barr said it was the first time his agency had heard from the Department of the Interior on the matter. "Our attendance at that meeting was the direct effect of that telephone call from a Hurwitz attorney," Barr said. "The other meetings were a chain reaction stemming from the first meeting." Griffith hotly disputed the FDIC's account of events. A Hurwitz representative may have expressed an interest in discussing a debt-for-nature settlement, but only because it was apparent that the FDIC was going to hold Hurwitz hostage with legal actions until it got what it wanted. "That Mr. Hurwitz would make contact with the kidnappers should not be held against him," Griffith said. "But we certainly did not initiate these meetings." Allen McReynolds, the Interior Department official who called the initial meeting, said in a deposition that the meeting was held at the request of two congressmen who had an interest in resolving the conflict between environmentalists and Pacific Lumber and ending the protests, where some participants were being injured. Additionally, the FDIC's internal documents fail to back up the agency's version of events. Although the meetings with Interior Department officials were discussed in detail in the reports, there was never a mention that the FDIC attended at the request of Hurwitz. The unsealed documents also reveal that FDIC officials brought the lawsuit against Hurwitz despite their own analysis that they would probably lose the case, a decision that is in direct violation of the agency's policies. According to a copy of an FDIC publication obtained by the Chronicle, the FDIC's policy is that a lawsuit should not be brought unless the FDIC is "more than likely to succeed in any litigation necessary to collect on the claim." The unsealed FDIC documents discusses the two types of claims against Hurwitz - the issues of mismanagement in the institution's investment policies, and Hurwitz 's failure to live up to a "net worth maintenance agreement," by failing to invest additional money in the institution to keep it solvent. On the mismanagement issues, FDIC lawyers concluded that there was a 70 percent chance that their case would be thrown out in the early stages of the legal proceeding. Even if the case survived the summary judgment level, the odds of a favorable outcome for the FDIC were "marginal at best," the report stated. FDIC lawyers concluded the claims regarding recapitalizing the institution stood a better chance, but overall, the case had less than a 50 percent chance of success. That assessment was virtually identical to a report prepared for the FDIC several years earlier by two Houston law firms. That report concluded the FDIC's chance of success was somewhere between 35 and 50 percent. Nonetheless, the authors of the FDIC memo argued that a lawsuit should be brought despite the high risk because of "the egregious character of the underlying behavior in this case which caused enormous losses." Despite the conclusions spelled out in the FDIC internal documents, FDIC officials insist the lawsuit conformed to the agency's policy. "It would not have been filed if it didn't," Barr said. Houston attorney Joel Androphy, an expert in white-collar crime, said it is disgraceful for a federal agency to bring legal action when it knows it is so unlikely to win the case. "The government is clearly acting in bad faith," Androphy said. "If they lose, the FDIC should have to pick up every dollar Hurwitz had to spend to defend himself in this case." The unsealed memo also raises questions about the methods used by FDIC officials in deciding who was sued and who was not in the United case. Rather than basing their decision solely on the issue of wrongdoing, the internal documents show that FDIC officials targeted people based on their relationship to Hurwitz . The authors of the internal documents recommended filing lawsuits against the S&L's officers and directors who were members of Hurwitz 's "core group," while allowing others to escape prosecution even though they were judged equally liable in the institution's failure. In one instance, the unsealed documents show that FDIC officials decided against suing one person because it would make the agency look bad. George Kozmetsky, a co-founder of Teledyne and former dean of the University of Texas business school, was a board member and close Hurwitz associate. FDIC officials did not name him in the lawsuit because of his background as a well-known contributor to charitable causes and the recipient of numerous awards. "A suit against him would produce sympathy for the defendants and the impression that FDIC is pursuing a claim against him solely because of his financial circumstances," the internal report states. "Although Kozmetsky's high net worth could be relevant . . . the litigation risks are too high to justify naming him in our suit." The FDIC eventually named only Hurwitz in its August 1995 lawsuit because the rest of the proposed defendants continued signing tolling agreements with the FDIC. Another federal banking agency, however, decided in late 1995 to pursue legal actions against Hurwitz and a group of the former S&L's officers and directors in an effort to recover a portion of the losses suffered in the institution's failure. That suit also named Maxxam as a defendant. The action by the Office of Thrift Supervision was relatively rare because the agency's primary responsibility is to regulate the operations of existing savings institutions rather than try to recover from insolvent institutions, something that is generally left to the agencies that insure deposits. The OTS, however, had recently adopted a controversial policy of stepping up its legal efforts to collect such losses from failed S&Ls. The OTS suit mirrored almost exactly the charges in the FDIC lawsuit. The OTS had two advantages over the FDIC. Because its legal actions took the form of an administrative hearing, it did not face the statute of limitation problems that plagued the FDIC case, and its case would be heard before an administrative judge in OTS' employ. The legal actions continued on both fronts, much to the displeasure of Judge Hughes, who was assigned the FDIC case. His orders in the case showed his growing irritation over the dual prosecutions. The issue reached its peak after Hughes ordered the FDIC to produce their memorandum to sue, which revealed that the FDIC has not only paid the OTS to investigate the United failure, but was also picking up its sister agency's tab for prosecuting the OTS lawsuit, something the FDIC had kept secret for several years. The FDIC documents, which consistently refer to the OTS' actions as "independent" of their own, also revealed that the two agencies had an agreement providing for the FDIC to receive any money collected as a result of the OTS suit. Under pressure from Hughes, the FDIC dropped most of its federal lawsuit, leaving only the claims that Hurwitz violated its agreement to recapitalize the S&L. The remaining portion of the lawsuit was also delayed until the OTS action is complete, and will only be pursued if the OTS collects less than $250 million in its case. The OTS case began testimony earlier this year and is in trial in Houston. It is expected to continue until the end of the year. Hurwitz attorney Griffith is not optimistic of his client's chances of winning that lawsuit. He expects that Hurwitz may only find himself exonerated after getting the case heard before a federal appeals court. "We are playing their game in their home court," Griffith said. "The judge seems to be a reasonable and fair man, but he is still employed by the other side."
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