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Plea Agreement Didn’t Save Independence Bank

January 31, 1992

NEW YORK (AP) _ A key selling point of the plea agreement between BCCI and federal regulators was to keep the ailing Independence Bank in Southern California afloat with a cash infusion.

But bank’s problems were too severe and too immediate, forcing bank regulators to seize the insolvent Independence late Thursday.

The bank’s collapse marks the most visible damage of Bank of Credit and Commerce International’s penetration of the American banking industry. But regulators said Friday the plea agreement is structured so taxpayers won’t be stuck with the bailout bill.

The Federal Reserve Board charged BCCI secretly acquired Independence in 1985 for $23 million through Ghaith Pharaon, a former BCCI shareholder who regulators said acted as an illegal front man.

BCCI memos in 1984 said Independence would be a good way to expand the international bank’s presence in California.

Under the reign of Independence Chairman Kemal Shoaib, a former BCCI executive in London, the small bank made speculative real estate loans. A 1988 examination disclosed severe problems with Independence’s loans, regulators said.

After Shoaib’s departure, Fulvio V. Dobrich was brought in as chairman in 1989. He said Independence had lost potential customers because of the negative publicity surrounding BCCI.

Independence and bank regulators for months tried to convince investors to inject new capital or buy the bank. But this week, a report showed time had run out.

Independence was insolvent, with a negative net worth of $30.6 million, said Stan Cardenas, senior deputy superintendent for the California State Banking Department.

Cardenas said Friday his department would have kept Independence open if money had been available from a special fund designed to aid the four U.S. banks and thrifts secretly targeted by BCCI.

The others institutions are CenTrust Savings of Miami, which failed in 1990; First American Bankshares Inc. of Washington; and National Bank of Georgia, which First American bought in 1987. First American officials say the bank has stabilized since the BCCI scandal broke last summer.

A legal battle has kept the forfeited funds tied up and regulators had no choice but to seize Independence, said Cardenas.

BCCI had agreed to forfeit $550 million of its U.S. assets as part of a plea agreement to federal racketeering charges. The forfeiture would be the largest in U.S. history.

Under the deal, about half the assets would be set aside to repay BCCI’s depositors worldwide, while the remaining half would be used to pay a $10 million fine, the cost of prosecution and, if necessary, to shore up the banks it had acquired in this country.

Under the deal, Independence received an infusion of $5 million from BCCI’s liquidators earlier this month, said Ira Raphaelson, special counsel for financial fraud at the Justice Department. But forfeiture of BCCI’s assets won’t take place for at least several weeks.

The forfeiture was delayed because BCCI’s U.S. creditors objected to the deal, arguing it was unfair to seize BCCI’s assets when ownership of disputed accounts hadn’t been resolved.

If the money were available, Cardenas said between $60 million to $75 million would be needed to restore Independence to adequate capital levels.

The state banking department and Federal Deposit Insurance Corp. seized Independence after the close of business Thursday, capping four years of intense scruitiny by bank regulators.

Independence Bank, based in the Encino area of Los Angeles, has $535.8 million in assets and 13 branches.

All Independence deposit accounts will be transferred to First Interstate Bank of California. Independence depositors were told to visit certain First Interstate branches Friday for access to their money.

First Interstate will honor checks written on Independence accounts, the FDIC said.

Depositors have 60 days to decide whether to withdraw their money or open a First Interstate account. If no action is taken within that time, checks for funds will be mailed to customers.

Raphaelson said the Independence seizure should not cost the taxpayer or tap the FDIC bank insurance fund. Under the plea agreement, the FDIC tap the forfeited funds to reimburse their costs of seizing Independence, he said.

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