Cen Trust Bank And David Paul example essay topic

Cen Trust Bank ScandalCenTrust, first called Dade Federal Savings and Loan, was founded in 1934 during the Great Depression and eventually became a stalwart of the South Florida business establishment. By the early 1980's, Miami had a corporate community that any city would envy. The companies were large and growing. They contributed mightily to local causes. They virtually invented a skyline where none existed as late as the early 1980's. Cen Trust Bank and David Paul gave huge sums of money and much effort toward founding the New World Symphony in the 1980's.

But the local corporate world was shaken badly at that time. In South Florida, home of fragile physical, social and economic climates, big business became an endangered species. Prominent in the downtown skyline were buildings built by financial institutions that had failed or were in serious trouble. By November 1983, Cen Trust had losses of $500 million and was headed toward insolvency and federal takeover. David Paul, pledging little more than some real-estate holdings, gained control and quickly remade and personalized the institution. Before long, the company's stock-ticker symbol became DLP, Paul's initials.

At the end, as senior managers deserted him, David Paul held the posts of chairman, president, chief executive officer and chief operating officer. South Florida became a center of risky banking practices in the 1980's, and Cen Trust was one of hundreds of thrifts traumatized by inflation and soaring interest rates. Through this time, Drexel's former junk king Michael Milken, sold billions of dollars of high-yield junk bonds to cooperative companies with big piles of cash such as Cen Trust Bank, Columbia Savings & Loan, Imperial Corp. of America and First Executive. The companies were loyal buyers of Drexel underwriting's. They paid fat trading and investment banking fees to Drexel and helped the firm to launch bigger and bigger deals. Cen Trust held more than $1 billion in junk bonds and worked closely with Drexel.

The relationship was launched when Drexel led an underwriting syndicate of five investment bankers that raised $12 million in subordinated debt to bolster Cen Trust's capital base. Eventually, Cen Trust also bought $1.4 billion in junk bonds from Drexel. Moreover, in early 1989, Lincoln and Cen Trust sold warrants and other assets to each other through Drexel, with each recognizing substantial income. In 1989's third quarter, thrifts marked down their junk by about 10%, or hundreds of millions of dollars. Thrifts suffered more than mutual funds, because they were clogged with battered Drexel-underwritten issues. The episode marks the first time a financial institution has been brought down primarily because of its involvement in the junk-bond market.

Cen Trust reported a $119.5 million loss for its fiscal year ended Sept. 30, 1989, after writing down a ton of junk and reserving for losses. Under thrift rules, Cen Trust needs about $130 million of equity capital but currently has an equity shortage of $283 million. After all this happen, Cen Trust planned to sell most of its branches to raise capital and create a separate unit to hold its junk until maturity to avoid turning accounting losses on bonds real losses. Months later, they planned to merge with Hamilton Holding Co., but neither the sale of its branches nor the merge gotten executed.

Cen Trust Bank, the non-operational Miami savings and loan that invested heavily in junk bonds, also invested heavily in political candidates. The thrift's chairman, David Paul, also had dozens of meetings and meals with politicians, most of them Democrats. The get-together's included a June 1988 lunch with former President Carter and seven meetings with Florida Rep. Bill Nelson, a member of the Banking Committee. Just how far Cen Trust's fortunes had deteriorated became clear in December 1989, when the Office of Thrift Supervision slapped a cease-and-desist order on the thrift, attacking its sloppy bookkeeping and criticizing Mr. Paul for allegedly extravagant spending when the thrift was experiencing serious operating losses and declines in its capital. In January 1990, dozens of somber, conservatively dressed banking examiners carrying briefcases and cellular phones stepped off elevators and emerged on the 45th floor of the tower, where the company's executive offices were based. The officials, most from the Federal Deposit Insurance Corp. (FDIC), enter through the complex.

A second wave arrived within 20 minutes and took possession of other Cen Trust operations. They ordered corporate employees to leave their offices without removing any documents. They advised employees to take their identification badges so they could re-enter the building the following business day. Federal officials said they seized Cen Trust to protect its remaining assets and replace Paul and other managers.

They took it down because it was an unsafe or unsound condition to transact business and had grave capital and other financial problems. The Office of Thrift Supervision (OTS) had said that Cen Trust had a 'substantial dissipation of assets and earnings due to violations (including) excessive and inappropriate expenses and investments. ' Less than two weeks later, state regulators began efforts to get rid of Mr. Paul, alleging in an administrative complaint that he had misspent about $45 million in federally insured funds and used thrift funds to purchase art works as well as a yacht, Oriental rugs, crystal for the thrift, a controversial art collection -- including Portrait of a Man as Mars by Peter Paul Rubens, which Cen Trust bought for $13.2 million, and gold-plated bathroom fixtures. He also, diverted millions of dollars offshore, and engaged in securities and commodities trading overseas. Moreover, a $4.9 million Cen Trust retirement plan, created primarily for Mr. Paul, has been moved to the Midlands Bank, United Kingdom. The retirement plan funds were managed by Edward D.G. Davies, who was a Cen Trust shareholder and an associate of Mr. Paul.

Furthermore, The OTS charged that David Paul, illegally transferred $200,000 to a private account in Israel. Mr. Paul and other defendants were named in the 22-count indictment allegedly used the fraudulent securities purchase in 1988 to try to conceal Cen Trust's perilous financial condition from regulators. The indictment charged that another person involved in the conspiracy to cover up problems at Cen Trust was Gwaith Pharaon, an alleged front man for The Bank of Credit & Commerce International (BCCI), the international bank that collapsed in 1991 being seized by regulators from several countries. BCCI was controlled by BCCI Holdings (Luxembourg) S.A. The goal of the conspiracy was to make it appear that there was investor interest in Cen Trust at a time that regulators were investigating allegations of false internal accounting by the thrift.

Cen Trust eventually repurchased the securities for more than BCCI had paid, and Mr. Pharaon allegedly kept the difference of $331,500. Mr. Pharaon a Saudi businessman was indicted on 1991 as well as Mr. Milken on 1989 was indicted of racketeering and securities violations. Drexel Burnham Lambert has settled criminal and civil securities charges. After being seized, Cen Trust sold its deposits in June 1990, to Great Western Financial Corp., Beverly Hills, California. Mr. Paul, the former chairman and CEO of the failed Cen Trust Savings Bank of Miami, was sentenced to 11 years in federal prison after being convicted in a jury trial of 68 fraud-related counts in US District Court in Miami involving the spectacular collapse of Cen Trust at a cost of $1.7 billion to taxpayers, and for allegedly helping arrange the sham purchase of $25 million in Cen Trust securities by Bank of Credit & Commerce International. The verdict followed a six-week trial.

In all felony counts, most involving allegations that he siphoned $3.2 million from Cen Trust and spent it on his 95-foot yacht, his homes in Miami, his luxuries, and elsewhere during the 1980's.