The Westgate Scandal

The elaborately constructed business empire of Financier C. Arnholt ("Mr. San Diego") Smith has been under unrelenting attack for months. He is fighting the Securities & Exchange Commission, which has charged him and several cronies with fleecing the stockholders of Westgate-California Corp., the multimillion-dollar conglomerate of which Smith is chairman. The suit is scheduled to go to trial in San Diego this week. Smith is also dueling with the Internal Revenue Service, which claims that he owes $23 million in unpaid taxes and interest. Even his old, close friendship with Richard Nixon, whom Smith has helped bankroll politically since the 1940s, has tumbled him into trouble. The IRS is investigating whether firms under Smith's control made illegal contributions to Nixon's 1968 and 1972 campaigns.

Last week Smith, 74, suffered his greatest setback. In a move that rekindled memories of the bank crashes of the Depression, the U.S. Comptroller of the Currency declared insolvent the U.S. National Bank of San Diego (assets: $1.2 billion), which Smith has controlled for 40 years. The collapse--the biggest in U.S. banking history--will not affect the funds of depositors, but it threatens to wipe out the investments of several major holders of U.S. National stock. Smith is the largest of these, with 28% of the 2,000,000 shares.

The bank has been under federal supervision since spring, when the Comptroller forced Smith to step down as chairman. Reason: the bank had lent more than the legally permissible 10% of its assets to companies controlled by a single individual: C. Arnholt Smith. Smith's enterprises turned out to be the bank's biggest credit risk; his companies' bad debts constituted an unspecified but large percentage of the $143 million in outright losses and possibly uncollectible loans that U.S. National had on its books.

According to the SEC, Smith and some associates devised a complex scheme to convert Westgate's most profitable assets to their own use. Smith supposedly 1) allowed the conglomerate to buy up companies of questionable value at grossly inflated prices, 2) transferred control of the acquisitions to other parts of his financial machine, and 3) used these grossly inflated assets to secure huge loans from U.S. National. In other instances, Smith is charged with selling solid Westgate holdings at bargain prices to other companies under his control and financing the deals with loans from the bank.

This legacy contributed to an almost insurmountable problem for U.S. National. Since the risky loans totaled about $80 million more than the sum in its capital account, the bank was forced to pay higher and higher interest rates to attract the large, short-term deposits that it needed to continue operations. In recent months, the bank's managers have been buying up money on the open market in sums of $100,000 or more from corporations, labor unions and private investors eager to make the quick profits that those extraordinarily high interest rates seemed to promise. But by September, the pressure of paying the interest on this money had become so great that the Federal Deposit Insurance Corporation and the Comptroller's office began asking other banks to buy up and bail out the failing U.S. National. San Francisco's Crocker National Bank won the bidding with an $89.5 million offer.

The question is what happens to the bank's stockholders. Unlike depositors, whose funds are insured up to a total of $20,000 by the FDIC, they have no protection and could end up losing every nickel. At week's end, the biggest potential loser was ensconced in the penthouse of the Westgate Plaza Hotel in San Diego, protesting his innocence. All his troubles, said C. Arnholt Smith, stemmed from the fact that overzealous "bureaucrats" resented his friendship with President Nixon.

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