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Investigation Experience and Assignment Highlights

Throughout the thrift crisis, the government has filed several lawsuits against accounting firms, seeking billions of dollars. The common allegation is that independent certified public accountants did not adequately audit and/or report the S&L's financial or internal control problems in accordance with professional standards.

Our firm, Diligence Incorporated, has not only been aware of this problem for several years, but has produced work directed at recovering monies from independent certified public accountants because of their substandard performance. In the majority of those cases where Diligence has established a lack of management integrity, Diligence also has raised serious questions regarding the accounting firm's opinion that financial statements were presented in conformity with generally accepted accounting principles and that their examinations were performed in accordance with generally accepted auditing standards. We have also been aware and have produced work concerning the malpractice of other outside professionals (i.e., attorneys, appraisers, brokers, etc.). Whether the fraud or wrongdoing initiated from outside or inside the institution, Diligence Incorporated has had a variety of experience in discovering and exposing misconduct and has worked toward its attendant recovery.

The following highlights ten assignments of Diligence Incorporated:

1. In an investigation of what is probably the largest loss to a financial institution in the history of the United States, Diligence, at the discretion of the thrift's new management and board of directors (appointed by the regulatory bodies), was requested to ascertain if the significant loss occurred due to bad business, criminal activity, or a combination of both.
   
   The massive investigation that followed was sanctioned by regulatory authorities and indicated that former management was involved in imprudent lending practices, the nonrecognition of losses, the processing of false accounting entries, and stock manipulation tactics. The loss to the association is currently estimated to be at least in the hundreds of millions of dollars. The investigation resulted in the filing of the largest fidelity bond claim to date.
   
   Diligence Incorporated originated research and analysis which demonstrated that the thrift's independent accountants had not performed the necessary audits and had favorably opined on the former management's false and misleading financial information. The subsequent litigation concerning these reports was settled out of court in favor of the thrift for an amount in the tens of millions of dollars.
   
   Part of the above described investigation was also successfully used in support of a claim under the directors and officers insurance policy.
   
   In addition, extensive criminal activity was identified and referred to the United States Department of Justice under Title 18 of the United States Code.
   
2. The Board of Directors of a Northwestern thrift, in concert with The Federal Home Loan Bank of Seattle, "FHLB of Seattle") engaged Diligence Incorporated to investigate certain questionable activities of prior management and directors of this institution. Diligence acted as an adjunct to the examination process of the FHLB of Seattle. The investigation conducted by Diligence demonstrated clear violations of Title 18 of the United States Code. Diligence Incorporated produced and submitted criminal referral forms to the United States Department of Justice for the subsequent prosecution of the referred violators. Diligence investigated and consulted with counsel to determine that fidelity bond and directors and officers liability was not in force or did not apply to the discovered violations.
   
3. Diligence was engaged by the investment committee of a large transportation company's pension plan because the committee was concerned that a bank trustee had not complied with its fiduciary duties applicable to certain oil and gas investments. Diligence's research and investigation discovered nonconforming investments which resulted in an out-of-court settlement of several million dollars to the pension fund.
   
4. Diligence Incorporated was hired jointly by the Federal Home Loan Bank of San Francisco and the Savings and Loan Commissioner of the State of California to investigate suspicious loans and real estate transactions between a savings and loan association and various business entities who had obtained loans through that association. Diligence's investigation, in conjunction with state and federal examiners, developed evidence of prior business relationships between borrowers and the savings and Ioan's chairman of the board, as well as possible violations of federal criminal statutes.
   
5. During the course of litigation involving the FSLIC and a major accounting firm, information was developed which showed the accounting firm was acquiring a 100% interest in an appraisal firm that was providing expert appraisers to the FSLIC in connection with their litigation against the accounting firm. Diligence was able, within several hours of a request for assistance, to dispatch teams consisting of certified public accountants and former FBI fraud investigators to assist the law firm representing the FSLIC in a voluminous review process and with complex interviews. This resulted in a expeditious resolution of the highly sensitive matter.
   
6. In December, 1986, Diligence was retained by the Federal Home Loan Bank of San Francisco to conduct a review of transactions entered into by the principals of a mid-sized savings bank in Southern California. Diligence reviewed existing audit materials to develop the factual documentation necessary to support FHLB criminal referrals to the FBI for violations of Title 18, Sections 1006 and 1344 (which relate to schemes to defraud insured financial institutions).
   
7. When Diligence was hired by the Federal Home Loan Bank of Dallas to investigate an S&L in Texas, the objective was to identify individuals inside and outside the thrift who may have defrauded that institution of millions of dollars. The investigation established probable cause on five or more individuals, including the thrift's president. Criminal referrals were made to the Department of Justice, contributing to multiple indictments for violation of several fraud-related sections of Title 18 of the United States Code.
   
8. Diligence Incorporated was engaged by the Federal Home Loan Bank of Topeka to identify individuals, both inside and outside a troubled institution in Oklahoma, who might be engaged in fraudulent activities against that institution.
   
   Diligence's investigation revealed fraud on the part of individuals central to this institution, as well as other savings and loans, banks, and "so-called" mortgage brokers. This investigation resulted in Diligence providing supporting information for fidelity bond claims in two financial institutions, as well as criminal indictments of several top-level managers and significant borrowers.
   
9. Diligence was hired by a Southern California bank to investigate irregular activities in their loan department. Diligence identified a scheme, perpetrated by two former loan officers, in which clients were referred unnecessarily to an outside mortgage broker. Diligence was also instrumental in creating criminal referrals resulting in prosecution of three individuals, one of whom was prominently involved with a local public employee pension advisory board.
   
10. Hired by FHLB of San Francisco, Diligence was asked to evaluate questionable practices and transactions at a Southern California savings and loan and advise an appropriate course of action. Diligence employees examined the records, identifying a number of obvious criminal violations. Diligence prepared criminal referral forms which were submitted to the Federal Bureau of Investigation. The institution was subsequently taken over by FSLIC and three indictments on violation of Title 18 ensued.