The Wall Street Journal
May 21, 1981 - Front page
Like Wells Fargo Case,
Chase Bank Sustains
$20 Million Loan Loss
Two Vetaran Bank Employes
Were Involved in Scheme,
Court Records Indicate
Cash for Resorts, Juke Boxes By JULIE SALAMON and STANLEY PENN
Staff Reporters of The Wall Street Journal
NEW YORK It's embarrassing for any bank to be taken for $21 million. And, as Wells Fargo Bank found out earlier this year, it's downright humiliating when the loss makes headlines coast-to-coast.
Chase Manhattan Bank recently has had the embarrassment of a $20 million loss of its own, but not the accompanying humiliation. The nation's third largest bank found, like Wells Fargo, that it had employes it couldn't trust. But, unlike the West Coast bank incident, the escapade at Chase has largely escaped notice, buried in a pile of court records in Florida, Connecticut and New York.
The Wells Fargo case had a glamor setting in Beverly Hills. A central figure was a big-time sports promoter with business ties to ex-heavyweight champion Muhammed Ali. His alleged cohort inside the bank was an officer who had figured out how to foil the institution's computer system.
Chase, on the other hand, has managed to maintain a low profile on its $20 million embarrassment partly because of the humdrum nature of the case. No electronic wizardry was involved, just loans to people that Chase normally wouldn't look at twice. The action emanated from a prosaic office in downtown Brooklyn, and the central character, Michael J. Calandra, was an otherwise unremarkable 51-year-old Chase vice president who, for the first 26 years of his banking career, never gave his employer a bit of trouble.
Delegated Lending Power
While the Wells Fargo case may be flashier, the Chase affair is an equally forceful reminder that, despite elaborate controls, the nation's big banks are vulnerable to major frauds. This is partly the result of the sheer size of these institutions and partly because of the latitude they give lending officers in their eagerness to drum up business. Mr. Calandra, for example, had authority to disburse $3 million per loan without anyone's approval.
Bankers insist that such latitude is necessary for the business to run smoothly and profitably. Says one Chase officer, "If you have a bank the size of this bank and you don't give people independent lending judgment, the bank would slow to a halt."
The questionable loans were first disclosed in a brief press release Chase issued last June. It said the bank was investigating a possible $20 million loan fraud. In subsequent months, the bank declined to provide additional information despite repeated requests from this newspaper. At the company's annual meeting last month, Willard Butcher, Chase's chariman, in response to a stockholder's question, said that two loan officerswhose names he wouldn't revealhad been dismissed in connection with the loans. He disclosed only that the Chase investigation was continuing.
What Mr. Butcher didn't say was that the investigation has resulted in at least 18 lawsuits around the country and a grand-jury investigation in New York City. Although not named as defendants in the lawsuits, the pivotal characters are Mr. Calandra, who joined the bank in 1952, and his associate, 39-year-old Jonathan Levine, a 15-year Chase veteran.
Real Estate and Juke Boxes
The lawsuits reveal a tangled mass of sometimes-overlapping loans that Messrs. Calandra and Levine made from their headquarters at 16 Court Street in Brooklyn over a two-year period. At least one of the borrowers had been turned down by other lenders and apparently came to Chase as a last resort. The loan money went into a variety of projects, from Florida real estate to coal ventures, juke-box operations and cable-television systems.
Since uncovering its loss in late 1979, Chase has pushed some of the borrowers into bankruptcy and has sued others. To add to the complications, some of the borrowers are countersuing Chase or threatening to, contending that they have been victimized by the actions of Messrs. Calandra and Levine.
What led these two veteran bankers astray? Interviews with former colleagues indicate that Mr. Calandra may have gotten into this situation by his willingness to do favors for friends. It isn't clear what his friends did for him; about all that shows up in the court records is a gift of a $100 bottle of brandy for Mr. Calandra and three bottles of port wine for Mr. Levine from one borrower.
"With a friend you just don't ask the hard questions," says a former colleague. "That's what happened to Mike. Then he couldn't back out when he found out he was in too deep."
As for Mr. Levine, another former associate says, "He was just playing loyal employe. He worked for Mike and became friendly with the same people."
Neither man was available for comment, but their lawyers say they have done nothing wrong.
One of Mr. Calandra's major customers was Irvin Freedman. Both men had attended the University of Miami in the early 1950s, but after college their careers took different paths. Mr. Calandra joined the bank; Mr. Freedman went into real estate.
Not all of Mr. Freedman's real-estate ventures worked out. At the time he and Mr. Calandra began doing business together in 1978, he was already involved in two bankruptcy proceedings in Miami. (At least one of them has resulted in an investigation by the Justice Department.)
Well known in the Miami area, Mr. Freedman is described by a Miami lawyer who has often opposed him in court as "an engaging fellow who could talk anybody into anything."
One Freedman venture, for which Mr. Calandra lent some $3 million of Chase money, was Holiday Isle, a five-acre resort complex in the Florida Keys, complete with a 67-room hotel, restaurant, bar, swimming pool and marina.
Holiday Isle also had a secret nest egg. "On the very first day I met Mr. Freedman, I was instructed to take $1,000 a day and place it in a deposit bag in the safe," says Linda Clark, a former Holiday Isle bookkeeper, in a deposition taken in the company's bankruptcy proceedings in Miami. "It wasn't to be removed until he asked for it, so about once a week he would come and take this money." Mrs. Clark added that the record of this money." Mrs. Clark added that the record of this money "was removed from the consolidated daily reports and also from the general ledgers."
Chase is trying to recover at least $5.3 million from Mr. Freedman and Freedman-controlled companies for financing Holiday Isle and other real-estate projects. Holiday Isle also has increased the already keen interest federal investigators have in Mr. Freedman. He is currently under investigation for possible bank fraud, wire fraud and racketeering, according to a Justice Department official in Miami.
Mr. Freedman introduced many prospective customers to Mr. Calandra. Among them was James J. Durkin, who is described in a 1980 report by the Pennsylvania Crime Commission as a highly successful life-insurance salesman who in the past controlled companies that owned "large portions of the coal-producing areas in Pennsylvania." The commission report adds: "These coal companies have been inolved in questionable . . . activities." Mr. Durkin couldn't be reached for comment.
Incident in Canada
Mr. Calandra loaned $4 million to American Energy & Coal Inc., a Durkin project. That money, according to a Chase suit filed in a state court in Manhattan, was never repaid. Last November, Chase won a $4.6 million judgment against the company, which it has yet to collect. The bank, in another suit in the same court, claims that a company connected to Mr. Durkin's two sons owes $295,000, but there has been no decision in this suit.
During 1978 and 1979, still more borrowers found their way to Mr. Calandra's door. For example, Mr. Calandra lent $5.5 million to Poenix Communications Inc. and Lake Telecommunications Inc., Connecticut cable-TV concerns, and to Galanis Brothers Trust. They were operated by John P. Galants, a former New York stock promoter who pleaded guilty in 1972 and 1973 to charges of securites fraud in Manhattan federal court. Mr. Galanis was also accused of a $1.6 million securities fraud in Canada in 1973, but the Canadian government was unsuccessful in attempts to have him extradited to Canada.
Did Mr. Calandra know about his clients' backgrounds? After Chase pushed the Galanis-controlled cable-TV companies into a trusteeship in bankruptcy court in Bridgeport, Conn., last year, Mr. Galanis testified in a deposition that Mr. Calandra knew of his criminal convictions. Mr. Galanis also said that Mr. Calandra never received any shares in Galanis-controlled companies.
Pressure on Borrowers
However, when Chase tried to examine corporate documents of the Galanis companies, the bank was told that a fire in the office had caused the books and records to be "covered with a black, sticky oily substance, which rendered them illegible," according to court papers in the bankruptcy proceeding.
By late 1979, some of the loans Mr. Calandra had made were coming due but weren't being paid off. About this time, according to court documents in another suit in state court documents in another suit in state court in Manhattan, the embattled banker began putting pressure on other borrowers to help bail out the non-payers.
Daniel Segal, president of Sage Capital Corp., a New York mortgage-brokerage firm, for example, says in an affidavit in Manhattan Supreme Court that Mr. Calandra granted Sage a $900,000 loan in June, 1979, on the recommendation of Mr. Freedman. But as soon as the deal was made, Mr. Calandra insisted that Sage give $300,000 "in loans" to Mr. Freedman and another $75,000 loan for Mr. Freedman's benefit "in a coal deal." (Chase has sued Sage for $1.8 million, including interest, that it claims the company owes the bank.)
"Calandra orchestrated this ingenious scenario of high finance by his utilization of a clever 'book juggling' act involving the basic principle of 'borrowing from Peter to pay Paul,'" Mr. Segal says in the affidavit.
Mr. Segal, who claims, as do others, that he was "a victim" of Messrs. Calandra and Levine, says that Chase wasn't blameless either. "Where was Calandra's supervisor while all this was going on?" he asks in his affidavit. "How could (Chase) let a man like Calandra operate for so long and permit him to get involved in (such) situations?"
A Gap in the Controls
Chase apparently lacked effective control measures to prevent such loans. According to Chase papers filed in Miami bankruptcy court, the bank's "credit policy guide" stipulates that new borrowers must submit detailed financial statements, including unqualified opinions from an accountant. This documentation wasn't furnished when a $2.96 million loan was made to Waterside Towers apartments, a Freedman venture, according to Chase Vice President Richard Hines in a deposition.
Chase did have a credit-review policy when the Calandra loans were being made, but individual loans weren't reviewed unless the officer involved brought the loan to the committee's attention the equivalent of blowing a whistle on one's self. At Citibank, in comparison, at least three officers must approve any loan.
Had the Waterside Towers loan gone before Chase's review committee, it most likely wouldn't have been approved. Mr. Hines, who was Mr. Calandra's former superior, says in a deposition in the Miami bankruptcy proceedings, "One, we wouldn't make a loan to a real-estate property. Two, we wouldn't make a loan to a real-estate property in Miami. Three, we wouldn't make a real-estate loan to a property in Miami relying on a conversion (from apartments to condominiums)."
A Touch of Hysteria
By the summer of 1979, Mr. Calandra apparently was having a rough time keeping the lid on his shaky portfolio. The loan that apparently aroused his superiors' suspicions wasn't made to Mr. Freedman but to Seeburg Corp., a Chicago juke-box manufacturer, then controlled by the family of Louis J. Nicastro, currently chairman of Williams Electronics Inc., a Chicago-based manufacturer of coin-operated amusement devices. Last year, Seeburg's assets were sold off after Seeburg was taken over by a court-appointed trustee following the company's petition for reorganization under Chapter 11 of the federal bankruptcy code.
According to a sworn statement by Mr. Nicastro in Manhattan Supreme Court, Messrs. Calandra and Levine permitted Seeburg to overdraw its account at Chase's Brooklyn branch by amounts ranging from $250,000 to $800,000. As Mr. Nicastro tells it, on Sept. 14, 1979, Mr. Calandra phoned in "near hysteria" seeking a meeting.
At the meeting, according to Mr. Nicastro, Mr. Calandra begged him to infuse money into Seeburg to reduce its overdrafts. Mr. Nicastro says that Mr. Calandra told him that he had "several very serious problems at his branch involving other customers" and that his superiors wer expected to examine the branch's accounts within the next day or so.
Mr. Nicastro claims that Mr. Calandra threatened to call Seeburg's loans immediately if he refused to reduce the overdrafts. Then, according to Mr. Nicastro, Mr. Calandra "pulled a blank Chase check and asked me to sign it, saying he 'would work something out.'" Mr. Nicastro says he signed the check. He adds that he wan't present when somebody at Chase later filled in the amount of $500,000. The check was used to reduce Seeburg's overdrafts, he says.
Chase claims that Mr. Nicastro, who had guaranteed Seeburg's loans and also signed a note, owes the bank $1.25 million. Mr. Nicastro says he doesn't owe Chase anything because of Mr. Calandra's alleged negligence and fraud.
The details of the Seeburg problem began filtering through the bank. "People were gossiping about it," says a Chase insider.
"The Seeburg thing blew up, and it became clear there was more to it than just a matter of financial difficulties. Calandra was an ardent defender of the loan."
Mr. Calandra was asked to present his entire portfolio to his superiors. By early 1980, it had become clear to other bank officials that the man who, as a former colleague put it, "had never lost a dime for the bank" during his first 26 years of employment, had somehow gone astray. In February, Mr. Levine resigned; two months later Mr. Calandra was fired, according to a depostion by a Chase official in one of the court actions.
The Brooklyn bank office, meanwhile, has been staffed with all new managers. Most of the employes who worked there during the Calandra-Levine tenure have been "relocated" to free them from any "taint," says a Chase insider.
Chase still refuses to discuss the case or identify its principals, but it defends its auditing procedures. "Hypothetically," says a Chase spokesman, "if one or more officers were to violate established procedures, they may be able to curcumvent the system, but eventually those violations will be exposed through the audit process." Nevertheless, the spokesman adds, "As a result of all this we have made some minor enhancements in the credit procedures."
Chase may be able to recover almost all of its losses from its insurersif the bank can prove the losses resulted from fraud rather than the bank's own negligence. In any case, the bank's financial health won't be affected; it has already included most of the loans as part of the $139 million in bad loans that were written off in 1980.