FOR THE THREE. OR FOUR nights and days before Christmas in 1985 the scene at Jones, Day, Reavis & Pogue’s booming Austin office was an apt symbol, even a microcosm, of the Texas real estate market. "There was a lot of money going around," says one participant. "There was a lot of madness in the air."

Representing two Austin savings and loans that were lending more than $115 million in eight interwoven, high-risk land deals, Jones, Day lawyers were churning out mounds of paper amid frenzied last-minute negotiations. With the clients pressing to wrap it all up and book millions in paper profits by year’s end, the deals were closed by Christmas Eve.

"It was a circus in the Jones, Day office," says one who was there (who, like many of those interviewed for this article, would not be quoted by name). "It was basic chaos. The office was full… People were up there until midnight. People were there twenty-four hours a day. Lots of pizzas, lots of fast food… We really took over the law firm." One "particularly diligent" young partner, this player recalls, "developed a nervous twitch" from working long hours without sleep, to the point that "people were worried that he was going to develop a stroke.’"

Among those passing through this maelstrom were Ben Barnes, an influential former lieutenant governor and real estate developer in partnership with former governor John Connally; Louis Reese III, a high-flying, land-flipping, good-old-boy Dallas developer who drove a Rolls-Royce and sported a $100 million financial statement; J. Scott Mann III, a politically connected wheeler-dealer and former University of Texas tackle who owned CreditBanc Savings Association; William Moore, a brainy, clean-cut part owner of Franklin Savings Association; and a supporting cast of appraisers, lawyers, and others.

The masterminds of "the Christmas transactions," as they have come to be called, were Moore and Mann, both promoter developers turned bankers, and, by most accounts, once-and-future Jones, Day partner Carey Brennan, then 37, a rising star who had befriended them both.

Brennan had joined Jones, Day’s new Austin office as a partner in 1984, bringing a major client, Moore’s Franklin Savings, with him from Johnson & Swanson. He soon became a principal attorney for Mann’s companies as well and helped engineer the complex deals that created CreditBanc in August 1985. Shortly thereafter Brennan agreed to help Mann run CreditBanc, lured by a million-dollar-plus signing package. ("At this point," Mann reilects, "he probably feels he was unpaid." ) Now Brennan, Mann, Moore and his partners, and Jones, Day are co-defendants in a $76 million lawsuit by the Federal Deposit Insurance Corporation. The agency accuses Brennan and the other "insider defendants" of illegal conduct including fraud and self-dealing. It says they wasted the federally insured assets of CreditBanc and Franklin including $35 million in losses from the Christmas deals alone – to suit their personal financial interests.

The FDIC complaint says Jones, Day "aided and abetted" the insiders in making unsound, illegal, and "fraudulent" transactions, in misleading regulators, and in using a "sham" real estate loan in a stock-parking scheme. It stops a hair short of accusing the firm of knowing participation in fraud.

Jones, Day, the nation’s second-largest law firm, with 1,219 attorneys, says the suit is groundless. So does Brennan, who returned to Jones, Day in 1987 and is now based in Pittsburgh.

Filed late last October, the FDIC suit capped an unhappy chain of events that began as Austin’s overheated real estate market caught a chill in 1986 and then crashed: Reese, Barnes, Connally, and a lot of other people defaulted on their loans and went into bankruptcy. CreditBanc and Franklin went from regulatory supervision to federal receivership, almost $1 billion in the hole between them. And many of those involved in the Christmas transactions . fell into bitter recriminations.

Lenders sued borrowers. Borrowers sued lenders. And after bank examiners started closing in, friends turned on friends: Brennan handed regulators evidence highly damaging to Mann and Moore; Brennan, Mann, and the other CreditBanc directors (including the wife of a Jones, Day partner) sued Mann’s college roommate and other former CreditBanc employees, who countersued; and Moore sued Jones, Day and his former friend Brennan for conflicts of interest and betrayal.

Meanwhile, in the fall of 1986, Brennan and the CreditBanc board shipped $2 million in CreditBanc money to the law firm – one jump ahead of the regulators – for future legal fees and termination payments for Brennan, Mann, and another officer. And Brennan and Jones, Day helped Mann persuade Jim Wright, then the majority leader of the U.S. House of Representatives, to tell federal regulators to back off.

Federal prosecutors are investigating the affairs of CreditBanc and Franklin. Some of the FDIC’s allegations against the insider defendants, including Brennan, could, if proved, establish violations of federal criminal law.

THE $72 MILLION QUESTIONS

For Jones, Day the most significant development is the FDIC’s claim against the firm and Brennan, and the broader questions underlying the detailed disputes of fact and law on which the case will turn. Did this rapidly expanding law firm let greed overcome judgment? Did its pursuit of big fees deaden its sense of obligation not to assist in the waste of its client institutions’ federally insured assets in the service of the personal financial interests of those who controlled them? Did it assist in evasion of regulatory safeguards, even in fraud? Or is this case just an example of politically inspired harassment of good lawyers who did a professional job documenting what turned out, after the crash, to be bad business deals?

Richard Pogue, the managing partner of the Cleveland-based firm, says in a prepared statement that "it is patently unfair to attempt to change the rules retroactively in an effort to create liability for lawyers based upon the success or failure of their clients’ business transactions."

Pogue says that neither Brennan nor the firm did anything wrong, and that the firm’s representation of CreditBanc and Franklin was "in all respects appropriate and correct." He calls Brennan "an outstanding lawyer and a very fine human being." And he says the recent filing of this and some 50 other FDIC suits against law firms shows that "the very federal regulators who… allowed the savings and loan crisis to develop are now searching for scapegoats."

The most important partner at the second-biggest law firm in the nation has more than a passing interest in the Austin office. Pogue says the first thing he did when he became managing partner in 1984 was decide to expand from Dallas to Austin, then one of the nation’s hottest boom towns. And in the fall of 1985, according to Bill Moore, Pogue – "a helluva nice guy" – came down from Cleveland and took Moore to the fanciest lunch club in town "to schmooze me a little bit so that they could continue to represent both companies" – a representation that Moore and the FDIC now claim involved multiple conflicts of interest.

The FDIC seeks to hold Jones, Day and all its partners jointly and severally liable with the individual defendants for $72 million of the $76 million in losses that the agency says CreditBanc and Franklin suffered from 1982 through 1986 due to fraudulent and other illegal conduct by the owners and (beginning in 1984) by Brennan.

The $76 million FDIC claim would cover less than a tenth of the nearly $1 billion estimated cost to the taxpayers of bailing out CreditBanc and Franklin. But It’s still real money, whether you are the nation’s second-largest law firm or a regulator trying to show you are hot on the trail of alleged S&L crooks and the lawyers and accountants who helped them. Jones, Day happens to be the only defendant with enough money to pay a big judgment.

According to the FDIC complaint, from 1984 through 1986 Carey Brennan and other Jones, Day lawyers repeatedly committed malpractice, "failed to disclose or misrepresented facts about conflicts of interest," and participated in breaches of federal and state laws and regulations. It also accuses the firm of "failing to disclose or misrepresenting to federal regulators facts concerning the associations," of participating in violations of fiduciary duties by the owners, and of helping to divert a $5.5 million Franklin loan to finance an illegal stock parking scheme for Moore and his partners.

Many of these violations were designed, according to the FDIC, to create "phantom profits" – by having the thrifts do "sham transactions" with each other and cooperating borrowers, often with Jones, Day representing both institutions – so that they could inflate capital and pay millions in dividends to their owners: Mann, Moore, and Moore’s partners. (The four Franklin owners called themselves GMAC, an acronym for their last names: Peter Gallaher, Moore, J. Clifford Alsup, and Charles Christensen.)

"The means employed to inflate the net worths of the associations," the FDIC says, "included loan transactions, in which each association would lend money to a borrower to finance that borrower’s purchase of property owned by the other association at prices in excess of fair market value." The FDIC’s leading examples are two of the Christmas transactions.

In its answer Jones, Day concedes no impropriety and denies many of the FDIC’s allegations against its former clients. The firm also suggests that, in any event, it was not retained to evaluate "business aspects," and any improprieties were hidden from it. Saying "we will try the case in court," not in the press, Pogue declines to respond to detailed questions. Brennan declines all comment. But there is no shortage of people who have unkind things to say about Jones, Day among the more than 40 in Austin and elsewhere whom I interviewed. Most – like Moore, who says that Brennan "was one of my best friends" and that "[he] sold me down the river" – are far from disinterested. And most insist on anonymity.

For these reasons, this article is necessarily somewhat lopsided: I know a lot more about the evidence against Jones, Day and Brennan than I know about their side of the story. They may in the end be completely vindicated, at least as far as the law is concerned. Among other things, they may be able to show that making failing thrifts look solvent by inflating their capital – and spurring thrift owners to make investments that were bound to go bad when the real estate boom fizzled – was the essence of federal regulatory policy.

To avoid confronting the mushrooming billions in savings and loan losses that were apparent by 1982, the government sought to make them disappear by licensing buyers of failing thrifts to use accounting gimmicks to mask their losses and try to recoup them through aggressive growth. These federal policies played a large role in turning thrifts like CreditBanc and Franklin into federally approved and insured casinos, attracting brokered deposits with high interest rates and investing them in real estate deals, with all the risk on the taxpayers.

Among the questions underlying suits like the one against Jones, Day is whether the lawyers hired by thrifts like Franklin and CreditBanc made this governmentally inspired disaster worse, by helping clients evade the regulatory safeguards that did exist.

The evidence I have seen so far suggests that Brennan and Jones, Day were deeply involved in some deals that for now, at least, seem exceedingly difficult to justify. Most salient among them is a series of 1985 transactions in which Moore and his GMAC partners in effect made Mann a gift of more than $5 million of Franklin depositors’ money to finance his acquisition of another insolvent thrift GMAC wanted to unload. Jones Day represented GMAC’s Franklin in the transactions with Mann, and Mann’s CredilBanc in the acquisition of the thrift from GMAC.

The FDIC claims the law firm "aided Mann in concealing" from regulators his source of financing, which it says was "fraudulently obtained." It says the firm had a financial stake in misleading regulators because Brennan had already begun the job discussions that led to Mann’s funding a $1 million trust for him, with partner James Baumoel, who then headed the Austin office and now heads the 157-lawyer Dallas office, as trustee.

"This," says embittered former client Bill Moore, "is their jugular vein."

LAND-FLIPPING, ROUND-TRIPPING

The story outlined in the FDIC complaint begins in December 1982, when Bill Moore and his three GMAC partners bought Jefferson Savings Association of McAIlen, Texas. The transaction was so tainted that nearly everyone involved – with the exception of Scott Mann – now claims not to have known what was going on.

Jones, Day had nothing to do with this transaction, but Carey Brennan, then a 34-year-old partner at Johnson & Swanson, worked on a related deal. He disclaims knowledge of key aspects of these events, an assertion the FDIC has not challenged.

Congress had just passed the 1982 Garn-St. Germain legislation, designed to help the savings and loan industry grow out of its troubles by engaging in a wide variety of direct investments that were by their nature far riskier than traditional home mortgage lending.

Like thousands of other businessmen, Moore, fellow developer Gallaher, and the two other members of GMAC, Austin businessmen Alsup and Christensen, saw a golden opportunity to wheel and deal with pots of other people’s money – all federally insured. So did Mann, a business friend of the GMAC four who had known Gallaher on the University of Texas football team.

Moore and Gallaher’s relationship with Mann was "an odd one… hot and cold," according to a 1988 deposition by Ben Plotkin in a lender liability case against Franklin that has since been settled. Plotkin worked on the 1982 acquisition as a young lawyer with Elias, Matz, Tiernan & Herrick, a Washington, D.C., firm specializing in thrift regulatory work, and was later hired to help run Franklin.

"At times," Plotkin recalled in his deposition, Moore and Gallaher "were very, very close to [Mann]; at other times, you know, they were convinced [he] was trying to screw them, or at least that’s the perception I got. It always seemed to me that one way or the other [Mann] ended up with the better half of the deals after the deals were done."

The four GMAC partners and Mann had signed a letter of intent to purchase Jefferson in the fall of 1982. Federal regulators were anxious to get the institution out of the hands of its owner, Guillermo Cartaya, a Cuban emigre who later went to prison on tax charges.

One problem was that neither Mann nor GMAC had enough money to buy Jefferson. Another was that Mann had gone through a bankruptcy a few years before, which could have made it harder to win regulatory approval, and had to drop out of the acquiring group.

According to the FDIC complaint, GMAC and Mann devised an ingenious solution: "GMAC acquired Jef-ferson/McAllen with the association’s own cash, passed through Mann."

Here’s how it worked, according to the FDIC and others who have investigated the deals: Acting as trustee for Jefferson Savings, Mann arranged for it to buy certain oil and gas properties directly from a third party for $9.8 million. Then Mann, GMAC, and Jefferson’s management caused the thrift to wire $13.8 million to the escrow agent, with Mann raking off $4 million.

(Keep your eye on those oil and gas properties. They’ll be bouncing back to Mann two years down the road, with Jones, Day representing both sides in the deal.)

The FDIC says Mann and GMAC "caused a false purchase agreement to be placed in Jefferson/McAllen’s files," purporting to involve a sale of the oil and gas properties from Mann to the thrift for $13.8 million.

Mann promptly loaned the $4 million to Moore and Gallaher, who used it to remove a $4 million lien encumbering a shopping center they co-owned. (Moore denies having known that Mann had made the $4 million profit.) Then they traded the shopping center to Jefferson Savings for a piece of real estate and $6 million and, with their GMAC partners, used $5 million of the cash to buy Jefferson from Cartaya, who sent $1.5 million back to buy the real estate GMAC had just acquired from the thrift.

Some arithmetic: Jefferson is out assets worth $21.3 million – $19.8 million in cash plus $1.5 million worth of real estate (if Cartaya’s purchase from GMAC can be used to establish the value). In return, the FDIC says, the thrift obtained assets worth at most $17.3 million, indulging for the moment the charitable assumptions that the oil and gas properties were worth the $9.8 million Mann paid for them (Mann still says they were worth $13.8 million) and that the shopping center was worth the $7.5 million in assets that Jefferson paid for it.

Where did all that cash go? The original seller of the oil and gas properties got $9.8 million; Cartaya walked away with $3.5 million; Moore and Gallaher got $4 million through Mann and used it to pay off the lien on the shopping center; and they and their two GMAC partners got $2.5 million.

What did Mann get? A $4 million note from Moore and Gallaher – and, according to the FDIC, a $5.3 million loan commitment from GMAC’s Jefferson for a condominium project in Austin. The day the $5.3 million loan was funded, the FDIC says, Mann renegotiated the $4 million note to give Moore and Gallaher far more generous terms; a few months later he sold it – for $1 million – to Alsup and Christensen, to whom Moore and Gallaher have made no payments.

And even though Jefferson had a negative net worth, accounting gimmicks approved by regulators allowed GMAC to book its net worth at the $5 million GMAC had "paid" for it.

It all might seem like what Neil Bush would call "an incredibly sweet deal" for all concerned, except perhaps for the taxpayers who end up having to bail out Jefferson, after it was merged into a thrift owned by GMAC and then into Mann’s Credit-Bane. (What GMAC didn’t know in 1982, says Moore, was that Jefferson "was probably fifty million dollars in the hole" with bad debts.)

One of the grounds on which the FDIC faults this sequence of deals is that GMAC did not disclose to federal regulators in its application for approval of the Jefferson acquisition that Moore and Gallaher had financed it by borrowing $4 million from Mann.

Former Franklin CEO Plotkin testified in his deposition in the lender liability case that in October 1986 Brennan (who was then a CreditBanc executive) told him some things about the 1982 and 1983 deals that were so "disturbing" that Plotkin immediately resigned. Brennan told him, Plotkin testified, "that Scott Mann in connection with that oil and gas transaction flipped those properties and made four or five million dollars in cash and that those funds were round-tripped, so to speak," to Moore and Gallaher.

"The fact that this was an un¨disclosed transaction was very disturbing," Plotkin explained. "It was certainly very material, and the obligation is on the acquirer to make disclosure in their application of essen¨tially all the facts. It wasn’t in the application."

For his part, Brennan testified in a 1987 deposition in the same suit that he represented Moore and Gallaher in restructuring the shopping center transfer, helping them avoid adverse tax consequences. Although he represented Jefferson in connection with its $5.3 million loan to Mann, he said he did not learn until the summer of 1986 about Mann’s role in the sale of the oil and gas properties to Jefferson or his $4 million "loan" to Moore and Gallaher. Brennan said he had nothing to do with the acquisition of Jefferson or with the change of control application.

One source familiar with the shopping center transactions contradicts Brennan on one point, insisting the lawyer did know in 1982 that Mann was the source of the $4 million. Others question how Brennan could have analyzed the tax implications of the transfer of the shopping center and restructured the deal without having some idea where his clients got $4 million to remove the lien.

But nobody has publicly contradicted Brennan. And while the FDIC says Mann and the GMAC four all knew where the money had come from to finance the 1982 acquisition, it has made no such claim as to Brennan.

"I" M NOT ONE OF YOUR TYPICAL S&L CROOKS"

By 1984 Moore and his partners had bought two more Austin thrifts: Franklin Savings Association, a venerable Austin institution that had been conservatively run, and Northwest Savings Association, a smaller thrift into which they merged the deeply troubled Jefferson Savings.

With Gallaher as the pitchman and Moore as the financial wizard and hardball negotiator, Franklin and Northwest moved into bigger and riskier real estate deals, often negotiating loans that included equity interests or profit participations.

One source of pressure to make big profits was the need to make payments on the millions of dollars in bank debt the GMAC partners and their holding company had taken on to pay for Franklin. Another was the burden of Jefferson’s bad debts. "We needed to do what we thought were appropriate activities from a regulatory standpoint but more risky from a business stand¨point," recalls Moore. "And we didn’t do anything without running it by lawyers."

Early this year, over breakfast in an Austin hotel overlooking the Colorado River, Moore stressed that he and his partners should not be lumped together with operators of defunct thrifts like Don Dixon, convicted in December on charges including fraud and using federally insured assets and his company plane to promote interstate prostitution. "I’m not one of your typical S&L crooks," says Moore, clearly meaning that he’s not a crook at all. "I have a highly developed family life. None of my kids are on drugs or alcohol. My wife and I married twenty-two years [ago]. I don’t screw around.

"We didn’t pay for any whores," he says, leaning forward. "We didn’t have extravagant parties. When I used the company airplane, I paid for it."

Others who worked at Franklin and CreditBanc describe Moore, his partners, Brennan, and – to a lesser extent – Mann as unflashy family men, most of them churchgoers, with fancy houses and cars (Brennan drove a Jaguar, according to three former acquaintances) but not given to the extravagances of a Don Dixon.

In 1983, Moore and others say, Moore gave Brennan, then a Johnson & Swanson partner, a bigger and bigger share of the GMAC-owned thrifts’ growing legal fees. Meanwhile, Brennan’s career was flourishing as big Dallas and Houston firms moved into Austin, followed by national firms like Jones, Day. A 1976 graduate of the University of Arkansas Law School who earned an advanced degree in taxation from New York University Law School in 1977, he had spent 14 months at a tax specialty firm in Little Rock before settling in Austin as an associate at McGinnis, Lochridge & Kilgore. After making partner he left in late 1982 for the Austin office of Dallas’s Johnson & Swanson (now Johnson & Gibbs).

By May 1984 Brennan was on the move again, this time to Jones, Day’s new Austin office, which opened August 1. Thanks largely to his relationship with Moore, he brought with him the business of Franklin Savings, which had accounted for more than 15 percent of Johnson & Swanson’s Austin billings.

Brennan is universally described as a nice-looking, likable, understated man with a keen intellect. Some who know him well praise him, with evident sincerity, as the soul of decency and integrity. Others, like Bill Moore, revile him as a smooth, self-serving snake.

The other partners who opened the Austin office along with Brennan included James Baumoel from the firm’s Dallas office, which had a lot of financial institutions and real estate work, and James Erb from Cleveland.

In their answers to the FDIC lawsuit, Jones, Day and Brennan deny the agency’s claim that they "held themselves out as experts in the fields of savings and loan regulation and real estate transactions."

Moore scoffs at this denial. When Jones, Day’s lawyers were seeking to keep his business, he recalls, they "pointed to the ex-regulators they had, they pointed to the successes they had had in the regulatory arena," and they "presented themselves as being experts in the regulatory process." Moore adds that Richard Kneipper of the firm’s Dallas office "presents himself as being the guru of S&L regulation" – remark echoed by others who have dealt with Kneipper (Kneipper, who is not named in the FDIC suit, did not return calls.)

"We were looking to them for highly competent legal work, so we were willing to pay extravagant fees – to people who now claim they weren’t experts about anything," Moore says.

Mann says he first used Jones, Day in 1983, hiring lawyers in the Dallas office to represent him and a partner named Victor Rogers when they acquired Equitable Savings Association, a small thrift in Round Rock, Texas. "Jones, Day probably has as large a number [as any firm] of attorneys… that were formerly at… the regulatory agencies," Mann says. "That was one of the principal reasons they were recommended to us and one of the reasons we were and still are comfortable with them."

Mann says he has "nothing but the highest praise for Jones, Day and Mr. Brennan." He says he looked to them for legal advice "with respect to every aspect of every transaction," including the valuations of properties.

With all this business, and other clients like Dallas-based real estate giant Trammell Crow, Jones, Day’s Austin office was up to 19 lawyers by late 1985. And Brennan was one of its biggest rainmakers.

WHY BET AGAINST THE HOUSE WHEN IT’S YOURS?

The earliest transaction for which the FDIC seeks to hold Jones, Day liable – to the tune of $7.7 million – is a December 1984 real estate swap between GMAC’s troubled Northwest Savings and a company owned by Mann. With Jones, Day representing both sides, Northwest transferred back to Mann the same oil and gas properties that he had sold for $13.8 million two years earlier to Jefferson; in exchange Mann transferred to Northwest a 130-acre tract of land called Bridgepoint, on which he owed $7.9 million.

The purpose of the swap, the FDIC contends, was to "conceal Northwest’s actual net worth from government regulators," by falsely inflating the value of its assets. The FDIC says the oil and gas properties were worth only about $3 million (in part because oil prices had plunged), and that the swap was devised to avoid marking them down to their true value and admitting that Northwest was insolvent.

The trick, according to the FDIC, was to overvalue the Bridgepoint property by about $16 million. A November 1983 appraisal valuing a larger tract of which Bridgepoint was a part indicated that Bridgepoint itself was worth only about $3.2 million, minus the $7.9 million in debt (a negative net worth of $4.7 million). Despite this, the FDIC says, Northwest falsely recorded Bridgepoint on its books as being worth nearly $19 million minus the debt (a positive net worth of $11.1 million).

This trade, the FDIC says, not only artificially inflated Northwest’s sagging net worth, but caused Northwest to lose $7.7 million in real assets, while handing Mann a $7.7 million profit. The FDIC says Brennan and his law firm are liable for Northwest’s losses because they knew that the $ 19 million appraisal "included residential and commercial acreage that was not being conveyed to Northwest" and failed lo advise Northwest of this and other problems with the deal.

In their answers Jon…

FOR THE THREE. OR FOUR nights and days before Christmas in 1985 the scene at Jones, Day, Reavis & Pogue’s booming Austin office was an apt symbol, even a microcosm, of the Texas real estate market. "There was a lot of money going around," says one participant. "There was a lot of madness in the air."

Representing two Austin savings and loans that were lending more than $115 million in eight interwoven, high-risk land deals, Jones, Day lawyers were churning out mounds of paper amid frenzied last-minute negotiations. With the clients pressing to wrap it all up and book millions in paper profits by year’s end, the deals were closed by Christmas Eve.

"It was a circus in the Jones, Day office," says one who was there (who, like many of those interviewed for this article, would not be quoted by name). "It was basic chaos. The office was full… People were up there until midnight. People were there twenty-four hours a day. Lots of pizzas, lots of fast food… We really took over the law firm." One "particularly diligent" young partner, this player recalls, "developed a nervous twitch" from working long hours without sleep, to the point that "people were worried that he was going to develop a stroke.’"

Among those passing through this maelstrom were Ben Barnes, an influential former lieutenant governor and real estate developer in partnership with former governor John Connally; Louis Reese III, a high-flying, land-flipping, good-old-boy Dallas developer who drove a Rolls-Royce and sported a $100 million financial statement; J. Scott Mann III, a politically connected wheeler-dealer and former University of Texas tackle who owned CreditBanc Savings Association; William Moore, a brainy, clean-cut part owner of Franklin Savings Association; and a supporting cast of appraisers, lawyers, and others.

The masterminds of "the Christmas transactions," as they have come to be called, were Moore and Mann, both promoter developers turned bankers, and, by most accounts, once-and-future Jones, Day partner Carey Brennan, then 37, a rising star who had befriended them both.

Brennan had joined Jones, Day’s new Austin office as a partner in 1984, bringing a major client, Moore’s Franklin Savings, with him from Johnson & Swanson. He soon became a principal attorney for Mann’s companies as well and helped engineer the complex deals that created CreditBanc in August 1985. Shortly thereafter Brennan agreed to help Mann run CreditBanc, lured by a million-dollar-plus signing package. ("At this point," Mann reilects, "he probably feels he was unpaid." ) Now Brennan, Mann, Moore and his partners, and Jones, Day are co-defendants in a $76 million lawsuit by the Federal Deposit Insurance Corporation. The agency accuses Brennan and the other "insider defendants" of illegal conduct including fraud and self-dealing. It says they wasted the federally insured assets of CreditBanc and Franklin including $35 million in losses from the Christmas deals alone – to suit their personal financial interests.

The FDIC complaint says Jones, Day "aided and abetted" the insiders in making unsound, illegal, and "fraudulent" transactions, in misleading regulators, and in using a "sham" real estate loan in a stock-parking scheme. It stops a hair short of accusing the firm of knowing participation in fraud.

Jones, Day, the nation’s second-largest law firm, with 1,219 attorneys, says the suit is groundless. So does Brennan, who returned to Jones, Day in 1987 and is now based in Pittsburgh.

Filed late last October, the FDIC suit capped an unhappy chain of events that began as Austin’s overheated real estate market caught a chill in 1986 and then crashed: Reese, Barnes, Connally, and a lot of other people defaulted on their loans and went into bankruptcy. CreditBanc and Franklin went from regulatory supervision to federal receivership, almost $1 billion in the hole between them. And many of those involved in the Christmas transactions . fell into bitter recriminations.

Lenders sued borrowers. Borrowers sued lenders. And after bank examiners started closing in, friends turned on friends: Brennan handed regulators evidence highly damaging to Mann and Moore; Brennan, Mann, and the other CreditBanc directors (including the wife of a Jones, Day partner) sued Mann’s college roommate and other former CreditBanc employees, who countersued; and Moore sued Jones, Day and his former friend Brennan for conflicts of interest and betrayal.

Meanwhile, in the fall of 1986, Brennan and the CreditBanc board shipped $2 million in CreditBanc money to the law firm – one jump ahead of the regulators – for future legal fees and termination payments for Brennan, Mann, and another officer. And Brennan and Jones, Day helped Mann persuade Jim Wright, then the majority leader of the U.S. House of Representatives, to tell federal regulators to back off.

Federal prosecutors are investigating the affairs of CreditBanc and Franklin. Some of the FDIC’s allegations against the insider defendants, including Brennan, could, if proved, establish violations of federal criminal law.

THE $72 MILLION QUESTIONS

For Jones, Day the most significant development is the FDIC’s claim against the firm and Brennan, and the broader questions underlying the detailed disputes of fact and law on which the case will turn. Did this rapidly expanding law firm let greed overcome judgment? Did its pursuit of big fees deaden its sense of obligation not to assist in the waste of its client institutions’ federally insured assets in the service of the personal financial interests of those who controlled them? Did it assist in evasion of regulatory safeguards, even in fraud? Or is this case just an example of politically inspired harassment of good lawyers who did a professional job documenting what turned out, after the crash, to be bad business deals?

Richard Pogue, the managing partner of the Cleveland-based firm, says in a prepared statement that "it is patently unfair to attempt to change the rules retroactively in an effort to create liability for lawyers based upon the success or failure of their clients’ business transactions."

Pogue says that neither Brennan nor the firm did anything wrong, and that the firm’s representation of CreditBanc and Franklin was "in all respects appropriate and correct." He calls Brennan "an outstanding lawyer and a very fine human being." And he says the recent filing of this and some 50 other FDIC suits against law firms shows that "the very federal regulators who… allowed the savings and loan crisis to develop are now searching for scapegoats."

The most important partner at the second-biggest law firm in the nation has more than a passing interest in the Austin office. Pogue says the first thing he did when he became managing partner in 1984 was decide to expand from Dallas to Austin, then one of the nation’s hottest boom towns. And in the fall of 1985, according to Bill Moore, Pogue – "a helluva nice guy" – came down from Cleveland and took Moore to the fanciest lunch club in town "to schmooze me a little bit so that they could continue to represent both companies" – a representation that Moore and the FDIC now claim involved multiple conflicts of interest.

The FDIC seeks to hold Jones, Day and all its partners jointly and severally liable with the individual defendants for $72 million of the $76 million in losses that the agency says CreditBanc and Franklin suffered from 1982 through 1986 due to fraudulent and other illegal conduct by the owners and (beginning in 1984) by Brennan.

The $76 million FDIC claim would cover less than a tenth of the nearly $1 billion estimated cost to the taxpayers of bailing out CreditBanc and Franklin. But It’s still real money, whether you are the nation’s second-largest law firm or a regulator trying to show you are hot on the trail of alleged S&L crooks and the lawyers and accountants who helped them. Jones, Day happens to be the only defendant with enough money to pay a big judgment.

According to the FDIC complaint, from 1984 through 1986 Carey Brennan and other Jones, Day lawyers repeatedly committed malpractice, "failed to disclose or misrepresented facts about conflicts of interest," and participated in breaches of federal and state laws and regulations. It also accuses the firm of "failing to disclose or misrepresenting to federal regulators facts concerning the associations," of participating in violations of fiduciary duties by the owners, and of helping to divert a $5.5 million Franklin loan to finance an illegal stock parking scheme for Moore and his partners.

Many of these violations were designed, according to the FDIC, to create "phantom profits" – by having the thrifts do "sham transactions" with each other and cooperating borrowers, often with Jones, Day representing both institutions – so that they could inflate capital and pay millions in dividends to their owners: Mann, Moore, and Moore’s partners. (The four Franklin owners called themselves GMAC, an acronym for their last names: Peter Gallaher, Moore, J. Clifford Alsup, and Charles Christensen.)

"The means employed to inflate the net worths of the associations," the FDIC says, "included loan transactions, in which each association would lend money to a borrower to finance that borrower’s purchase of property owned by the other association at prices in excess of fair market value." The FDIC’s leading examples are two of the Christmas transactions.

In its answer Jones, Day concedes no impropriety and denies many of the FDIC’s allegations against its former clients. The firm also suggests that, in any event, it was not retained to evaluate "business aspects," and any improprieties were hidden from it. Saying "we will try the case in court," not in the press, Pogue declines to respond to detailed questions. Brennan declines all comment. But there is no shortage of people who have unkind things to say about Jones, Day among the more than 40 in Austin and elsewhere whom I interviewed. Most – like Moore, who says that Brennan "was one of my best friends" and that "[he] sold me down the river" – are far from disinterested. And most insist on anonymity.

For these reasons, this article is necessarily somewhat lopsided: I know a lot more about the evidence against Jones, Day and Brennan than I know about their side of the story. They may in the end be completely vindicated, at least as far as the law is concerned. Among other things, they may be able to show that making failing thrifts look solvent by inflating their capital – and spurring thrift owners to make investments that were bound to go bad when the real estate boom fizzled – was the essence of federal regulatory policy.

To avoid confronting the mushrooming billions in savings and loan losses that were apparent by 1982, the government sought to make them disappear by licensing buyers of failing thrifts to use accounting gimmicks to mask their losses and try to recoup them through aggressive growth. These federal policies played a large role in turning thrifts like CreditBanc and Franklin into federally approved and insured casinos, attracting brokered deposits with high interest rates and investing them in real estate deals, with all the risk on the taxpayers.

Among the questions underlying suits like the one against Jones, Day is whether the lawyers hired by thrifts like Franklin and CreditBanc made this governmentally inspired disaster worse, by helping clients evade the regulatory safeguards that did exist.

The evidence I have seen so far suggests that Brennan and Jones, Day were deeply involved in some deals that for now, at least, seem exceedingly difficult to justify. Most salient among them is a series of 1985 transactions in which Moore and his GMAC partners in effect made Mann a gift of more than $5 million of Franklin depositors’ money to finance his acquisition of another insolvent thrift GMAC wanted to unload. Jones Day represented GMAC’s Franklin in the transactions with Mann, and Mann’s CredilBanc in the acquisition of the thrift from GMAC.

The FDIC claims the law firm "aided Mann in concealing" from regulators his source of financing, which it says was "fraudulently obtained." It says the firm had a financial stake in misleading regulators because Brennan had already begun the job discussions that led to Mann’s funding a $1 million trust for him, with partner James Baumoel, who then headed the Austin office and now heads the 157-lawyer Dallas office, as trustee.

"This," says embittered former client Bill Moore, "is their jugular vein."

LAND-FLIPPING, ROUND-TRIPPING

The story outlined in the FDIC complaint begins in December 1982, when Bill Moore and his three GMAC partners bought Jefferson Savings Association of McAIlen, Texas. The transaction was so tainted that nearly everyone involved – with the exception of Scott Mann – now claims not to have known what was going on.

Jones, Day had nothing to do with this transaction, but Carey Brennan, then a 34-year-old partner at Johnson & Swanson, worked on a related deal. He disclaims knowledge of key aspects of these events, an assertion the FDIC has not challenged.

Congress had just passed the 1982 Garn-St. Germain legislation, designed to help the savings and loan industry grow out of its troubles by engaging in a wide variety of direct investments that were by their nature far riskier than traditional home mortgage lending.

Like thousands of other businessmen, Moore, fellow developer Gallaher, and the two other members of GMAC, Austin businessmen Alsup and Christensen, saw a golden opportunity to wheel and deal with pots of other people’s money – all federally insured. So did Mann, a business friend of the GMAC four who had known Gallaher on the University of Texas football team.

Moore and Gallaher’s relationship with Mann was "an odd one… hot and cold," according to a 1988 deposition by Ben Plotkin in a lender liability case against Franklin that has since been settled. Plotkin worked on the 1982 acquisition as a young lawyer with Elias, Matz, Tiernan & Herrick, a Washington, D.C., firm specializing in thrift regulatory work, and was later hired to help run Franklin.

"At times," Plotkin recalled in his deposition, Moore and Gallaher "were very, very close to [Mann]; at other times, you know, they were convinced [he] was trying to screw them, or at least that’s the perception I got. It always seemed to me that one way or the other [Mann] ended up with the better half of the deals after the deals were done."

The four GMAC partners and Mann had signed a letter of intent to purchase Jefferson in the fall of 1982. Federal regulators were anxious to get the institution out of the hands of its owner, Guillermo Cartaya, a Cuban emigre who later went to prison on tax charges.

One problem was that neither Mann nor GMAC had enough money to buy Jefferson. Another was that Mann had gone through a bankruptcy a few years before, which could have made it harder to win regulatory approval, and had to drop out of the acquiring group.

According to the FDIC complaint, GMAC and Mann devised an ingenious solution: "GMAC acquired Jef-ferson/McAllen with the association’s own cash, passed through Mann."

Here’s how it worked, according to the FDIC and others who have investigated the deals: Acting as trustee for Jefferson Savings, Mann arranged for it to buy certain oil and gas properties directly from a third party for $9.8 million. Then Mann, GMAC, and Jefferson’s management caused the thrift to wire $13.8 million to the escrow agent, with Mann raking off $4 million.

(Keep your eye on those oil and gas properties. They’ll be bouncing back to Mann two years down the road, with Jones, Day representing both sides in the deal.)

The FDIC says Mann and GMAC "caused a false purchase agreement to be placed in Jefferson/McAllen’s files," purporting to involve a sale of the oil and gas properties from Mann to the thrift for $13.8 million.

Mann promptly loaned the $4 million to Moore and Gallaher, who used it to remove a $4 million lien encumbering a shopping center they co-owned. (Moore denies having known that Mann had made the $4 million profit.) Then they traded the shopping center to Jefferson Savings for a piece of real estate and $6 million and, with their GMAC partners, used $5 million of the cash to buy Jefferson from Cartaya, who sent $1.5 million back to buy the real estate GMAC had just acquired from the thrift.

Some arithmetic: Jefferson is out assets worth $21.3 million – $19.8 million in cash plus $1.5 million worth of real estate (if Cartaya’s purchase from GMAC can be used to establish the value). In return, the FDIC says, the thrift obtained assets worth at most $17.3 million, indulging for the moment the charitable assumptions that the oil and gas properties were worth the $9.8 million Mann paid for them (Mann still says they were worth $13.8 million) and that the shopping center was worth the $7.5 million in assets that Jefferson paid for it.

Where did all that cash go? The original seller of the oil and gas properties got $9.8 million; Cartaya walked away with $3.5 million; Moore and Gallaher got $4 million through Mann and used it to pay off the lien on the shopping center; and they and their two GMAC partners got $2.5 million.

What did Mann get? A $4 million note from Moore and Gallaher – and, according to the FDIC, a $5.3 million loan commitment from GMAC’s Jefferson for a condominium project in Austin. The day the $5.3 million loan was funded, the FDIC says, Mann renegotiated the $4 million note to give Moore and Gallaher far more generous terms; a few months later he sold it – for $1 million – to Alsup and Christensen, to whom Moore and Gallaher have made no payments.

And even though Jefferson had a negative net worth, accounting gimmicks approved by regulators allowed GMAC to book its net worth at the $5 million GMAC had "paid" for it.

It all might seem like what Neil Bush would call "an incredibly sweet deal" for all concerned, except perhaps for the taxpayers who end up having to bail out Jefferson, after it was merged into a thrift owned by GMAC and then into Mann’s Credit-Bane. (What GMAC didn’t know in 1982, says Moore, was that Jefferson "was probably fifty million dollars in the hole" with bad debts.)

One of the grounds on which the FDIC faults this sequence of deals is that GMAC did not disclose to federal regulators in its application for approval of the Jefferson acquisition that Moore and Gallaher had financed it by borrowing $4 million from Mann.

Former Franklin CEO Plotkin testified in his deposition in the lender liability case that in October 1986 Brennan (who was then a CreditBanc executive) told him some things about the 1982 and 1983 deals that were so "disturbing" that Plotkin immediately resigned. Brennan told him, Plotkin testified, "that Scott Mann in connection with that oil and gas transaction flipped those properties and made four or five million dollars in cash and that those funds were round-tripped, so to speak," to Moore and Gallaher.

"The fact that this was an un¨disclosed transaction was very disturbing," Plotkin explained. "It was certainly very material, and the obligation is on the acquirer to make disclosure in their application of essen¨tially all the facts. It wasn’t in the application."

For his part, Brennan testified in a 1987 deposition in the same suit that he represented Moore and Gallaher in restructuring the shopping center transfer, helping them avoid adverse tax consequences. Although he represented Jefferson in connection with its $5.3 million loan to Mann, he said he did not learn until the summer of 1986 about Mann’s role in the sale of the oil and gas properties to Jefferson or his $4 million "loan" to Moore and Gallaher. Brennan said he had nothing to do with the acquisition of Jefferson or with the change of control application.

One source familiar with the shopping center transactions contradicts Brennan on one point, insisting the lawyer did know in 1982 that Mann was the source of the $4 million. Others question how Brennan could have analyzed the tax implications of the transfer of the shopping center and restructured the deal without having some idea where his clients got $4 million to remove the lien.

But nobody has publicly contradicted Brennan. And while the FDIC says Mann and the GMAC four all knew where the money had come from to finance the 1982 acquisition, it has made no such claim as to Brennan.

"I" M NOT ONE OF YOUR TYPICAL S&L CROOKS"

By 1984 Moore and his partners had bought two more Austin thrifts: Franklin Savings Association, a venerable Austin institution that had been conservatively run, and Northwest Savings Association, a smaller thrift into which they merged the deeply troubled Jefferson Savings.

With Gallaher as the pitchman and Moore as the financial wizard and hardball negotiator, Franklin and Northwest moved into bigger and riskier real estate deals, often negotiating loans that included equity interests or profit participations.

One source of pressure to make big profits was the need to make payments on the millions of dollars in bank debt the GMAC partners and their holding company had taken on to pay for Franklin. Another was the burden of Jefferson’s bad debts. "We needed to do what we thought were appropriate activities from a regulatory standpoint but more risky from a business stand¨point," recalls Moore. "And we didn’t do anything without running it by lawyers."

Early this year, over breakfast in an Austin hotel overlooking the Colorado River, Moore stressed that he and his partners should not be lumped together with operators of defunct thrifts like Don Dixon, convicted in December on charges including fraud and using federally insured assets and his company plane to promote interstate prostitution. "I’m not one of your typical S&L crooks," says Moore, clearly meaning that he’s not a crook at all. "I have a highly developed family life. None of my kids are on drugs or alcohol. My wife and I married twenty-two years [ago]. I don’t screw around.

"We didn’t pay for any whores," he says, leaning forward. "We didn’t have extravagant parties. When I used the company airplane, I paid for it."

Others who worked at Franklin and CreditBanc describe Moore, his partners, Brennan, and – to a lesser extent – Mann as unflashy family men, most of them churchgoers, with fancy houses and cars (Brennan drove a Jaguar, according to three former acquaintances) but not given to the extravagances of a Don Dixon.

In 1983, Moore and others say, Moore gave Brennan, then a Johnson & Swanson partner, a bigger and bigger share of the GMAC-owned thrifts’ growing legal fees. Meanwhile, Brennan’s career was flourishing as big Dallas and Houston firms moved into Austin, followed by national firms like Jones, Day. A 1976 graduate of the University of Arkansas Law School who earned an advanced degree in taxation from New York University Law School in 1977, he had spent 14 months at a tax specialty firm in Little Rock before settling in Austin as an associate at McGinnis, Lochridge & Kilgore. After making partner he left in late 1982 for the Austin office of Dallas’s Johnson & Swanson (now Johnson & Gibbs).

By May 1984 Brennan was on the move again, this time to Jones, Day’s new Austin office, which opened August 1. Thanks largely to his relationship with Moore, he brought with him the business of Franklin Savings, which had accounted for more than 15 percent of Johnson & Swanson’s Austin billings.

Brennan is universally described as a nice-looking, likable, understated man with a keen intellect. Some who know him well praise him, with evident sincerity, as the soul of decency and integrity. Others, like Bill Moore, revile him as a smooth, self-serving snake.

The other partners who opened the Austin office along with Brennan included James Baumoel from the firm’s Dallas office, which had a lot of financial institutions and real estate work, and James Erb from Cleveland.

In their answers to the FDIC lawsuit, Jones, Day and Brennan deny the agency’s claim that they "held themselves out as experts in the fields of savings and loan regulation and real estate transactions."

Moore scoffs at this denial. When Jones, Day’s lawyers were seeking to keep his business, he recalls, they "pointed to the ex-regulators they had, they pointed to the successes they had had in the regulatory arena," and they "presented themselves as being experts in the regulatory process." Moore adds that Richard Kneipper of the firm’s Dallas office "presents himself as being the guru of S&L regulation" – remark echoed by others who have dealt with Kneipper (Kneipper, who is not named in the FDIC suit, did not return calls.)

"We were looking to them for highly competent legal work, so we were willing to pay extravagant fees – to people who now claim they weren’t experts about anything," Moore says.

Mann says he first used Jones, Day in 1983, hiring lawyers in the Dallas office to represent him and a partner named Victor Rogers when they acquired Equitable Savings Association, a small thrift in Round Rock, Texas. "Jones, Day probably has as large a number [as any firm] of attorneys… that were formerly at… the regulatory agencies," Mann says. "That was one of the principal reasons they were recommended to us and one of the reasons we were and still are comfortable with them."

Mann says he has "nothing but the highest praise for Jones, Day and Mr. Brennan." He says he looked to them for legal advice "with respect to every aspect of every transaction," including the valuations of properties.

With all this business, and other clients like Dallas-based real estate giant Trammell Crow, Jones, Day’s Austin office was up to 19 lawyers by late 1985. And Brennan was one of its biggest rainmakers.

WHY BET AGAINST THE HOUSE WHEN IT’S YOURS?

The earliest transaction for which the FDIC seeks to hold Jones, Day liable – to the tune of $7.7 million – is a December 1984 real estate swap between GMAC’s troubled Northwest Savings and a company owned by Mann. With Jones, Day representing both sides, Northwest transferred back to Mann the same oil and gas properties that he had sold for $13.8 million two years earlier to Jefferson; in exchange Mann transferred to Northwest a 130-acre tract of land called Bridgepoint, on which he owed $7.9 million.

The purpose of the swap, the FDIC contends, was to "conceal Northwest’s actual net worth from government regulators," by falsely inflating the value of its assets. The FDIC says the oil and gas properties were worth only about $3 million (in part because oil prices had plunged), and that the swap was devised to avoid marking them down to their true value and admitting that Northwest was insolvent.

The trick, according to the FDIC, was to overvalue the Bridgepoint property by about $16 million. A November 1983 appraisal valuing a larger tract of which Bridgepoint was a part indicated that Bridgepoint itself was worth only about $3.2 million, minus the $7.9 million in debt (a negative net worth of $4.7 million). Despite this, the FDIC says, Northwest falsely recorded Bridgepoint on its books as being worth nearly $19 million minus the debt (a positive net worth of $11.1 million).

This trade, the FDIC says, not only artificially inflated Northwest’s sagging net worth, but caused Northwest to lose $7.7 million in real assets, while handing Mann a $7.7 million profit. The FDIC says Brennan and his law firm are liable for Northwest’s losses because they knew that the $ 19 million appraisal "included residential and commercial acreage that was not being conveyed to Northwest" and failed lo advise Northwest of this and other problems with the deal.

In their answers Jones, Day and Brennan deny these claims and say they were "not asked to evaluate, did not receive, and did not discuss the appraisal in question," that Northwest was not "misled as to the acreage conveyed," and that the firm’s role was limited to documenting a deal negotiated by the parties.

Moore still defends the swap as a good business deal: "Even with the debt we thought |Bridgepoint| was worth more than the oil and gas properties." He says the FDlC’s allegations are absurd on their lace. Why, he asks, would anyone deliberately incur a $7.7 million loss for his own thrift?

The FDIC complaint seems to suggest an answer when it notes that before the December 1984 swap, Mann had held detailed discussions with Moore and his GMAC partners about taking Northwest off their hands; Mann’s profit increased "the net worth of his holding company through which he intended to acquire Northwest" – which he did in the summer of 1985, in the series of transactions that led to the creation of CredilBanc.

FREE PARKING?

What the FDIC describes as illegal stock parking occurred in June 1985, when GMAC’s Franklin loaned $5.5 million to two San Antonio developers, secured by real estate. They used the money to buy 10 percent of the stock of another thrift, First Federal Savings and Loan.

One observer familiar with the transaction says the $5.5 million was wired by Franklin directly to an investment house to buy the stock.

The FDIC says that while "the stated purpose of the loan was to acquire several tracts of real property," GMAC sought no appraisals of the security; the FDIC asserts that "the real purpose" was to finance the stock purchase "on behalf of GMAC and Franklin’s holding company… who were seeking to acquire control of First Federal." (The complaint says Franklin lost $2.5 million when the loan was not repaid in full.)

Brennan and Jones, Day knew all this, according to the FDIC, and knew also that the developers "were mere stock ëparkees’ and that the real estate loan was a sham and a deception." The agency says the firm wrongly advised GMAC and Franklin that no disclosures were required and failed to tell them the whole transaction was illegal.

As Kirk Ladendorf first reported in the Austin American-Statesman, the government has handwritten notes, apparently by Brennan, that refer to the developers as "the ‘parkees,’ and a Jones, Day draft of a "side letter" to the developers confirming they could use the $5.5 million to buy the stock. According to two reliable sources, the notes – dated June 8, addressed to "Bill," and signed "Carey" – discuss whether "the ëparkees’ [would] be required to disclose their relationship or understanding with Franklin." The draft, which was kept out of the loan files, was sent to Brennan and James Erb by Robert Profusek, a Dallas partner, on June 17.

Poguc, who told Ladendorf the FDIC claim was "ludicrous," now declines comment. In their answers to the complaint Jones, Day and Brennan say the loan "as represented" by Franklin was legal and did not need to be disclosed.

WHAT’S A LITTLE DECIMAL POINT?

But perhaps the most serious FDIC charges against Brennan and Jones, Day involve the claim that in July and August 1985, they assisted Mann, Moore, and Moore’s GMAC partners in "fraudulently" diverting more than $5 million in Franklin assets so Mann could take the Northwest Savings albatross off of GMAC’s neck. The complaint also charges the lawyers with concealing this alleged misuse of Franklin assets from regulators, in part for Brennan’s personal gain – namely, his million-dollar signing package with Mann.

Three lawyers and two witnesses say the criminal investigation into CreditBanc and Franklin now seems focused on these and related deals, including suspected tax fraud. Two of the lawyers say they have heard proposed indictments are under review in Washington. At this writing the nature of the suspected violations and the identities of the targets are unclear.

GMAC began trying to find a buyer for Northwest in the summer of 1984. Moore and his partners, under pressure from regulators to inject more capital into Northwest, were eager to get rid of it. Mann wanted to buy Northwest and merge it with Equitable, but Victor Rogers, Equitable’s co-owner, would not agree.

GMAC decided to help Mann buy out Rogers by having Franklin sell a 75-acre property to Mann’s Trilex Corp. for $580.000 – while simultaneously lending Trilex $5.8 million, with the same 75 acres as the only security. As part of the same deal Franklin loaned Mann another $3.5 million secured by the stock of the new CreditBanc, which was to emerge from the deal encumbered by Northwest’s bad loans.

Mann used $6.7 million of this Franklin money to buy out Rogers; he then "bought" Northwest from GMAC’s holding company for a $10 million "earnout note" and merged the two thrifts to form CreditBanc. These transactions closed in August 1985, but were back-dated to July 30.

An Austin lawyer taking a deposition from Moore in the lender liability case called Jones, Day’s documentation of the Trilex deal "the strangest closing statement that I’ve ever seen in my life." If the 75-acre plot was worth only the $580,000 Mann paid, why would Franklin lend him $5.8 million in federally insured money on it? And if it was worth the $5.8 million Franklin loaned Mann, why would Franklin sell it for $580,000?

Moore responded in his deposition that he and his partners thought the land was worth $5.8 million, but were willing to have Franklin sell it for "our basis" of $580,000 "to provide [Mann] with the resources to buy Northwest Savings…. We felt that we would be made whole at some point in the future."

According to an April 1987 internal Federal Home Loan Bank Board report by enforcement attorney Gary Gegenheimer, Franklin’s wholly owned appraisal company valued the 75 acres at more than $7.1 million in July 1985. The FD1C now says that this appraisal "did not conform to federal regulations" and that the land was really worth about $ 1.8 million.

(As it turned out, the gift of Franklin assets to Mann amounted to about $5.2 million. Less than five months later, in the Christmas transactions, Franklin helped arrange for Mann to sell the same 75 acres to developer Louis Reese for $5.8 million, with Reese assuming Mann’s debt to Franklin.)

Ben Plotkin, who was Franklin’s CEO at the time of the $580000/$5.8 million deal, has since conceded that "in hindsight" it seemed to be of no benefit to Franklin. Plotkin may make a good witness for the FDIC, which claims that Jones, Day had a conflict of interest and "knowingly aided GMAC and Mann to the detriment of its client Franklin."

SILVER, FREEDMAN: WE WERE HAD

Jones, Day and Brennan represented Franklin in the $580,000/$5.8 million deal at the same time they were representing Mann in his acquisition and merger of Northwest into CreditBanc. The FDIC says the firm "prepared the change-of-control application submitted to federal regulators for this transaction" and helped Mann conceal the Trilex purchase from the regulators "so that the sale of Northwest could be accomplished."

According to the Gegenheimer report, the Mann-CreditBanc application for bank board approval of the acquisition and merger "merely states that Franklin was to make a ëconforming real estate loan’ to Mann to facilitate his acquisition. It does not reveal the amount of the loan, nor does it reveal that Franklin had, in effect, given Mann the property that collateralized the loan."

The report adds, "Mann identified Brennan and attorney Lois Jacobs [of Washington, D.C.’s Silver, Freedman & Taff], his attorneys on the Northwest acquisition, as having played large roles in structuring the sale and loan to Trilex as part of his acquisition."

Nobody mentioned the $580,000/ $5.8 million deal to Silver, Freedman, according to Jacobs, who has since retired, and name partner Robert Freedman. "I was not told the facts," says Jacobs, adding, "I don’t believe the transaction would have been consummated [if the Trilex deal had been disclosed]."

Freedman says that, from what he knows now, "that financing transaction that Franklin did was just an outrage." Had his firm been aware of it, he says, "We certainly would have disclosed everything… We were brought in by Jones, Day to handle the technical aspects of it," he explains. Asked why a mega-firm with a Dallas office full of former regulators would need his firm for such tasks, Freedman replies, "We were told that the Austin office would not use the Dallas office for regulatory work, so they went outside."

He adds, "The bottom line is that somebody knew what was going on from day one. We didn’t… A number of people, including us, were had in this transaction." By whom? "I guess I’ll leave it up to the courts to decide," says Freedman.

Mann asserts that Brennan and other lawyers at Jones, Day scrutinized every, aspect of the transactions and disclosures and advised that they were "strictly in accordance with all the rules and regulations."

And Moore – who has filed a multimillion-dollar lawsuit against Brennan and Jones, Day – says the firm was "intimately involved in the preparation of the application for change of control and in every aspect of the transaction." Former Franklin officer Plotkin has testified that Brennan assured him the required disclosures had been made.

According to Moore, Mann insisted that he would buy Northwest only if Moore would let Brennan represent Mann in the deal. Moore claims he told Brennan," ë’I’m going to suggest to you that it’s a bad idea, but I’m not going to tell you you can’t " Now, Moore says, "we think [Jones, Day] filed a fraudulent application, and in discovery we’re going to find out who’s on the document circulation list" at the firm.

Sounding a bit like a man rehearsing for a jury, Moore frames the questions about the firm’s alleged role in concealing the $580,000/$5.8 million deal from federal regulators as follows: "Were they on the circulation list for the documents? Did they read the documents? Were they paid to review the documents?

"And if the answers to all those questions are yes" – which Moore strongly implies – " did they not have a responsibility… to ensure that [the $580,000/$5.8 million transaction] was in the application? And did they not have a responsibility to us as a client of the firm to make sure that we weren’t disadvantaged by it not being in there?"

He continues, "The last question is, who would benefit from it not being in there? Who was concerned that the application might not be approved if that transaction was disclosed?"

(Noting the FDIC’s allegation that he and his partners benefited, Moore stresses, "We had no control over the application… "We didn’t tell anybody to keep [the $580,000/$5.8 million deal] out." )

As if to answer Moore’s cui bono, the FDIC complaint asserts that Brennan began talking to Mann about employment at the new CreditBanc while he was working on the Northwest deal, and accepted Mann’s offer shortly after the deal closed in August, but did not inform Franklin until October.

According to the FDIC complaint, "Brennan and Jones, Day concealed from Franklin a conflict of interest in which they served as attorneys for the seller (Franklin), handling the sale of the real property used to finance Mann’s purchase of Northwest, and in which they had a direct and personal financial interest (through Brennan)." The complaint proceeds to detail the terms of Brennan’s deal with Mann: "a salary of $200,000 a year… a three-year ëconsulting agreement’ for which he was paid $600,000, and a five-year covenant ënot to compete’ for which he was paid $400,000. The consulting agreement and covenant not to compete were funded by a $1 million trust, with Jones, Day partner Baumoel as trustee."

Aside from Brennan’s $1 million, Moore says he has heard that Credit-Banc alone paid $500,000-$1 million in legal fees on these transactions.

In its answer to the FDIC complaint Jones, Day denies serving "as regulatory counsel" in the merger deal, admitting only "that it prepared portions of the application submitted to federal regulators… in conjunction with [CreditBanc Corporation’s] regulatory counsel," an apparent reference to Silver, Freedman. Brennan and Jones, Day also maintain that the Mann-Brennan job discussions, which began July 5, 1985, "were promptly disclosed" to Franklin and its owners.

Assuming for the moment that the evidence supports Jones, Day on these points, the firm will still have some explaining to do: How could it not know that the $580,000/$5.8 million deal had not been disclosed to regulators? Why didn’t it make sure the deal was disclosed? And what about the FDIC’s allegation that the firm’s role in the July-August 1985 transactions facilitated collusion by GMAC and Mann to use Franklin’s federally insured assets to the detriment of Franklin, a Jones, Day client?

While the FDIC’s complaint includes claims of fraud against Brennan, Mann, Moore, and Moore’s three partners in GMAC, it stops short of alleging fraud by Jones, Day or any lawyer other than Brennan. Instead, the FDIC somewhat ambiguously contends that Brennan engaged in fraudulent conduct while at Jones, Day, and that the firm itself either aided and abetted fraudulent conduct or negligently failed to prevent it. The absence of an explicit fraud claim against the firm probably means the agency sees the lawyers, other than Brennan, as less culpable than the individual defendants. Another possible consideration, however, is that alleging that Jones, Day knowingly assisted in fraud could make it difficult or impossible for the government to collect any settlement or judgment from the firm’s insurers.

In this regard, an apparent last-minute change in the FDIC complaint is suggestive. Before filing the final typed version, someone crossed out by hand the word "knowingly" in the following sentence: "Jones, Day knowingly aided Mann in concealing the benefit that Mann received through the Trilex purchase and loan from the federal regulators so that the sale of Northwest could be accomplished."

THE GOVERNMENT’S NEW MATH

Northwest had a negative net worth of about $64 million and an annual operating loss of nearly $20 million when Mann acquired it in August 1985 and merged it with the much smaller Equitable to form CreditBanc. One might wonder why in the world anyone would want to buy it.

Mann seems to have had at least three reasons. First, of course, was GMAC/Franklin’s generous inducement to Mann, to the tune of $9.3 million of Franklin’s money. Another incredibly sweet deal.

Second was that Franklin essentially gave Northwest to Mann for free. Under the terms of his $10 million note Mann had no obligation to make any payments unless Credit Banc’s earnings met highly ambitious targets.

"The valuation of the note turned solely on the credibility of the CreditBanc business plan," ex-Franklin CEO Plotkin testified in his 1988 deposition. "If you just took their CreditBanc business plan as filed with the regulators … [the note] was worth ten million dollars. I don’t think we believed that, nor did the accountants [from Ernst & Whinney], who were also the accountants for CreditBanc."

(Ah, the accountants. But that’s another story.)

Plotkin estimated the real value of the $10 million note as of the summer of 1985 at "anywhere from two million to five million dollars." It turned out to be zero. CreditBanc went into the tank, and Mann never made a payment.

The third reason Mann might have wanted to buy Northwest was that federal regulations made a failing thrift a lot more valuable in the hands of a buyer than in those of a seller, thanks to the magic of "purchase accounting." This was a federally approved gimmick under which the buyer of an insolvent thrift could presume fallaciously that its net worth was whatever he paid for it and book that amount as capital.

Mann booked the new CreditBanc’s capital at more than $20 million – the sum, it seems, of the face value of the $10 million note he had "paid" for Northwest, and approximately twice the $6.7 million he had paid for Rogers’s 51 percent of Equitable.

In terms of real assets CreditBanc’s capital account came out of thin air. The $6.7 million Mann paid Rogers was, to be sure, real money – Franklin’s money – but half of Equitable was worth that much to Mann only because thrift ownership amounted to a license to operate a federally insured casino. Even if Equitable was, in fact, worth $13.4 million, adding that to Northwest’s $64 million negative net worth would still leave the combined institutions more than $50 million in the hole.

To mask such unpleasant realities and defer massive thrift failures, purchase accounting – with the blessings of the federal government – balanced the books of thrifts like CreditBanc by plugging millions of dollars of "goodwill" into their asset accounts, transubstantiating real losses into brand new paper assets. For example, when CreditBanc had to mark down the book value of the Bridgepoint property from $19.5 million to $5.22 million, it simply added enough paper goodwill, according to the Gegen-heimer report, to leave its net worth unaffected.

On top of purchase accounting there were regulatory "forbearances" allowing CreditBanc and other failing S&Ls that changed hands in "supervisory acquisitions" to relax net worth requirements and exceed regulatory limits on growth.

But, of course, you can’t eat goodwill, so to keep ahead of its bad debts CreditBanc needed to grow fast and book big profits. Mann says his federally approved business plan called for $20 million a month in transactions. And as long as the Austin real estate market kept booming, people who worked under him say, Mann seems to have thought that he could do it.

Mann also seems to have thought CreditBanc should go first-class. He spent a lot of federally insured dollars doing just that, paying unusually high salaries to other top executives and housing CreditBanc in lavishly appointed new offices. The ninth-floor executive suite, where Mann and Brennan reposed amid expensive reassembled English antique desks, "was just very, very plush – beautiful Oriental rugs, very fine furniture," one former employee says.

There were also, according to former CreditBanc employees, a Falcon jet, a twin-propeller plane, a helicopter, and two ski condominiums near Vail, Colorado. There is some uncertainty among former employees about whether these particular business necessities were owned by CreditBanc, by Mann personally, or by one of his companies. (The Gegenheimer report cites "numerous irregularities… including the payment of large personal expenses to Mann," and says that "some of these matters appear to involve criminal activity." )

And there were, of course, first-class legal fees, mostly going to Jones, Day. "From very early on," recalls one CreditBanc employee with no fondness for Mann, Brennan, or Jones, Day, "we were instructed that all closings and everything else were to be conducted through Jones, Day, and when Brennan came on he coordinated any and all legal issues with Jones, Day…. He was the sole liaison [with] Jones, Day on everything.

"We were constantly complaining," this banker says, "as our borrowers were, about the extravagant fees Jones, Day charged over routine transactions and closings…. [Brennan] would get livid about [the complaints]. He would say, ëThat’s the fee, period.’ "

Similar complaints are made by other former employees and by borrowers, who were assessed for the legal fees to document their deals. One lawyer who represented borrowers says Jones, Day fees sometimes seemed to have been computed on a percentage-of-the-deal basis, as high as 3 or 4 percent. A former Jones, Day client laughs about being hooked up on national conference calls "so we’d get to talk to ten lawyers instead of two," with ten meters running.

On the other hand, Scott Mann, along with other former officers at the thrifts with less of a stake in the matter, say that Jones, Day’s fees, though higher than most, seemed reasonable in light of the complexity of the transactions and the expertise a big national firm could bring to bear.

Franklin co-owner Moore estimates that Jones, Day made close to $4 million in all from its work for Franklin and CreditBanc from mid-1984 to mid-1986. A disgruntled former CreditBanc employee puts the amount closer to $10 million. Jones, Day declines to comment on its fees.

LUNCH WITH POGUE

Moore says he was surprised and "unnerved" when he learned that his lawyer and friend Brennan had taken $1 million to go to work for Mann at CreditBanc. Others say that Brennan’s move into Mann’s orbit seemed to be a severe blow to Moore’s ego.

Moore claims he had already begun to feel estranged from Brennan and concerned about conflicts of interest, and that Brennan’s move to CreditBanc intensified his concern. Moore says he feared Brennan might have used his "intimate knowledge" of Franklin’s business plan to the advantage of CreditBanc.

"I made it well known at Jones, Day how upset I was," Moore says. He recalls that in the fall of 1985 managing partner Pogue flew down from Cleveland to explain why Jones, Day should continue to represent both companies. "That’s what it’s all about," Moore adds a bit sardonically. "It’s about money."

According to Moore, he had a pleasant lunch at the University Club with Pogue and, he believes, partners James Baumoel and William Paddock. Pogue, he says, "told me they viewed us as an extraordinarily important client…. The tenor of the meeting was, what can we do to keep your business? … Then they went into this description of how they would have a Chinese wall in the middle of the law firm."

Moore has only praise for Pogue: "He is a very charming man, a very imposing man… and I think he’s probably an individual of good character…. I have no reason to accuse him of having knowledge of the indiscretions that were going on in the Austin office." But Moore says he was unconvinced by the Chinese wall idea: "I don’t think the Great Wall of China ever kept out the Mongol hordes." By early 1986, he says, he had begun "to spread our business around."

Meanwhile, Carey Brennan was getting started at CreditBanc. Some former employees say he seemed to be working there full time by September 1985, although he did not officially leave Jones, Day until October 1, when he became chairman of CreditBanc’s executive committee. Brennan also sat on the loan committee. He became chief executive officer of CreditBanc Corporation, the holding company, in December.

Brennan denies the FDIC’s claim that he structured loan transactions, suggesting that he left such matters to underlings. Several of his former underlings have a different view. They say Brennan and Mann worked both on corporate matters and on big deals. There were "lots of closed-door meetings about things that weren’t discussed with most of the management," one former employee says. "We would learn about transactions and investments after the fact. Information was tightly controlled."

APPRAISALS, LAS VEGAS STYLE

The first of the new CreditBanc’s deals now under challenge by the FDIC were a prelude to the Christmas transactions: two October 1985 deals that were expressly contingent on each other, both with the partnership of former lieutenant governor Barnes and former governor Connally. According to the FDIC, both Barnes and Connally were in serious financial straits, and Mann and Jones, Day knew it.

Jones, Day represented CreditBanc in the Barnes-Connally deals, and Brennan worked on them both before and after becoming a CreditBanc officer. In one of the deals, the Barnes-Connally Partnership, or BCP, bought a 54-acre tract from CreditBanc for $9 million – a $2.5 million down payment and a $6.5 million note. This allowed CreditBanc to book a $2.5 million profit.

Where did BCP get the $2.5 million down payment? From CreditBanc, of course. Barnes told federal investigator Gegenheimer it came from $17 million that CreditBanc had paid the same day to a joint venture 50 percent-owned by BCP for a 232-acre tract of undeveloped land known as The Crossing. Two months earlier the joint venture had bought the same land for $4.36 million; CreditBanc paid almost four times as much.

The FDIC claims that the appraisals in both deals were inflated; that Mann did the deals to book paper profits for CreditBanc; and that Jones, Day and Brennan knew this – which they deny.

The agency says CreditBanc lost $4 million when BCP defaulted.

There was, by some accounts, sharp conflict over these deals in meetings of CreditBanc’s executive committee, including one held, appropriately, in a Las Vegas hotel bar. According to the Gegenheimer report, at one meeting S. Lynn Gray, Mann’s college roommate whom he had made head of CreditBanc’s investment subsidiary, told Mann that "he had no business" buying The Crossing for so much money, and that it was probably worth only a fraction as much. Gray also complained that the committee had not voted on the deals. C. Danny Payne, the president of CreditBanc’s holding company, questioned whether the thrift should lend money to two men on the edge of bankruptcy. Or so Gray and Payne later reported to federal investigators.

However Brennan, Mann, and Patrick Pierson, a friend of Mann’s and Gray’s since high school who was on CreditBanc’s executive committee, told Gegenheimer no one had voiced any significant complaints about the deals before they were consummated.

Gray resigned soon after the BCP deals. He has said in subsequent litigation against Mann, Brennan, Pierson, and others that it had become apparent to him that Mann had offered him "a very large salary and possibilities of future financial benefit" in order "to entice him into performing improper actions." Gray claimed Mann wanted him to lend his name to, and take responsibility for, "unsound and unsafe" deals in which Mann, Brennan, and others were pursuing "their own personal financial gain" to the detriment of CreditBanc. The college roommates were friends no longer.

As the end of 1985 neared there was great pressure at both CreditBanc and Franklin to close some big deals and book some big year-end profits. Indeed, the owners’ solvency may have depended on it. Moore and his GMAC partners needed to show enough profits to pay themselves (or their holding company) several million dollars in dividends in early 1986, so that they could make payments on the millions they had borrowed to buy Franklin. And Mann needed millions in dividends to make payments on the more than $9 million he had borrowed from Franklin. As before, Mann’s fortunes were intertwined with GMAC’s: Unless CreditBanc booked big profits, Mann would not be able to pay his debts to GMAC’s Franklin.

Developers Louis Reese and Ben Barnes apparently had to do the deals, too, to generate cash to pay off huge debts. (Barnes did not return a phone call, and Reese declines to comment in detail on the matter.)

"They all had to do this deal," says one observer familiar with the Christmas transactions. "They were all willing to play the game because they were all doing the same thing – just swapping paper."

Former Franklin CEO Plotkin said in his 1988 deposition that Moore and his partners "had put themselves in a position personally that they were dependent upon [Franklin] because of their personal financial situation, and thus they had to get the institution profitable. I think [they] took some excessive risk to get profits to the institution."

He added that "their view of the real estate values [was] influenced – it’s the only way I can explain it – by their desire to do transactions and make money for the institution, because in hindsight … the real estate values didn’t make sense."

Over at CreditBanc Mann says he wasn’t thinking about dividends but about meeting the ambitious targets in his governmentally approved business plan for the thrift. "There was literally a frenzy in the last three weeks of 1985," says one former CreditBanc employee, "a frenzy of a very disorganized, hurried nature, and nobody with proper expertise in lending could properly have applied their talents."

CHRISTMAS TREATS

The frenzy climaxed with the $115 million Christmas transactions depicted in the diagram on page 77.

"It appears that once the decisions were made by Mann at CreditBanc and Moore and Gallaher at Franklin to do these deals," the 1987 Gegenheimer report says, "the underwriting and loan documentation activity proceeded at a furious pace in an effort to close by December 31." When Payne, the president of CreditBanc’s holding company, told Mann and Brennan more time was needed to analyze and underwrite the proposed transactions properly, they responded that "the [loan] committee ëwould work around the clock’ if necessary," according to the Gegenheimer report.

Mann gave a talk at CreditBanc’s December 19 loan committee meeting. "According to Mann and Brennan," Gegenheimer reported, "the tone of Mann’s pep talk was generally upbeat, with Mann indicating that the Federal Home Loan Bank was expecting good things out of CreditBanc because of the representations and projections in its business plan."

According to others, Gegenheimer continued, "Mann’s talk focused on why the loans under consideration were good for CreditBanc even though they may not meet certain regulatory criteria, and that anyone who did not think so was not a ëteam player’ and was not acting in the best interest of CreditBanc."

As Gegenheimer reconstructed the events of that day, after the all-day meeting had apparently ended in approval of the loans, Payne called Brennan at home and said nobody had wanted to approve the loans but Mann had made them do it. At a Christmas party at Mann’s house later that night Brennan questioned the members of the loan committee and found that, despite concerns about such things as Reese’s heavy debt load, they agreed that the loans should go forward.

The following morning the loan committee reconvened to reconsider the proposed loans to Reese and Barnes. They were still there at midnight. "The committee members that we interviewed other than Mann and Brennan all testified that there was a great deal of reluctance and questioning on their part about the wisdom of doing the deals, mainly because of the dollar amounts involved and the extremely questionable credit situations of Barnes-Connally and Reese," Gegenheimer reported. "Eventually, however, the loans were approved. Mann and Brennan testified that no one expressed any opposition."

"All of [the committee members] ended up signing over their objections," says a source who is familiar with these events and hostile to Mann and Brennan. "It was very obvious they were just intimidated."

The next day, Gegenheimer reported, "a flurry of activity commenced at Jones, Day’s office," with all players "working many extra hours at a furious pace to close the transactions by year-end." Jones, Day documented all or most of the transactions and represented both Mann’s CreditBanc and GMAC’s Franklin.

When the blizzard of paper had cleared, the following interlocking deals had been done:

• Mann’s CreditBanc sold back to Barnes a 60-acre parcel called ACCP, part of the 232 acres that CreditBanc had bought from the joint venture half-owned by Barnes and Connally. Barnes "paid" $12.5 million, putting up no cash of his own. The price per acre: $208,000, compared with the $73,000 CreditBanc had paid two months earlier for the larger parcel and the $19,000 that the joint venture had paid two months before that. CreditBanc booked an $8 million profit. (Thank you, Mr. Barnes.)

• The Barnes-Connally Partnership, BCP, got a $4 million loan (on which it later defaulted) from Mann’s CreditBanc, secured by a property called Barton Creek, which BCP bought for $2.2 million the same day from another Barnes-Connally company. (Jones, Day says it did not represent CreditBanc in this deal.) (Much obliged, Mr. Mann and CreditBanc.)

• Mann sent Barnes to Franklin’s Moore and Gallaher for down payment financing to buy the ACCP parcel back from CreditBanc. Franklin gave Barnes a $7.5 million loan (on which he later defaulted); he used $5 million for the down payment to CreditBanc and gave CreditBanc a $7.5 million note (on which he later defaulted) for the balance. (Thank you, Franklin and the GMAC partners.)

• GMAC’s Franklin sold its 1,605-acre Jourdan Crossing tract to Reese, who "paid" Franklin $45 million. Reese put up no cash of his own. Franklin booked a $25 million profit. (Thank you, Mr. Reese.)

• Moore and Gallaher sent Reese to CreditBanc’s Mann for down payment financing to buy Jourdan Crossing from Franklin, according to the Gegenheimer report. CreditBanc gave Reese a $15.5 million loan (on which he later defaulted), which he used to make the $10.6 million down payment to Franklin and fund an interest reserve; Reese gave Franklin a $34.6 million note (on which he later defaulted) for the balance. (Much obliged, Mr. Mann and CreditBanc.)

• Reese sold a 450-acre property called Lynnwood Creek to a company owned by Bill Sadler and W.C. Weeden for $18 million, which came from Franklin’s $20.6 million loan to Sadler and Weeden (who later defaulted). Sadler and Weeden put up only $44,000 of their own. (Much obliged, GMAC and Franklin.)

• Reese got an $18 million loan (on which he later defaulted) from Mann’s CreditBanc on a 675-acre property called Amherst, adjacent to Lynn-wood Creek, which one Reese company simultaneously sold to another for an undisclosed amount. (Much obliged, Mr. Mann and CreditBanc.)

• Mann’s Trilex sold to a Reese company for $5.8 million the 75-acre property Trilex had bought from Franklin that summer for $580,000 (and which the FDIC says was worth about $1.8 million). Reese took title to the land and, with Franklin’s consent, assumed Mann’s $5.8 million debt (on which Reese later defaulted). The effect was as if Mann had sold the 75 acres back to Franklin for $5.8 million (a $5.2 million round-trip profit) and Franklin had then transferred the land to Reese for his note in the same amount, with no down payment. (Thank you, GMAC and Franklin. And you, too, Mr. Reese.)

• Mann sold another 72-acre tract he had bought from Franklin that summer back to Franklin for $2.14 million, which the FDIC says gave Mann a $350,000 profit. Franklin simultaneously sold the same 72 acres to Weeden for $2.25 million – a $450,000 down payment borrowed from Reese, and Weeden’s note (on which he later defaulted) for the balance.

(Thanks all around, boys.)

Reese walked away from the Lynn-wood Creek and Amherst closings with more than $8.2 million in federally insured CreditBanc and Franklin cash, after paying off liens on the properties.

The FDIC alleges, and the evidence strongly suggests, that each of these deals was tied to others by a yous- cratch-my-back-I’ll-scratch-yours dynamic. Central to these allegations is CreditBanc’s financing Reese’s $10.6 million down payment to buy Jourdan Crossing from Franklin, while Franklin financed Barnes’s $5 million down payment to buy ACCP from CreditBanc and arranged the 75-acre and 72-acre side deals in which Mann personally profited by over $5.5 million.

The FDIC says the Christmas deals violated federal and state laws including a "tying" statute that bars conditioning a loan on the borrower’s entering into side deals.

Reese made similar claims in his own suit against the two thrifts, alleging that Franklin’s Moore had told him he would have to buy Mann’s two properties and Franklin’s Jourdan Crossing to get the refinancing he desperately needed to avoid foreclosure on other loans secured by Lynn-wood Creek and Amherst.

In his suit Reese claimed he had balked, in discussions with Mann, Brennan, and Jones, Day lawyers, because he was concerned it might be illegal or improper for him to buy properties from Mann while borrowing $33.5 million from Mann’s CreditBanc. He said he had been falsely assured that Mann was making no profit and that one or both properties were owned by a trust for Mann’s children, so there was no problem of illegal self-dealing. Reese added that he had gotten out of buying the 72-acre parcel when Weeden had been prevailed upon to buy it.

Weeden recounted in his testimony in Reese’s suit that he had gone to Franklin for a loan to buy Lynnwood Creek from Reese. Weeden said he had never heard of the 72-acre property until the day of the closing and never saw it until afterward – from the airplane flying him out of Austin. He bought the 72 acres, he testified, because Moore told him that if he didn’t, the Jourdan Crossing, Lynnwood Creek, and Amherst deals would not close. Weeden said Moore promised that Franklin would soon relieve him of the 72 acres.

"A SPEED BUMP"

These deals came at a time when the Texas real estate market had already softened perceptibly, even in Austin, which was buoyed by an influx of high-tech companies. Real estate developers are optimists by nature, however, and Moore, Gallaher, and Mann, like their borrowers, were real estate developers at heart, not bankers.

"We looked at the market," one participant in the Christmas transactions recalls, "and nobody saw that what we were coming up on was a cliff. At the time we thought it might be a speed bump… . The idea was not to do a bad deal and another bad deal and tie them together. The idea was to do a bunch of good deals and tie them together."

Within a year they had all gone bad – every single one of them. And the FDIC alleges that while these may have been good deals for CreditBanc owner Mann and Franklin owners Moore etal., they were very bad deals for the thrifts, whose actual assets were being depleted to generate "phantom profits" for their owners. "The lenders did not expect repayment from the borrowers," the complaint says. "Neither Franklin nor CreditBanc conducted an adequate investigation into Reese’s or Barnes’s ability to make repayment of the loans… . Franklin and CreditBanc were forced simply to hope for subsequent sales of the property to prevent default on the loans."

The FDIC also claims that the appraisals used to justify the property values were inflated and that some were not even completed until after the closings. Some were done by Franklin’s appraisal subsidiary, which, according to Plotkin, habitually overvalued properties.

The Gegenheimer report notes that at meetings in Jones, Day’s office on December 21 and 22 Barnes and Mann "were adamant" that the entire 60-acre ACCP parcel be appraised as if it had "lake zoning," a highly valuable but unrealistic designation for the property. One appraiser testified, according to Gegenheimer, "that it was highly unusual for both a borrower [Barnes] and a lender [Mann’s CreditBanc, which was also the seller] to be so vociferously arguing for a higher appraised value on a given piece of property."

Subsequent appraisals set far lower values. For example, an October 1986 appraisal, after the market had fallen, valued the ACCP plot at $30,000 per acre; Barnes had "bought" it from CreditBanc for $208,000 per acre, with Franklin’s financing. An independent reappraisal of Jourdan Crossing found a value of $28 million, compared to a $40 million appraisal by Franklin’s appraisers dated December 9, 1985, and to a $64 million appraisal that Reese testified he was shown by Franklin to justify a last-minute price increase.

Reese also claimed, according to a source familiar with the litigation over the Christmas deals, that when he questioned apparent flaws in this appraisal, Brennan assured him that CreditBanc had approved it. Months later, Reese added, a CreditBanc officer told him this appraisal was fraudulent.

The FDIC says the Christmas transactions generated enough paper profits for Mann to take $3 million in dividends out of CreditBanc, and for Moore and his GMAC partners to take $5 million in dividends out of Franklin. The Christmas deals also relieved Mann of $7.6 million in personal debt to Franklin on the 75-acre and 72-acre properties he had bought in the summer of 1985.

When all the Christmas 1985 loans went bad, according to the FDIC, CreditBanc lost at least $28.3 million, including the $10.6 million that Reese had used for the down payment to Franklin on Jourdan Crossing; Franklin lost at least $7.4 million, including the $5 million that Barnes used for the down payment to CreditBanc on ACCP.

The FDIC alleges that Jones, Day knew most or all of the facts that, the agency says, show that the Christmas transactions were designed to produce "phantom gains" and were "tainted with conflicts of interest and self-dealing" and contrary to statutes and regulations. It says the firm involved itself in "multiple conflicts of interest" without the informed consent of its clients Franklin and CreditBanc.

The firm denies any wrongdoing or negligence. It says it documented the Christmas transactions and "was aware of the terms set forth in the transaction documents, but denies any implication that it was retained to evaluate the business judgment of its clients or the business aspects of the [transactions]."

One player present for some of the action asserts, however, that "the Jones, Day firm was not just a paper shuffler and a documenter. They were very inventive, very creative in structuring these transactions, more so than any other law firm I know of."

As the deals were renegotiated and the word processers churned, this man recalls, the lawyers "knew everything that happened. How could they not? They drew every paper… . The mighty Jones, Day guys were sitting there in the middle of the transaction… . They represented both sides… . It was particularly complicated, particularly long. The Jones, Day people were particularly diligent."

Mann says that while he himself was "actively involved" in all of CreditBanc\s deals, he relied greatly on Brennan and his stall’, and looked to Jones. Day for legal advice "with regard to every aspect of every transaction."

It is unclear which Jones, Day lawyers did what in the Christmas transactions; the FDIC complaint mentions four Austin partners – Baumoel, Erb, William Paddock, and Steven Wagner – as having represented the thrifts about that time. All four are still with Jones, Day: Baumoel and Wagner are in Dallas, Erb in Columbus, and Paddock in Austin.

TAKE A TURN, BLOW A WHISTLE

One of the first things Brennan and Mann did after New Year’s was fire holding company president Payne, chief loan underwriter Robert Askew, and several other employees who had questioned the Christmas deals. (Some have said that, in effect, they quit.)

Brennan later told regulators, Gegenheimer wrote in his report to the FHLBB, that "he learned these people were incompetent and not doing their jobs properly (a sentiment also voiced by Mann), and were being directed by Mann to do things without his (Brennan’s) knowledge." In other words, Brennan fired his subordinates in part for taking orders from his boss – with whom Brennan apparently remained on the best of terms.

"The perception of the former employees," Gegenheimer reported, "is that they were fired for not going along with the demands of Mann and Brennan that the various deals be done."

By February 1986 most of the nine or so people who had sat on the loan committee in December were gone. Among those brought in to fill the vacancies was June Baumoel, the wife of Jones, Day partner James Baumoel. The Baumoels were friends of the Brennans’; the two couples vacationed together at CreditBanc’s condominiums in Colorado.

June Baumoel’s job at CreditBanc was described by former employees as loan servicing supervisor. Some of those working under her complained, according to two sources, that she had little or no experience and had to be trained by subordinates. One of her supporters counters that she was a capable businessperson brought in by Brennan to clean up "a disaster" left by departed employees. By July she was on the board.

In early 1986 the Texas savings and loan department had gotten wind of the flurry of departures at CreditBanc and had begun to question the loans to Reese. Regulators started poking around. By spring federal bank examiners were documenting problems at CreditBanc. One examiner told Brennan – or so Mann later complained in a letter to House majority leader Jim Wright – " ëI’m a son of a bitch, and I’m here to put some knots on CreditBanc’s head.’ "

By July federal regulators had presented CreditBanc’s board with a "supervisory directive," based on what Mann called "groundless accusations." According to Mann’s letter to Wright, a regional FHLB official in Dallas told CreditBanc in July that "he had no faith in the integrity of the board" and "had to get control" of CreditBanc.

And by sometime in August three or more CreditBanc employees had gone to the stale savings and loan commissioner to voice concerns about some 1986 deals, according to two other former employees.

It was about that time that Carey Brennan became a whistle-blower, in response to regulators’ questions about those popular oil and gas properties.

According to Brennan’s deposition in the lender liability case, he learned for the first time in July and August. 1986 the grisly details of the 1982 and 1983 transactions, centering on Mann’s $4 million profit and his loan to Moore and Gallaher. All this had come as a nasty surprise, or so Brennan testified. He said he was concerned that these transactions and the nondisclosures in GMAC’s application for regulatory approval of its acquisition of Jefferson might have violated federal regulations – not to mention (and Brennan did not mention) various criminal laws.

Brennan added that when he questioned Mann about these events, Mann gave an account that was "not accurate" about the $4 million note.

By mid-August 1986 Brennan had shared his discoveries with federal regulators in Dallas, in order, he said in his deposition, "to satisfy our fiduciary obligations" as directors of CreditBanc.

Says one former business associate: "He turned Scott in! He turned him in!"

Within six weeks Mann had, at least ostensibly, been pushed out of active participation in CreditBanc’s affairs. CreditBanc had begun to look to some people like a Jones, Day affiliate, especially with Brennan and June Baumoel sitting on the six-member board. (A third board member, CreditBanc in-house counsel David Greenman, had worked with Brennan at Johnson & Swanson and was to go with him to Jones, Day’s Los Angeles office in 1987.)

"Jones, Day was effectively running CreditBanc," asserts Moore. He says that Brennan and the law firm, together with regulators, "ran Scott Mann off." Moore is, of course, more than a bit biased. But some former CreditBanc employees share his assessment.

CREDITBANC’S WAR CHEST

As federal regulators prepared to clamp on tight controls in late September, Brennan and Jones, Day made some controversial defensive moves. Over a weekend June and James Baumoel and others wheeled many files out of CreditBanc’s offices and drove away with them, according to three disgruntled former CreditBanc employees. "When they came back," says one, "things, were missing… . We had some appraisals that could no longer be located, [along with] personal notes, handwritten notes, internal materials."

But a source close to CreditBanc says the files were returned intact after being duplicated for Jones, Day at a copy center. This source says the copying had to be done hurriedly over the weekend because of concern that the government might seize the files and deny the directors and lawyers the access they would need to defend themselves.

The FDIC complaint does not mention this incident. Jones, Day declines comment. June Baumoel could not be reached.

CreditBanc’s directors, on or before September 29, also "wired over $2 million to Jones, Day to pay for any future suits, etc., and signed an agreement among themselves that all CreditBanc directors would receive one year’s compensation up front if the association is taken over by any regulatory authority," according to an internal FHLBB document that cited "probable insider abuses" at CreditBanc and Franklin, One source maintains that the $2 million included $300,000 apiece in compensation for Brennan, Mann, and CFO Pierson, plus $1.1 million for future legal fees for Jones, Day to defend Brennan etal. in any litigation that might arise. Another source says CreditBanc’s board also shipped money to another law firm. Neither assertion could be confirmed.

A banker who discussed the $2 million transfer with regulators says "it was commonly referred to by the regulators as a war chest… . They couldn’t believe that anyone had the gall to do that." According to the internal bank board memo, $1 million had been returned to CreditBanc by the end of October, and the directors had been instructed to return the rest. (Jones, Day’s Pogue declines to comment on the $2 million transfer.)

It was also on September 29 that Jones, Day filed suit on behalf of CreditBanc’s board against Mann’s college roommate, Lynn Gray, along with Payne, Askew, and two other high-level CreditBanc officers who had left in January. The suit charged the departed employees with "failure to comply with prudent loan policies and underwriting procedures" ; with "maliciously" seeking "to cripple and destroy" CreditBanc by making "false reports concerning the operations, business, and solvency of CreditBanc" ; and with maligning the integrity of the thrift’s directors.

In a countersuit Payne and Askew claimed these "false and vicious accusations" were part of a "scheme and design to distract and obstruct discovery of their own responsibility for their greed and gross mismanagement of CreditBanc."

"I could not believe, frankly, that [the CreditBanc board] even filed the suit," says William Allen, a crusty trial lawyer in Willis, Texas, who came out of retirement "as a matter of principle" to represent Payne and Askew. "I was never so personally disgusted as an attorney," adds Allen. "I never saw such a groundless lawsuit, initiated for no reason at all except to cover the fraud and chicanery of the truly responsible parties."

Of his own clients, Allen says, "I thought it spoke pretty well of their integrity that they walked away from these pretty nice-paying jobs because they didn’t want to approve these illegitimate loans – and to be sued for that is just about the rawest thing I’ve ever seen."

On October 6 federal regulators demanded that CreditBanc’s directors sign a document stipulating that the institution was insolvent, that grounds for appointment of a receiver existed, and that the directors could be removed at any time by regulators.

That same clay, Mann says, he and C. Thomas Long, a partner in Jones, Day’s D.C. office and a former FHLBB deputy general counsel, visited House majority leader Wright in his office. The next day Mann dispatched a five-page letter to Wright, detailing how "the regulatory juggernaut has been unleashed" on CreditBanc based on "patently erroneous information" and the regulators’ "prejudgment and bias." Mann says Brennan drafted most of the letter and he and Long reviewed it.

Mann’s letter got quick results. Wright, who had already been leaning on FHLBB chairman Edwin Gray to stop being so hard on Texas thrifts, sent it on to Gray on October 10, together with his own letter denouncing the regulators’ "high-handed and arbitrary attitude" and demanding that Gray call off the dogs.

Gray responded, four months later, by apologizing for "instances of unfortunate and ill-advised remarks" by bank board personnel. But he also noted "deep-seated financial problems" at CreditBanc. According to its own quarterly reports, Gray noted, in the year that ended September 30, 1986, CreditBanc had fallen $21 million below its required net worth, had had an annualized loss of $22.5 million, and had gone from $16 million to $98 million in "seriously delinquent loans."

During 1987 regulators increasingly took control of CreditBanc’s operations and effectively removed Mann, Moore, and Gallaher from the thrift business. Regulators made it clear to Brennan that he would have to leave CreditBanc, but they kept him until mid-1987 while they found new management – including a new CEO who later went to prison for crimes unrelated to the FDIC suit.

By September 1988 both CreditBanc and Franklin had been declared insolvent and gone into government receivership. Mann continues to blame CreditBanc’s fate on regulators, claiming they reneged on the "contract" entered into when they approved his business plan back in 1985.

OLD FRIENDS, NEW FRIENDS

Gary Gegenheimer submitted his report on April 22, 1987, to Rosemary Stewart, then head of the FHLBB’s Office of Enforcement. Three-and-a-half years later the FDIC’s suit against Carey Brennan, Jones, Day, etal. emerged from the bureaucratic process.

In the meantime Brennan had returned to Jones, Day in 1987, going first to Los Angeles and then to Pittsburgh. Pogue says the firm has satisfied itself that Brennan did nothing wrong.

Brennan and Rosemary Stewart are now partners: The former regulator joined Jones, Day’s D.C. office. She has attracted criticism in Congress and the press for making her subordinates go easy on Charles Keating, Jr., and his Lincoln Savings & Loan. Keating happens to have been another Jones, Day client. If the plaintiffs lawyers have their way, Jones, Day and Keating will be co-defendants in a multimillion-dollar class action by investors in the now-worthless junk bonds of one Keating company.

Down in Texas, people are trying to pick up the pieces – and lawyers are still making lots of money, much of it on thrift-related litigation. Jones, Day used to get its share of FDIC work. No more. But Graves, Dougherty, Hearon & Moody, the 71-lawyer Austin firm handling the FDIC’s case against Brennan, Jones, Day, etal., was paid more than $2.2 million by the FDIC in 1990. At least a dozen lawyers have worked on the case.

With discovery just getting under way, there will also be plenty of work for Morris Atlas of McAllen’s Atlas & Hall, who is defending Jones, Day against the FDIC suit and Bill Moore’s cross-claim. (Jones, Day is handling some of the work in-house.)

Atlas also represents Brennan and Jones, Day in a suit Moore filed against them in state court in early 1989. Moore says he requested a meeting with his former friend Brennan before filing and claims he would have settled for an apology. When Moore and his lawyer, Gary DeShazo of Austin, showed up for a meeting at Jones, Day’s office, Moore says he asked to speak with Brennan directly. "I said, ëGuys, this is not really a meeting for lawyers. This is a meeting for two individuals," Moore recalls. "There were some formalities – typical lawyer posturing. … I said, ëLet’s cut through all this.’… [Brennan] never spoke to me directly… . His lawyer said he couldn’t meet with me without his lawyer present. Now what does that tell you about how our basic ability to communicate has been corroded by the legal profession?"

The nation’s second-largest law firm does not enjoy being in the dock with alleged S&L scam artists like Bill Moore. Nor does it enjoy being in the neighborhood when people like Austin’s Joseph Wells, a former Federal Bureau of Investigation agent who chairs The National Association of Certified Fraud Examiners, says things like, "The S&L debacle is probably the greatest criminal conspiracy that has ever existed in the history of our country.

"I have a lot of sympathy for Jones, Day," says one Austin lawyer. "I have a lot of sympathy for these good old boys down here in Texas, too, whom they’re calling S&L crooks. If the economy had gone the other way, they’d be heroes."