Hamilton Taft Funds Diverted, Report Shows : Bankruptcy: Owner Connie Armstrong Jr. used $3 million taken from the tax processor’s clients to gain control of Parker Automotive, trustee says.

COSTA MESA —  A trustee’s report in the San Francisco bankruptcy of tax processor Hamilton Taft & Co. concludes that owner Connie C. Armstrong Jr. diverted $3 million from Hamilton Taft clients to gain control of Parker Automotive Corp. in Costa Mesa.

Hamilton Taft is in bankruptcy proceedings, as are several Armstrong companies in his native Texas. A lawyer for the trustee said Thursday that the trustee, Fredrick Wyle, has been contacted by FBI agents seeking Hamilton Taft financial records.

Meanwhile, Armstrong and former Parker Automotive Chairman Michael E. Parker of Newport Beach have been struggling for control of the manufacturer of auto-engine cleaning products. Michael Parker has legal troubles of his own; he is charged in a federal indictment with defrauding a Beverly Hills thrift of $11 million and is out of jail on $1-million bail.

Wyle said in his report that Hamilton Taft diverted more than $85 million from clients for whom it paid payroll taxes to state and federal governments.

Besides Parker Automotive, the trustee said Armstrong used Hamilton Taft’s money to buy a 1,900-acre ranch for $10 million. He also used $9 million to operate another of his companies and pay for lavish perks, including a $340,000 Fourth of July party and rooms in expensive hotels; to buy a shopping center for $6 million; and to purchase several housing projects for $3 million, according to the report.

These purchases are only a “small fraction” of the $85 million in missing funds, the trustee’s report says.

A lawyer for Armstrong said Friday that Hamilton Taft had tacit approval from its clients--through their contracts with the tax-processing firm--to use their money for loans and investments.

“The customers knew the money was being used,” said Lawrence Callaghan, Armstrong’s lawyer. “What’s more, each and every one of these transactions is fully documented. That’s not behavior typical of someone who’s misapplying funds.”

Still, a federal bankruptcy judge shut down Hamilton Taft two weeks ago because of mounting losses.

One of Armstrong’s investments that has dropped in value is Parker Automotive, now called Carbon Clean International. The stock has dropped in the last few months from $5.125 to 75 cents a share at Thursday’s close.

Armstrong agreed in February to provide Parker Automotive with a $3-million loan that can be converted to stock in the company. In return, Michael Parker signed over control of his majority of the stock and severed his relationship with the company he founded.

In April, Parker filed a motion in federal court in Santa Ana claiming that Armstrong never disclosed the troubles at Hamilton Taft during his negotiations with Parker. The Hamilton Taft story broke in a front-page article in the Wall Street Journal about a month after Armstrong took control of Parker Automotive. Parker wants the court to set aside the agreement with Armstrong and return control of the company to Parker.

Armstrong, meanwhile, told the federal Securities and Exchange Commission in April that Parker had misled him by seriously overstating sales and understating losses during a nine-month period last year.

Armstrong told the SEC that Parker booked shipments of its engine-cleaning machines as sales and improperly accounted for some company expenses. Armstrong said he had hired accountants to review all the company’s records and eventually restate its quarterly financial statements.

Parker is facing charges that he defrauded Columbia Savings & Loan Assn. in Beverly Hills of $11 million in what federal prosecutors called one of the largest cases of savings and loan fraud in Southern California.