Judge Finds Regulators Erred at Delta Savings : Banking: Westminster thrift’s directors vindicated in case that raises questions about federal agency’s power.

Michael Kim invested in troubled Delta Savings Bank three years ago with the idea of helping immigrants like himself get started in business in their new country.

He and three fellow Korean immigrants revived the tiny Westminster savings and loan and returned it to profitability. It became a healthy thrift that met federal mandates for financial strength.

But federal regulators nevertheless seized the institution last November. They also froze the assets of the directors while leveling charges that the directors had made improper loans and engaged in illegal insider transactions.

After a year of nightmares, lost business and departed friends, Kim can smile again. An administrative law judge has found that the Office of Thrift Supervision couldn’t prove that Kim and fellow director Young Kim caused Delta to lose any money or that they knowingly and willfully violated any laws. The Kims are not related.

In fact, Judge Arthur L. Shipe found that one OTS examiner all but blackmailed the thrift into hiring her. And testimony at the six-day administrative hearing last spring suggested that other examiners may have been racist in dealings with Delta’s directors and officers.

Shipe’s findings represent only the second time since the OTS was created in August, 1989, that regulators have lost in their efforts to gain restitution from directors of failed S&Ls; and to ban them from the thrift industry for life.

The other case, involving failed Newport News Savings Bank in Virginia, is pending before OTS Director T. Timothy Ryan. Ryan must approve Shipe’s findings in the Delta case before they become effective. He hasn’t overturned an administrative law judge’s findings yet.

“This certainly shows government overreaching at its worst,” said Terry O. Kelly, an attorney for Michael Kim. “I don’t think the OTS understood the minority community Delta served, and they didn’t make any attempt to work with the minorities running the institution.”

He and partner Brian Baumeister at the Los Angeles firm of McKenna & Fitting charged that the agency, particularly examiners in the La Palma office, has been running roughshod over thrifts with heavy-handed threats and actions that blanket everyone, regardless of blame. They also assert that the agency is not adequately accountable to anyone.

Even a supervising regulator for the state Department of Savings and Loan testified in the Delta case that the OTS has “great power, more power almost than God.” The regulator, Tommy F. Mar, also testified that some federal regulators simply assume that “everybody’s a crook or everybody’s a liar.”

OTS lawyers and executives refused to comment on the Delta Savings case.

Young Kim, a Los Angeles accountant and Delta’s former president, couldn’t be reached for comment, and his lawyer declined to discuss the case.

Two other directors--Yun Suk Seo, the thrift’s former chairman, and Minh Ngoc Dang--settled with the OTS earlier this year. Dang, a Vietnamese-American, was part of the original Delta board.

For Michael Kim, who was not involved in the day-to-day thrift operations, the judge’s findings vindicate him.

After the OTS imposed its freeze on all the directors’ assets, Kim said in an interview Friday that he had a difficult time making his mortgage payment on his home in the affluent Los Feliz area of Los Angeles. His fabric manufacturing company, CKM Industries Inc. in Los Angeles, made the payments for him and deducted the money from his salary.

CKM itself was hurt. The company, which employs 200 people, saw its revenue shrink from a rate of about $10 million a year to $8 million a year as suppliers began refusing credit and demanding cash on delivery after the news spread through Korean-language newspapers, he said.

His reputation in the Korean community sank, he said, and nightmares were constant. Even friends and business associates stopped talking with him, believing that he must have done something wrong if the government brought civil charges against him.

“At times, I thought of killing myself,” he said, partly through an interpreter. “How could I make payments? How could I go to the market? How could I buy the raw materials for my firm? I didn’t kill anybody, but the regulators treated me like a murderer.”

The branch manager at the bank where he had his business accounts wouldn’t even talk with him any longer, he said.

Kim lost the $650,000 he invested in Delta, and attorney fees and legal costs defending the OTS action against him will push his losses to nearly $1 million, he said.

Kim joined the three other immigrants to invest a total of $1.5 million in tiny, troubled Delta, which was formed by Vietnamese business leaders to serve the Vietnamese community in Orange County’s Little Saigon. The new owners targeted Westminster’s Korean community as well.

Within three months after taking over Delta, they had halted the $100,000-a-month losses and began turning a profit. By the end of 1990, the S&L; had $73 million in assets and posted annual net income of $520,000.

Meantime, however, relations were quickly souring with regulators.

During a financial examination of the thrift in March, 1990, OTS examiners determined that the thrift needed better internal policies and procedures, particularly regarding conflicts of interest and loans to insiders.

Adrienne Miller, the examiner in charge, went into Young Kim’s office and asked him for a job as Delta’s chief operating officer, according to Shipe’s findings.

“At the time that Miller asked for a job with Delta, Miller advised Young Kim that Delta would experience severe regulatory problems unless Miller was hired to keep the institution out of trouble with regulators,” Shipe found.

Michael Kim said the directors were shocked and intimidated by the demand. The thrift hired her and put her in charge of implementing policies to comply with OTS regulations.

Her new policies allowed, among other things, loans to insiders of up to $300,000. Michael Kim took out a $200,000 loan and contributed half the money to the S&L;’s capital base.

But later that year, a new OTS examiner-in-charge challenged that loan and said the lending policy, along with other Miller-generated policies, violated OTS regulations. Upon learning of the violation, Kim repaid the loan.

Still, the OTS made that transaction part of the eight charges against Kim and the other directors that the agency believed warranted restitution and a lifetime ban from the industry. Though Kim was named only in one charge, the agency contended that he was liable on the other charges as well because of his fiduciary position as a director.

Seven of the charges involved loans or the use of Delta funds while the eighth alleged that the original investment was misrepresented because one of the investors borrowed money from the chairman, Seo, instead of using his own money. Only one of the loans is chronically late in being paid down, Kim’s lawyers said.

The agency, in fact, never cited an amount that Delta lost. Instead, the agency asserted that there were potential losses and that the directors should be held to pay restitution for any future losses on the deals.

In taking over Delta, the OTS acknowledged that the thrift appeared to be healthy and said simply that its bookkeeping and internal policies were in such disarray that examiners couldn’t verify that it was financially sound.

Lawyers Kelly and Baumeister contend that such rationale was bogus. They brought state regulator Mar to the stand to show a possible hidden agenda.

Mar testified both at the hearing and in a pre-hearing deposition that David Henry, the examiner in charge of Delta’s OTS audit, chewed out the thrift’s president, Young Kim.

“He was shouting at him and, you know, making all kinds of accusations regarding loans to Chairman Seo,” Mar said at the hearing. “That’s how an examiner ought not to behave.”

Later, Mar testified, he overheard Henry on the telephone telling an OTS executive that he was “banging up on the Korean.” Mar said in his deposition that there was a “real possibility” that the agency’s actions were motivated by racial bias.

In addition, the state regulator said, it appeared that Miller was trying to get Young Kim ousted as president so that she could take over.

Michael Kim said that regulators had demanded Young Kim’s removal but that the board wouldn’t do it because Young Kim was the banker on the board with all the business relationships and because directors had no one else to take his place.

Instead, the board discharged Miller in February, 1991, even though they were warned by another OTS examiner not to fire her.

At that point, said Michael Kim’s lawyers, relations between the bankers and the regulators quickly deteriorated.

Miller couldn’t be reached for comment. Kelly and Baumeister said they couldn’t find her for four months before the hearing to issue her a subpoena to testify, and the OTS didn’t call her as a witness.

Though the judge’s decision isn’t final yet, Michael Kim is relieved that the ordeal is almost over.

“I learned so much about life,” he said. “I’m very happy today. I’m very peaceful.”