The latest lawsuit charges Duffel and Johnson with negligent misrepresentation, common law fraud, stock fraud, and securities fraud. To unravel the allegations, it will be necessary to return to August of 1981 and introduce a player whose role remains to be clarified. From there, we can recount the story told by the plaintiffs in their recent petition. IT WAS AUGUST 24, 1981, when the holding company of Eden Bancshares, Inc., was incorporated by the State of Texas with Frank Head, Sr., as its sole shareholder, chairman of the board, and president. Head also was the sole shareholder of the holding company, Rochester Bankshares, Inc. These holding companies controlled the ownership of the Eden and Rochester State Banks. In addition, both holding companies had stock loans at the First State Bank of Abilene. Donald Johnson had been president of the Rochester bank since 1970, and had acquired simultaneous presidency over the Eden bank in 1975. In early 1984, says the petition, Don Johnson “devised a scheme or plan by which he could acquire control of Home State Bank from Head for a discounted price, while concurrently assisting Head in attracting purchasers for Eden State Bank, the sales price of which would be greatly, indeed, fraudulently, inflated.” To further this alleged “scheme or plan,” say the plaintiffs, Johnson “enlisted the aid of Duffel. ” Duffel prepared audits of the Eden bank in 1982 and 1983 which returned, they said, “unqualified” endorsements of the bank’s financial health. With these reports in hand, say the plaintiffs, Johnson enticed the plaintiffs to join him in a partnership to buy the Eden bank from Head. The four plaintiffs are Eden businessmen Joe Bob Green, F. David FOR THE FIRST time in over 50 years, the banking system in the U.S. is being rocked by a major crisis. The crisis is much more immedi ate than the likelihood that developing Randall Dodd studied economics at UT Austin and is now a Ph.D. candidate in economics at Columbia University. Duwe, and Ray Lubke, as well as San Angelo investor Clark Pfluger. Together they raised the $1.3 million purchase price and agreed to assume responsibility for the holding company’s unpaid note balance of $280,000 at the First State Bank of Abilene. Total consideration extended on Head’s behalf was approximately $1.6 million. It is the amount the plaintiffs want Duffel and Johnson to make good. Looking back on those days, one of the plaintiffs told the Observer that the partners considered funding an independent audit. “But there was a large expense involved, and we were looking at ten years of experience in the president of the bank. We thought we were making a conservative business decision. As it turned out, the audit money would have been the cheapest thing we could have done.” In October of 1984, the plaintiffs formed a partnership with Johnson to buy the Eden holding company. That same month, Johnson bought the Rochester holding company. Plaintiffs allege that Johnson essentially was using the bank for the personal benefit of himself and his family while he and Duffel kept transactions hidden from Johnson’s four partners. Duffel prepared a 1984 audit which again gave unqualified opinions as to the bank’s health. When Johnson’s partners found out what was going on, they “blew the whistle,” according to one. Johnson was separated from the Eden bank in late 1985. Bank examiners subsequently “wrote off” $600,000 worth of loans on one visit and another $700,000 on another occasion, says one of the four plaintiffs. The Observer is seeking to confirm his report in an open records request pending with the state’s banking office. The plaintiffs claim that Johnson and Duffel knew that the Eden bank, at least, countries will never repay the principle on some $100 billion in bank loans. The immediate causes of the growing number of bank failures are to be found here at home in the collapse of several key sectors of the economy. Several hundred have failed so far, and the rising rate of such failures each year suggests that the worst of the crisis is still ahead. was something other than a “sound and wise business investment” whose “stock would pay for itself without any additional capital outlay.” Duffel, when contacted at his Abilene office, said, “I would deny all their allegations.” A receptionist for the Johnson-owned Eden Insurance Co. said Johnson doesn’t come there anymore. The Observer was unable to contact him at home. A group of seven Concho County investors, wise to the troubles of the Eden bank, formed an association to bid on the bank in the event of failure. “We wanted to protect our community,” one of them explained. “If the bank had closed and there had been no one to buy it, then it would have been liquidated. That was our major concern. It would have been catastrophic.” When Stribling outbid them, it came as somewhat of a relief. The publisher of the Eden Echo, Allen Amos, says the bank closing is a nuisance to community boosters who are touting the town’s new 64-acre industrial park, but he is pleased with the word about Stribling. “He’s taking an interest in the community,” says Amos. Meanwhile, Interim President Hearn says a careful search is underway for a talented banker who wants to make a commitment to this small town. “It takes a special kind of person,” observes Hearn. The drive east from Eden offers an indigestible banquet of the day’s once hopeful pluckings. Bits of these tragic allegations are scattered like so many carrion along the road. And buzzards continue to claim the heights. Where does one look for the symbol that will bring all these bits home whole again? “You know the saddest thing?” one is asked on the streets of Eden. “The real painful part is yet to come.” In October of 1930, the failure of the Bank of the United States signaled the start of a colossal banking crisis. Before it ended in 1933, 9,000 banks and hundreds of savings banks had failed, taking a lot of people’s money down with them. Just over 50 years and a New Deal later, the failure of the Penn Square Bank in July of 1982 signaled a new round of bank failures. There were 30 reported bank failures in 1981 according to the Federal Deposit Insurance Corp. The annual toll had risen to 79 by 1984, and then rose again as approximately 100 banks failed in 1985. Meanwhile, over 1,000 voluntarily closed their doors. This year, the government expects that 160 more banks will fail, while more than 1,300 banks are currently listed as “troubled” or THE TEXAS OBSERVER 13 Behind the Banking Crisis By Randall Dodd
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