WASHINGTON, D.C. -- The United States has sued five individuals alleging they engaged in a fraudulent conspiracy that contributed to the failure of CorEast Savings Bank by funneling millions of dollars in loans from CorEast and its predecessors into several dubious New York City construction projects in which the banks' chairman, Arthur G. Cohen, had secret, pecuniary interests, the Department of Justice announced today. The complaint--which alleges bank fraud, misapplication of funds of a financial institution, bank bribery, illegal participation in loans, falsification of bank records, false statements to bank regulators, and conspiracy to violate federal banking laws--asked for civil penalties of more than $100 million under the provisions of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA, 12 USC, § 1833a). Assistant Division and U.S. the complaint was Court in Roanoke, Samuel G. Wilson, Attorney General Frank Hunger of the Civil Attorney Robert P. Crouch Jr. of Roanoke said filed under seal February 25 in U.S. District Virginia. The case was assigned to Chief Judge and the complaint was made public today.

Named as defendants were Arthur G. Cohen, a New York City real estate developer who served on the boards and executive committees of the Virginia banks; Marvin B. Tepper of Sands Point, New York, and Steven M. Terk of New York City, who both served on the boards and executive committees of the Virginia banks; Lawrence M. Goodman of New York City, who is Cohen's nephew and borrowed millions of dollars from the banks; and Ilyne R. Mendelson of New York City, who was a lawyer for the banks. The banks included First Federal Savings and Loan Association of Roanoke; Colonial Savings and Loan Association of Richmond; and CorEast Savings Bank, which was formed through the merger of Colonial and First Federal in 1988. Cohen acquired control of Colonial in 1984, First Federal in 1986 and CorEast in 1988. All were insured through the Federal Savings and Loan Insurance Corporation and later through its successor, the Federal Deposit Insurance Corporation (FDIC). Hunger said, "Congress enacted FIRREA to combat and deter fraudulent conduct that threatens the safety and soundness of the nation's financial institutions. The message to the financial community from the complaint should be clear and unambiguous: law enforcement will not tolerate attempts to circumvent federal banking laws or conceal unlawful conduct. The law requires, and law enforcement expects, that individuals entrusted with the management of financial institutions will abide by the law, all regulatory requirements, and the highest standards of corporate citizenship."

The Department also asked the court for an injunction to enjoin Cohen from dissipating assets while the suit was pending. In 1985, the complaint said, the Federal Home Loan Bank Board (FHLBB) advised Cohen that federal regulations prohibited direct and indirect transactions between federally-insured banks and Cohen or his affiliates. The complaint alleged that Cohen repeatedly told the FHLBB that he understood that he could not have a personal interest in any project financed by the Virginia banks. Nonetheless, according to the complaint, Cohen caused the Virginia banks to make $34.1 million in loans to New York City cooperative conversion projects, while concealing from the regulators and the boards of the banks that he shared in the proceeds of loans and had other pecuniary interests in the projects. The complaint also asserts that Cohen's companies secretly shared in the proceeds of loans from the Virginia banks. According to the complaint, Cohen's companies were DCI Contracting Corporation (an interior and architectural design company), Kingswood Management Corp. (a real estate management company), and Fleetwood Realty Corp. (a sales agent for various projects). The scheme, according to the complaint, was accomplished with the active participation of all defendants, and concealed through fraudulent bank records and false statements to bank regulators. The complaint alleges that Cohen committed 23 violations of federal banking law, including conspiracy, bank fraud, misapplication of bank funds, bank bribery, illegal participation in loans, false statements to bank regulators, and falsification of bank records. According to the complaint, Terk and Tepper allegedly conspired to violate the law and caused the falsification of board minutes, while Mendelson allegedly aided the conspiracy by distributing loan proceeds for the benefit of Cohen and his companies and through other actions. The complaint alleged that Goodman, in conspiring to violate federal law, entered into an unlawful quid pro quo arrangement by which Goodman agreed to use Cohen's companies and pay them $1 million in overcharges and, in exchange, Cohen caused CorEast to lend funds to Goodman to compensate for the overcharges. Under FIRREA, if found liable, the defendants face civil penalties of up to $1 million for each violation and civil penalties for the pecuniary losses to the Virginia banks and the United States and the pecuniary gains of the defendants and others. Hunger praised the Federal Bureau of Investigation for its efforts in conducting the investigation of this matter.