Called to Account : Money Laundering at Bank Proved to Be Flaw in Stafford Scheme

On a cold, rainy January night last year, James Marty Stafford sat in a Howard Johnson’s Motor Lodge in Lake Charles, La., sipping a beer and chatting with a former Bank of Industry teller.

When the meeting ended, Stafford slipped an envelope to the former teller, Lucilla Rowlett.

“What’s in it?” she asked.

“Don’t ask so goddamned many questions,” Stafford said. “Money.”

Stafford, the 68-year-old founder of the City of Industry--a man whose personal empire includes a family grain mill, substantial real estate holdings and enormous clout at City Hall--had come to Louisiana to buy Rowlett’s silence.

Conversation Recorded

What he actually bought was trouble. Rowlett was tape recording her conversation with Stafford for the FBI.

For some time, federal agents had been investigating a Stafford-orchestrated, $1.35-million bid-rigging and kickback scheme involving city construction contracts. The trail of evidence had led to the Bank of Industry, where Stafford had cashed $123,000 in kickback checks. Rowlett was the teller for most of the transactions.

The FBI traced Rowlett to her new home in Louisiana and persuaded her to cooperate in the investigation. Ultimately, transcripts of her conversations with Stafford were presented as evidence in federal court last November and were instrumental in Stafford’s being sentenced to a 10-year prison term in one of the biggest corruption cases in the history of the state.

In all, six people were indicted in the scheme: Stafford, one-time Bank of Industry chairman Robert K. King, Burbank contractor Frank C. Wood, two other contractors, and the project manager of the publicly financed Industry Hills Exhibit-Conference Center. All have pleaded guilty and have been sentenced.

Powerful at Bank

The Rowlett transcripts, along with dozens of court documents and interviews conducted by The Times over a two-month period with bank officials and others, offer the first insight into the machinations of James Marty Stafford. They show how Stafford--without owning a share in the bank or serving on its board of directors--virtually handpicked its first board and used the bank to launder kickback money. When the bank’s president called a halt to Stafford’s check cashing and raised questions about Stafford’s influence on the board, Stafford tried to have him fired.

In the end, the transcripts and interviews reveal an ironic twist to Stafford’s rise and fall: The kickback scheme was revealed by the bank that Stafford depended upon to conceal his illegal activities.

Stafford refused to be interviewed. But former associates, including King, said in interviews that the bank was essentially Stafford’s brainchild.

As were many of Stafford’s pet projects, the Bank of Industry was hatched over lunch at the California Country Club, then the town’s unofficial City Hall and a favorite watering hole for Stafford and his confidants.

Birth of a Bank

In the mid-1970s about a dozen of Stafford’s closest associates were summoned to a series of meetings at the country club to discuss the formation of what later became the Bank of Industry, according to several sources, including King. Ten of the original 12 bank directors attended the meetings at Stafford’s direct or indirect invitation, according to King and other sources.

“He sat there in the middle of the table firing questions like a godfather,” said Stafford’s son, Stephen, who said he accompanied his father to several of the sessions. Stephen Stafford worked for his father at the time, but they have since had a falling out.

Together, Stafford’s friends and associates on the board of directors invested nearly all of the $5.5 million needed to open the bank, bank records show. Stafford bought about $275,000 worth of bank stock (about 3.2% of the bank’s total shares) for his grandson. Those shares are held in trust by Stafford’s former daughter-in-law, said a bank officer who requested anonymity.

Federal court records show that soon after the bank received its state charter in April, 1981, Stafford and Wood established a money-laundering operation at the bank.

Dummy Company

Wood deposited $200,000 in kickback money in an account of a dummy company called Klamath River Forest Products so checks could be cashed for Stafford by the Bank of Industry, according to the indictments.

From May to September, 1981, Stafford cashed about $123,000 in kickback checks at the bank, court records show, and gave part of the money to Wood and King.

Bank President Dale E. Walter said in an interview that he approved cashing the first checks made out to the corporate account without question because Stafford was an important customer and because the checks were less than $10,000 each. Anything over that amount must be reported to the Internal Revenue Service.

Rowlett said in a telephone interview that she was unaware that Stafford was laundering kickback money. She said Stafford would show up at her window with a check and that she would put cash in an envelope and hand it to him. Stafford would then leave without depositing the money, Rowlett said.

Walker Suspicious

But Walter, who said he did not know that Stafford was laundering kickback money, said that the frequency of Stafford’s check-cashing activities eventually aroused his suspicions. Walter said he ordered tellers to refuse to cash Stafford’s checks.

“I’ve developed a sixth sense for these things,” said Walter, who came to the bank from a small bank in the San Francisco Bay Area where he had worked for 17 years.

Walter said that when the check-cashing problem arose, he turned to King for advice, not knowing of King’s involvement in the kickback scheme. He said he called King into his office one morning in September, 1981, and opened a desk drawer containing several uncashed kickback checks.

Recalling the incident, King said in an interview that Walter asked him, “What are these?”

King Cautioned Walter

King said he was shocked when he saw the kickback checks because he knew a third of the money was going to him. King said he told Walter:

“Dale, don’t cash them. You’re gonna wind up like me. I can’t get away.”

Walter said he cannot recall details of his conversation with King but said that soon afterward he directed tellers to stop cashing checks for Stafford on the Klamath Falls account.

(King later pleaded guilty to mail fraud charges in connection with the kickback scheme and was ordered to pay $75,000 in restitution and to perform 2,500 hours of community service as a condition of a five-year probation sentence.)

Walter said friction between him and Stafford began before the bank opened, when Walter barred Stafford from organizational meetings because an organizer complained that Stafford was an outsider whose attendance was improper.

Stafford Overcame Restriction

King and the bank’s first chairman, Donald R. Wheeler, who is still a director, said in separate interviews that Stafford easily bypassed the restriction by pumping friendly bank directors for information. King said Stafford sometimes did not wait for board meetings to end, but would telephone his closest cronies for in-progress briefings.

King said that during a fishing trip in Mexico late in 1981, Stafford told him he wanted King to succeed Wheeler as chairman of the bank’s board of directors. King said that Stafford told him the change was needed because Wheeler was “not controlling that (expletive) Walter. We need you as chairman so we can dictate to Walter what the program will be.”

“The program,” King said, referred to Stafford’s check laundering.

A few months later, with the support of Stafford’s allies on the board of directors, King ousted Wheeler as chairman, bank records show.

King’s installation as chairman, however, did little to strengthen Stafford’s grip on the bank. King, who said he feared deeper involvement with Stafford’s manipulations, said he ignored Stafford’s directives to make Walter cash the kickback checks.

Casino Investments

But Stafford still had clout at the bank. In March, 1982, he helped a friend, Wesley R. Lind, secure a $316,000 loan to invest with him in Sri Lankan and Greek gambling casinos, sentencing documents show. Lind, accompanied to the bank by Stafford and bank director Owen Lewis, falsely stated on his application that the loan would be used to launch a new business in La Puente, court records show.

(As the result of charges unrelated to the kickback scheme, Lind pleaded guilty to falsifying the loan application and was fined $5,000 and ordered to perform community service work.)

Walter said that in March, 1983, he decided to try to reduce what he called Stafford’s “negative influence” over several directors by putting together a group of investors who bought $1.5 million worth of stock from three directors, including Stafford allies King and Gary Bryce, on the condition they resign from the board. The third, former director John D. Stanko, said in an interview that he sold his shares and quit the board because he objected to Stafford’s meddling in bank affairs.

Attempt to Fire Walter

King said in an interview that Walter’s refusal to cash Stafford’s checks, coupled with the stock purchase from Stafford’s allies, triggered an attempt by Stafford to have Walter fired. King said that Stafford instructed him to arrange a board meeting to discuss Walter’s dismissal.

King also said that Stafford told him during a telephone conversation at the time, “Dale Walter ain’t gonna cash our checks. I think we ought to fire his ass.”

A board meeting was scheduled in April, 1983, King said, but was canceled after Walter threatened to notify state banking authorities of what he viewed as Stafford’s improper efforts to influence the board. Soon afterward, Walter said, he was approached by the FBI and he agreed to cooperate.

In the fall of 1983, with the FBI closing in, Stafford held his first meeting with Rowlett in a restaurant in Leesville, La. He paid her $1,000 to “forget” about cashing his kickback checks, FBI tape transcripts show.

Tirade Against FBI Agent

During the meeting with Rowlett, the transcripts show, Stafford boasted about his friendships with bank and city officials. Stafford also launched a venomous tirade against Jack Keller, the FBI agent assigned to the Industry investigation.

“Hey, that (expletive) will do anything. He’s the most miserable (expletive) you ever saw in your life. . . . What he tries to do, he tries to go around to everybody and scare the hell out of them.”

At the Howard Johnson’s meeting in January, 1984, Stafford gave Rowlett a second $1,000 in hush money, the transcripts show. Now desperate, Stafford bitterly railed against Walter at this meeting for providing information to Keller.

The FBI “likes guys like Dale Walter,” Stafford said. “ . . . That jackass . . . all he would have (had to have) said (to Keller) was, ‘Hey, the bank business is confidential.’ There’s a thing called bank secrecy. (But the) damned jackass gets in there and blabs.”

18 Criminal Charges

With Walter’s cooperation and Rowlett’s tape-recorded conversations, federal authorities compiled enough evidence to induce Stafford to plead guilty to 18 criminal charges, including fraud, obstruction of justice and conspiracy. (A federal judge last month reduced the sentence to eight years after Stafford presented evidence of his efforts to make restitution.)

Stafford, who was temporarily housed at the Federal Correctional Institution at Terminal Island while testifying in the ongoing federal inquiry into his business transactions and corruption in the City of Industry, is now at the U. S. Penitentiary in Lompoc, Calif.

Meanwhile, despite the negative publicity over the indictment of Stafford and former bank chairman King last year, the Bank of Industry has performed relatively well. The small commercial bank earned $400,000 in its first nine months of operation. Earnings reached $801,000 last year, up from $606,000 in 1983, and Veribanc Inc., a Wakefield, Mass., research firm, last fall rated it the 11th most profitable independent bank in California. It now boasts assets of $100.7 million.

Walter said he believes the FBI investigation and Stafford’s subsequent imprisonment have been healthy for the bank and the city, but added:

“If I had known what I was getting into, I wouldn’t have come down for the job.”