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THE BCCI AFFAIR

As the Federal Reserve found in its summary of charges, on about May 13, 1982, BCCI or ICIC Overseas made a payment to one of First American's holding companies, CCAI, of $2.5 million to permit it to pay interest on a loan from BAII, followed by a second payment of $2.3 million on about July 13, 1982 from BCCI or ICIC Overseas for the same purpose. According to the Federal Reserve, these payments violated the commitment made by Clifford and Altman and CCAH that no more than $50 million in debt would be incurred by CCAH and its subsidiaries for the acquisition of FGB, because they represented an addition $4.8 million in debt to BCCI or ICIC Overseas by CCAH. The Federal Reserve additionally found that they violated the commitment made that BCCI would not fund the CCAH acquisition of FGB, a commitment violated through the payment of the interest.(51)

Two weeks after the second payment, CCAH's outside auditors, Ernst & Whinney, who at the time were also auditing BCCI's Luxembourg holding company, wrote to BCCI and to Altman concerning the $4.8 million in new funds, and describing the new funds as a capital contribution by a new investor. In effect, the auditors were viewing the payment by BCCI to be a capital contribution by BCCI entitling it to own shares in First American. In response, BCCI told the CCAH manager in the Netherland Antilles and the auditors on September 20, 1982 that the funds should be treated as a short-term subordinated loan from the shareholders of CCAH, making it a loan from BCCI to all of CCAH's shareholders. Six months later, Altman wrote the CCAH manager in the Netherlands Antilles that only one CCAH shareholder had lent the money -- Kamal Adham -- despite knowing that BCCI itself had lent the money and was now using Adham as a pass through or nominee. Later, after BCCI officials in London complained about how much the loan was costing BCCI, Altman directed CCAH to prepay the loan 19 months prior to its maturity, replacing it with a new loan at a higher interest rate, costing CCAH $152,0000 over the remaining term of the loan.(52)

In August, 1982, BCCI provided $30 million to First American through its holding company, CCAH, to purchase the remaining common and Class A shares of Financial General, making FGB a wholly-owned subsidiary of CCAH by eliminating any shareholders from Financial General who were not controlled by BCCI. As the Federal Reserve found:

At the time CCAH received and used the funds, no decision had been made as to the method by which they would be reflected on the books of the company. The board of directors had not authorized the issuance or sale of additional shares of the company, and no decision had been made as to whom, if anyone, new shares would be issued.(53)

In effect, the $30 million capital contribution gave BCCI a direct stake in First American less than one year after the Federal Reserve had approved its application on the understanding that BCCI would not be involved. Alternatively, the $30 million could be characterized as a BCCI loan to First American, also prohibited by the Federal Reserve. It took BCCI over four months to decide how to structure the contribution. Its conclusion was to direct its resident agent in the Netherlands to direct Altman to treat the $30 million as capital contributions from three existing Middle Eastern shareholders and from a fourth new shareholder, Sheikh Khalifa Bin Zayed al Nahyan. The resident agent provided Altman with back-dated resolutions authorizing this handling of the funds, which Altman duly had signed by CCAH's directors.(54)

In 1983, when CCAH raised $75 million in additional capital through a "rights offering," BCCI again paid the funds to First American, advancing the purchase price for the shares, despite the fact that responsibility for payment of the funds had not yet been allocated among the various shareholders in accordance with their acceptances, or waivers, of the shares due them in the rights offering. According to the Federal Reserve's summary of charges:

Altman was aware of BCCI's payment, and was concerned that the funds had not yet been allocated among the various shareholders . . .(55)

Later in 1983, when BCCI failed to provide an additional $25 million requested by CCAH, BCCI provided CCAH with a $20 million credit line, stating that CCAH had requested the loan. These funds were paid by BCCI to First American, with documentation created later attributing the lending to Kamal Adham, a key front-man for BCCI in the CCAH stock purchases. Tellingly, although BCCI treated Adham as the lender of the funds, Altman and another partner at Clifford & Warnke dealt exclusively with BCCI concerning the terms and repayment of the loan, despite Altman's frequent contacts with Adham on other matters pertaining to First American. Later, another Clifford & Warnke attorney drafted loan documents memorializing Adham's involvement in the matter, back dated two and a half months, and signed by Altman, which were provided to BCCI for Adham's signature.(56)

In future years, Clifford & Warnke lawyers communicated with BCCI a number of times concerning the "Adham" loan, and described the loan in two instances as one "arranged by you [BCCI] in our favor."(57) Despite BCCI's handling of every aspect of the loan, including the original disbursement to First American, Altman in filings with the Federal Reserve described it as a "loan from Investor." In 1991, when Altman gave sworn testimony to the Federal Reserve, he represented that the loan was made to CCAH by Adham.(58)

First American's Purchase of NBG

Perhaps the clearest example of Clifford and Altman undertaking an action, ostensibly on behalf of First American, but directed by BCCI, was First American's decision to purchase the National Bank of Georgia in 1986 from Ghaith Pharaon. Clifford and Altman have testified that they "learned that the owner of NBG, Ghaith Pharaon, was in financial difficulty and might be willing to sell his bank."(59) Clifford and Altman describe the acquisition of the National Bank of Georgia by First American in 1986 as a "reflection of First American's consistent corporate strategy of expansion since 1982," suggesting that it was mere coincidence that First American purchased a bank already owned by another member of the BCCI family, Pharaon, and which they understood to have adopted BCCI's hexagonal logo and banking practices.(60)

As the Office of the Comptroller of the Currency had suspected in early 1978, BCCI in fact owned 50 percent of National Bank of Georgia (NBG) from the moment of its ostensible sale to Ghaith Pharaon in May of that year, with Pharaon acting as BCCI's nominee for those shares to avoid the hostility regulators had already demonstrated towards any direct acquisition by BCCI. If any of Pharaon's creditors attached NBG's assets, the ensuing civil litigation could threaten to reveal this secret interest, with the result that BCCI be destroyed. Accordingly, BCCI decided to consolidate its U.S. holdings through the sale of NBG to First American, as specified in some detail in the chapter on BCCI's later activities in the U.S. Thus, while BCCI's business need to bring about this purchase is clear, First American's was not, especially given the actual underlying problems at NBG, which had begun when the bank had been under the control of Bert Lance and accelerated as a consequence of BCCI's management of NBG while Pharaon held the bank.

BCCI's Business Need for First American/NBG Purchase

On January 1, 1985, Pharaon executed a secret "Memorandum of Deposit" with BCCI which provided that all of the outstanding shares of NBG Financial would be deposited with BCCI as collateral for loans to Pharaon and his companies, and giving BCCI "or its nominees" the right to vote the shares. As a result, as of that date, BCCI had effective control over the 50% of the shares of NBG which had been BCCI's from the beginning.(61)

By November 1985, with Pharaon's financial difficulties intensifying, BCCI's auditors, Price Waterhouse, began to express concern to BCCI about its exposure to Pharaon and calling on the bank to reduce this exposure. In fact, a portion of this exposure was related to Pharaon's holding of NBG on BCCI's behalf.

Accordingly, BCCI and Pharaon agreed to liquidate Pharaon's 50% interest in NBG, and sell his holdings of NBG stock held by Pharaon Holdings Limited back to NBG Financial, now controlled by BCCI. At this point, BCCI had direct and total secret control of all of the outstanding shares of National Bank of Georgia, and had demonstrated to Price Waterhouse its ability to force "loans" to major borrowers like Pharaon to be "repaid." But these financial manipulations did not solve the other serious problem created by Pharaon's deteriorating financial condition -- the possibility that creditors might seek to attach the shares of NBG Financial -- still officially "owned" by Pharaon. The result would not merely put BCCI's ownership of NBG at risk, but could set in motion the destruction of BCCI's entire empire in the United States and possibly globally.(62)

In London, Abedi looked at the NBG situation and determined that the simplest solution to the Pharaon problem was to merge National Bank of Georgia into First American, and thereby take Pharaon out of the picture. In the terms of the Federal Reserve charges, "in December 1986, BCCI caused CCAH to agree to purchase the shares of NBG [Financial] from Pharaon for $220 million."(63)

Significantly, while the transaction did not close until August 19, 1987, First American provided $80 million at the end of December, 1986 as an option on the purchase, securing those $80 million worth of shares and leaving Pharaon "holding" only a remainder of $140 million worth of the bank -- shares already held by BCCI as security for defaulted loans. Thus, any outsider who tried to attach Pharaon's shares in NBG would find that as creditors, they were now in back of First American and BCCI, making such an attachment of little legal value and thereby protecting the shares. From the point of view of First American, however, this secret arrangement had a significant problem. BCCI's security interest in NBG preceded that of First American. If something went wrong, First American might not be able to recover its $80 million.

BCCI's Understanding of First American Purchase of NBG

Within BCCI at the time, it was generally understood that the sale of NBG from "Pharaon" to "First American" was principally a consolidation of BCCI entities within the United States. As Abdur Sakhia testified, First American had been planning to expand its operations to Florida in the mid-1980's, and had never discussed a move into Georgia, until 1985. In late 1985, he became aware that Pharaon's financial situation had become shaky, and at Abedi's request arranged for a meeting to take place in Miami in November of 1985 involving Abedi, Naqvi, Clifford, Altman, and two officials from National Bank of Georgia -- Carlson and Jamil. No one else was permitted to attend the meeting. After it ended, Abedi came out and told Sakhia and other BCCI officials that National Bank of Georgia would be merged with First American.(64) Abdur Sakhia remembers organizing the meeting. According to Sakhia, it was at this meeting that the decision was made to merge National bank of Georgia and First American. According to Sakhia, afterwards he met with Abedi, who talked of "merger and not buy and sell."(65)

Later, in preparation for BCCI's possible purchase of a bank in Florida, Sakhia was provided with a model file of the Independence Bank transaction, which showed Pharaon's role as a nominee, which was to be the model for the purchase of the Eagle Bank by BCCI. Sakhia then met with Naqvi in Luxembourg, and discussed BCCI's planned purchase of Eagle, with Faisal al Fulaij to act as the nominee instead of Pharaon. Altman was present during the conversation, and thus participated in a meeting in which the use of nominees by BCCI to purchase banks in the U.S. was discussed.(66) Altman's knowledge of this practice by BCCI and by Pharaon in connection with Independence would obviously have been important in the NBG transaction, causing him as a lawyer to have asked many questions concerning the relationship between BCCI and Pharaon. No document provided the Subcommittee shows Altman having ever expressed concern about the possibility that Pharaon was a nominee. The obvious explanation is that he did not do so because it was a fact Altman already knew, and because Altman himself had become a party to the arrangements involving BCCI and Pharaon.

After the Miami meeting, Sakhia wrote Abedi in London in February 1986 regarding BCCI's "Future Plans in the United States." In the memorandum, Sakhia referenced his discussions with Altman concerning the planned purchases by BCCI of banks in Florida. In a paragraph concerning the National Bank of Georgia, Sakhia suggested that in view of "the forthcoming restructuring of the bank in Georgia, it may be useful to merge their Miami operation with BCC Overseas, Miami, as this will offer additional dollar deposit and correspondent banking relationship to BCCI Overseas."(67)

Clifford and Altman's Explanation of NBG Transaction

In their written testimony before the Senate, Clifford and Altman denied that the acquisition of NBG by First American was directed by BCCI, stating instead that the acquisition:

was a reflection of First American's consistent corporate strategy of expansion since 1982 . . . in December 1986, based solely on its judgment of First American's best interests, the CCAH Board approved the proposed acquisition of NBG. BCCI did not influence these deliberations, nor did it control the Company's decision to acquire NBG. First American, not BCCI, initiated the NBG acquisition.

The price paid by First American was reasonable and determined free of control by BCCI.(68)

As Altman told journalists in 1986 who wondered at the coincidence of Clifford and Altman buying the bank once held by Lance and whose sale by Lance to Pharaon they had participated in:

It was clearly an arms-length business deal, that is to suggest we didn't get any special consideration in terms of price. . . It's a logical move for us in terms of our market expansion.(69)

In answers to written questions from the Subcommittee, Altman denied attending any meetings regarding the NBG purchase by First American in Miami, as described by Sakhia. However, Roy P.M. Carlson, the former President of NBG, has told Subcommittee staff that he, Mr. Clifford and Altman all met together at the Grand Bay Hotel in Miami in February 1986 to discuss the price for NBG.

Unfortunately, the statements made by Clifford and Altman to the Committee regarding the National Bank of Georgia transaction cannot be reconciled with the documentary and testimonial accounts of the other parties involved.

Federal Reserve Findings on NBG Purchase

On July 29, 1992, the Federal Reserve issued a lengthy summary of charges against Clifford and Altman in connection with their roles in BCCI and First American, including 350 paragraphs setting forth their roles in connection with alleged violations of various federal regulatory provisions. Of those 350 paragraphs, 78 paragraphs were devoted to Clifford and Altman's handling of the purchase of NBG by First American, and they define in detail the factual basis for concluding that the purchase was occasioned not by the independent needs of First American, or an independent business judgment by Clifford and Altman, but by BCCI. The following account summarizes the Federal Reserve evidence and findings.

The Federal Reserve found that in 1977, Pharaon became the nominal owner of National Bank of Georgia in a transaction negotiated and bankrolled by BCCI, and in which BCCI had a secret 50 percent interest from the beginning. While nominally owned by Pharaon, NBG employed several BCCI officials, NBG personnel regularly attended BCCI conferences at BCCI's expense, NBG adopted BCCI's management style and hexagonal logo, and revised its business orientation from a retail bank to an international bank.(70)

In February 1983, Altman joined National Bank of Georgia officials at a BCCI-sponsored conference in New York, whose purpose was to integrate NBG into BCCI's corporate culture. Following a presentation by BCCI officials, an executive vice president of NBG, William Batastini, "gave public remarks at which he expressed his happiness at being part of the BCCI family," in Altman's presence. Batastini then repeated these remarks at a later annual conference of BCCI in Athens in March 1983, again in Altman's presence.(71)

By January 1, 1985, BCCI, in the course of restructuring Pharaon's loan portfolio with BCCI, acquired control of all NBG shares. In November, Pharaon's financial problems -- including a possible default on a $200 million loan that had been syndicated to a number of banks -- became public -- with the result that the prospect of liens on Pharaon's property by creditors became a significant threat. Moreover, the news caused Price Waterhouse, BCCI's auditor, to express concerns about BCCI's exposure to Pharaon, and to urge that BCCI call in loans to reduce its exposure. As the Federal Reserve found:

Because BCCI secretly owned and controlled NBG and its shares, an attachment of those assets by Pharaon's creditors threatened BCCI with a substantial financial loss. . . BCCI thus had an incentive to cause NBG to be sold to another BCCI nominee, one that would not be subject to levying creditors.(72)

Accordingly, BCCI began to plan the sale of NBG to CCAH and First American. In September 1985, Altman met with NBG's president, Roy Carlson, who had been placed at NBG by Abedi, who had known Carlson through Carlson's work at the Bank of America when Bank of America owned a stake in BCCI, and two other NBG officials. At the time, Georgia law prohibited the acquisition of a Georgia bank of a bank holding company, such as CCAH, which had substantial assets outside the south. The following month, Altman asked First American's Treasurer, A. Vincent Scoffone, to conduct a preliminary evaluation of NBG to determine a purchase price for NBG. Scoffone estimated that NBG's book value was approximately $80 million, and that based on recent bank sales prices of Georgia banks, a realistic price for NBG would range from $120 million to $180 million. At the time, Scoffone warned that "no review has been performed on the quality of the asset base. Such a review is mandatory before any real meaningful analysis can be made regarding the tangible net worth of NBG."(73)

According to testimony from Sakhia, and the summary of charges of the Federal Reserve, in November, 1985, Clifford and Altman attended a conference of BCCI managers in Miami, including Abedi, Naqvi, Sakhia, and two NBG officers, Carlson and former BCCI official Tariq Jamil. Following a conference with the managers, Clifford and Altman met separately with Abedi, Naqvi, Elley, Jamil and Carlson, during which Abedi decided and announced that NBG would be sold to CCAH, that Jamil would be transferred from NBG back to BCCI's headquarters in London, and that Elley would be transferred from First American New York to NBG to replace Jamil. Some time later, Altman told Sakhia he was not pleased with Abedi's decision to purchase NBG and that he would not have purchased the bank of his own free will.(74)

In February 1986, in connection with an evaluation of Pharaon's holdings, an independent valuation of NBG was conducted by the firm of Keefe, Bruyette & Woods, which determined that NBG was worth between $130 million and $144 million, and a copy of this report was provided to the firm of Clifford & Warnke. In May, 1986, First American's Treasurer, Scoffone, conducted a second analysis of NBG's value, without having been told by Clifford of Altman of the Keefe, Bruyette & Woods valuation. In a memorandum to Altman dated May 7, 1986, Scoffone concluded that based on the median purchase price for banks within the past year, its value was $152 million. Arguing that "NBG may be a unique situation because of its location in Atlanta, Georgia," Scoffone said that "a premium over the median purchase price may be appropriate," and on that basis concluded that a fair price for NBG would be $211 million if one assigned a higher multiple times book price for the shares than banks in the Georgia region had been sold for during the past year. He also acknowledged that at such a price:

this transaction would be highly beneficial to the present owner of NBG. The bank would be sold at a significant premium over both the national and local median sales prices.(75)

Contrary to normal banking practice on a purchase of this magnitude, Clifford and Altman did not retain an independent investment banker to assist in valuing the shares, as they had previously done in the purchase of branches for First American in New York from Banker's Trust in 1983, and would do again in 1990 when they were considering the sale of First American overall. Instead, First American relied on Scoffone's evaluation, and Altman became the sole representative of First American in negotiations over the acquisition and the structuring of the transaction. Significantly, in doing so, Altman did not deal with Pharaon, but with Abedi, Naqvi, and other BCCI officials.(76)

On May 8, 1986, Altman wrote Naqvi, enclosing Scoffone's evaluation, and expressing his hope that the purchase price would be in the range of $160 million to $175 million, as "we are nearing the point at which this purchase is too expensive."(77) A week later, meeting in London with Batastini at BCCI's London headquarters, Altman and Batastini agreed to a purchase price of $205 million, of which $80 million would be paid up front for an option to purchase, and $125 million upon consummation of the transaction. Under the agreement, First American (CCAH) would pay Pharaon the $80 million immediately, and against the $80 million would receive a security interest in NBG's shares -- thus protecting them from other Pharaon creditors. At the same time, BCCI and Altman discussed the fact that BCCI would simultaneously have lending to Pharaon for the remainder of the $205 million, leaving NBG's shares entirely pledged and protected from creditors. Altman then discussed this situation further with other attorneys for First American, who noted the following:

The proposed structure may focus unwelcome attention on the relationship between CCAH [First American's holding company] and BCCI and raise questions as to whether BCCI has acquired control of NBG. . . . A bigger problem [then certain other regulatory issues raised by the structure], however, arising from BCCI's involvement in the transaction is that it might focus closer attention on the relationship between CCAH and BCCI. An argument could be made perhaps that CCAH and BCCI are acting together and/or as principal and agent.(78)

Altman then sent a copy of this memorandum to Naqvi, and Clifford sent a second copy to Abedi in London, with a note from Clifford dated June 17, 1986 warning Abedi that the memorandum would "give you some idea of the difficulties and complexities facing us." Later in June, when CCAH and First American filed drafts of the option agreement with the Federal Reserve under which CCAH would acquire the National Bank of Georgia, the documents did not refer to the pledge of NBG shares to BCCI that was simultaneous with the pledge of NBG shares to First American, or to the fact that BCCI would acting as an "escrow agent" and would hold the funds paid to Pharaon by First American until the completion of the transaction.(79)

By August, Baldwin Tuttle at Milbank, Tweed, the regulatory attorney involved in handling the First American-NBG transaction, became sufficiently concerned about the structuring of it that he wrote to warn him that there five separate legal problems for First American arising out of it. First, the payment of the $80 million option placed CCAH/First American at risk; second, under the structure of the deal, First American did not have the right until the acquisition was completed to exercise any control of management of NBG, leaving it vulnerable should the current management not do their job; third, there was no provision in the agreement for negotiation of the price if the value of NBG declined prior to the option's exercise; fourth, legal opinions were necessary to determine "the validity of Pharaon's ownership of NBG;" and finally, there was no guarantee CCAH/First American would recover its $80 million if it chose not to exercise its option.(80)

These issues arose in part because Tuttle had previously been advised that BCCI would also have a security interest in NBG shares, raising the question of whether BCCI's interest in the shares, or First American's interest in the shares, would be satisfied first in the event something went wrong.

In response to this letter, Altman demanded that Tuttle appear at Altman's office, and during a "brief and hostile meeting," handed Tuttle both the original and the only other copy of his letter and warned Tuttle that if he ever wrote such a letter again, Tuttle would no longer represent CCAH/First American.(81)

While there are many conclusions one might draw on the basis of this incident, one notable element is Tuttle's recognition that there reasons to doubt "the validity of Pharaon's ownership of NBG." The only possible reason to doubt his ownership under the circumstances was the issue of whether BCCI was the actual owner already. Altman's response to Tuttle offers a convincing example of Altman's determination that no inquiries be made regarding this issue. It is evidence that Altman's failure to advise the Federal Reserve of BCCI's involvement in the transaction was wilful and intentional, rather than accidental, as reflected in the charges brought against Altman by the Federal Reserve in connection with this incident.

On September 4, 1986, Altman provided Naqvi at BCCI with draft documents relating to the option and loan transaction for his review, and identifying BCCI as pledge agent for First American's option payment and BCCI's loan. In a cover letter to Naqvi, Altman wrote that the agreements assumed that there was no debt secured by the NBG shares "except as may be later authorized with respect to the BCCI loan to Dr. Pharaon." As the Federal Reserve found, Altman was already aware of the Pharaon debt to BCCI secured by the NBG shares.(82)

The significance of the September 4, 1986 letter from Altman is that it identifies how Altman chose to respond to the problems posed by revealing the fact that BCCI already had a security interest in National Bank of Georgia shares that might impair the value of First American's security interest in them and raise questions about the $80 million option. Altman's response was, in effect, to join BCCI in a subterfuge -- that BCCI would not lend the money to Pharaon or gain security from Pharaon until First American's debt was secured -- when in fact, both Altman and Naqvi knew this was untrue.

On October 23, 1986, Pharaon and BCCI executed various agreements to effectuate the planned acquisition of National Bank of Georgia, which included a loan agreement between Pharaon and BCCI whereby BCCI would lend Pharaon $140 million at the time that CCAH/First American acquired its option to purchase NBG, secured by another pledge of NBG shares to BCCI. Altman did not sign these documents on behalf of CCAH, however, because, as the Federal Reserve found, he "became concerned that the documents as then drafted in connection with the NBG option would reveal to the Board BCCI's extensive participation in the transaction."(83) According to the Federal Reserve, Altman then went to London, where he met with a BCCI officer, Imran Iman, and a BCCI lawyer, to discuss the transaction. A memorandum written by the BCCI lawyer memorializing the meeting stated the following:

Mr. Altman stated that because the Federal Remere will see the Pledge Agreement they will see the references to the Loan Agreement and BCCI SA and will therefore want to see the Loan Agreement. By seeing all the documents, they would most likely arrive at an adverse conclusion.

Altman suggested that a better way to have structured the agreements would have been for the Option and Pledge Agreements to have been executed and then perhaps 60 days later, a Loan Agreement signed an addendum [sic] made to the Pledge Agreement to make BCCI a party to the Pledge Agreement. . .

[The BCCI attorney] would contact [C&W Partner] of Mr. Altman's office and appraise [sic] him of the above. [C&W Partner] would prepare the fresh Pledge Agreement on the above facts. . . Mr. Altman would discuss the above with Mr. Naqvi and if he is agreeable, Dr. Pharaon would be approached.(84)

Following the meetings with Altman, the documents were redrawn to separate the integrated transaction into two transactions in order to mislead the Federal Reserve. As a British lawyer for BCCI wrote in a memorandum:

[t]he reason for having two Pledge Agreements is that Mr. R. Altman feels that in the previous Pledge Agreement, the references to "Loan Agreement" would have given the Federal Reserve cause to see the "Loan Agreement" and possibly decide that an "integrated transaction" was being entered into. Whereas now, with the two Pledge agreements, the Federal Reserve will only see the Option Pledge, which contains no reference to the "Loan Agreement."(85)

A later memorandum by the BCCI lawyer to Naqvi, conveying the substance of meetings between him and Altman in Washington D.C. between December 18 and December 20, describes Altman advising that the documents pertaining to BCCI be signed after "a reasonable period will have elapsed" in order to prevent the Federal Reserve from concluding that the transactions involving BCCI were integrated with the First American purchase of NBG.(86)

The result of the signing of these documents is that NBG stock was simultaneously pledged to BCCI and to CCAH/First American, without it being clear which claim was subordinated. On December 18, 1986, Altman wrote BCCI to advise BCCI that CCAH consented to BCCI holding a security interest in Pharaon's stock in NBG up to a level of $140 million, in a letter that did not specify whose claim to Pharaon's pledged shares would come first.(87) In order to protect First American's interest, a subordination agreement was created on behalf of CCAH, which was executed by Altman the same day, December 18, 1986. BCCI did not, however, execute the agreement, leaving it of no effect. When First American lawyer Tuttle brought this to Altman's attention, Altman ordered the $80 million to be disbursed to Pharaon regardless, placing CCAH/First American at risk. Later, Altman lied about the situation to the Federal Reserve, denying that he was responsible for seeing to it that BCCI executed the subordination agreement.(88)

In the spring of 1987, months after paying the $80 million option to Pharaon, First American began its due diligence review of NBG to determine what First American had acquired. In the course of the due diligence, First American found numerous problems at NBG, including NBG having paid the expenses of its officials to meet with BCCI officials in London; NBG paying for hotel expenses for the crew of Abedi's private plane; NBG paying to fly Abedi to the opening of President Carter's Presidential library; NBG paying the salary of a former NBG employee for 15 months after he went back to work for BCCI; and paying a fee of $475,000 to BCCI in connection with the CCAH purchase. The due diligence also showed extraordinary expenses over NBG's assumption of a lease from Pharaon's business, Interedec, which would cost NBG another $25 million to $30 million over the 15 years life of the lease. Finally, it showed that NBG was at or near the bottom of its peer group on a wide variety of measures of financial performance, including its return on assets, return on equity, margin on earning assets, and percentage of non-performing loans. Any of these items would have justified First American demanding a reduction of the price paid for NBG, or its right to withdraw from the transaction. First American did neither.(89)

On April 22, 1987, CCAH/First American filed an application with the Federal Reserve to acquire NBG, which made no mention of BCCI's involvement in the transaction or of Clifford & Warnke's simultaneous representation of both CCAH and BCCI in the transaction. The application stated that Pharaon had control of 100 percent of NBG's shares, and did not disclose the existence of Pharaon's pledge of the NBG shares, and other documents giving BCCI the power to vote NBG's shares. When the Federal Reserve asked the source of funds for the purchase, at Altman's direction, CCAH's regulatory counsel, Tuttle, advised the Federal Reserve that the funds had been raised through a rights offering paid for in cash, with less than 5 percent of the equity capital involving borrowings by shareholders secured by a pledge of shares. In fact, at that very time, Altman and Clifford had themselves borrowed from BCCI about 10 percent of the equity capital in the rights offering, against shares in First American which they pledged to BCCI, in direct contravention of the representation they were making to the Federal Reserve.(90)

Finally, on July 24, 1987, Clifford and Altman sent all shareholders of First American an offering memorandum relating to a proposed share issuance to raise $115 million in new capital for CCAH to complete the purchase of NBG. This memorandum represented the first time that Clifford and Altman had asked the shareholders for their approval of the transaction they had commenced in September 1985 at BCCI's direction. It was, as the Federal Reserve found, materially incomplete about BCCI's involvement in the transaction. Moreover, its omission of any notice to the shareholder's of Clifford and Altman's own financial interest in the transaction, breached Clifford and Altman's fiduciary duties to the CCAH/First American shareholders.(91)

Final evidence of the fact that the NBG transaction was not in the interest of First American, is contained in the Federal Reserve's last finding concerning the transaction:

The acquisition of [NBG] created a serious drain on the financial health of First American . . . In 1992, First American transferred NBG to one of its subsidiaries at a fair market value of only $90 million -- $130 million less than it had paid for the bank only five years earlier. In addition, First American paid approximately $12 million to get out of the obligations of the master lease [on the Interedec property it assumed from Pharaon].(92)

The decision by BCCI, Clifford and Altman, to have First American buy National Bank of Georgia had ultimately cost First American over $140 million.

Other Conflicts of Interest

Part of the difficulty in unravelling the decision-making process relating to BCCI, First American, and the National Bank of Georgia, and Clifford and Altman's role in this process, is that Clifford and Altman simultaneously represented all parties in the transactions over a period of 12 years spanning each permutation of purchase and sale of each of the organizations involved.

The ambiguity about their multiple roles may have been convenient for Clifford and Altman in some circumstances, such as during attendance at BCCI's international conferences. But the ambiguity also created an overwhelming, ongoing conflict of interest between their obligations to First American's board of directors, officers and employees on the one hand, and BCCI on the other. This was especially true because in the United States, within both BCCI and First American, it was often perceived that there was an ongoing struggle for control of First American's destiny, between two competing organizations, one Pakistani, pertaining to BCCI, and the other American, and controlled by Clifford and Altman.

Nazir Chinoy, head of BCCI's Paris branch, learned of the struggle over First American New York at a BCCI annual conference in Luxembourg in 1985, from Afridi himself, who confessed over a glass of wine that he was increasingly unhappy at First American New York.

Afridi felt that Altman was not permitting him to run First American on BCCI lines and yet he was answerable to Mr. Abedi for profits. He said Altman was interfering in the management and that he had reported to Naqvi on many an occasion about Altman interfering with his management, or trying to change the management structure or style.(93)

As Chinoy described it, from his point of view as a BCCI official operating outside the U.S., there was not so much a separation between First American and BCCI as two different types of management, one Pakistani and one American.

I saw rivals competing for power -- Afridi wanting to be the top man, and Altman wanting to be the top man.(94)

The conflict of interest between First American's needs and BCCI's needs was made explicit to Clifford and Altman in a memorandum from an official of First American New York to them written in early 1987, concerning the termination of a First American employee in New York. Enclosed with the memorandum provided to Clifford and Altman was a letter from a First American employee that stated that the association between BCCI and First American was threatening to destroy First American as a bank:

Your basic error has been BCCI. This association is "on the street" and as soon as this becomes known (with BCCI reputation) decent accounts fly. . . . Either FAB must take over and become First American Bank and buy out BCCI shares, or let them have it. But have two factions running FAB, Eastern and Western, and until you decide just whom and what you are, FAB is doomed to extinction.(95)

There is no record that Clifford or Altman undertook any response to this letter, which contradicts Clifford's testimony that there was never a "suspicion" about BCCI's involvement in First American during the period he ran First American.

Another area of difficulty in assessing Clifford and Altman's knowledge of the relationship between First American and BCCI is that Clifford and Altman have maintained that BCCI acted as an investment advisor to the shareholders. In testimony before the Senate, Clifford testified, "we treat Mr. Abedi, we treat Mr. Naqvi, as the representatives of our investors."(96) In other words, not only did Clifford and Altman wear many hats, but they have maintained that Abedi and BCCI also played various roles, ranging from client to investment advisor to "communications link" for the middle eastern investors.

Sakhia, however, challenged Clifford and Altman's characterization of Abedi as a communications link for the Middle Eastern investors. Sakhia testified:

I fail to understand . . . that it was difficult to communicate with the Middle Eastern investors. . . . They were not Bedouins in the desert. . . . These were intelligent people who owned banks and businesses. The Abu Dhabi investment Authority has several billion dollars invested in this country, and if they can manage those businesses they did not need a channel via Mr. Abedi to First American. They could have done it directly.(97)

Clifford and Altman did begin to communicate directly with First American's shareholders in 1989, after the New York grand jury had begun and both BCCI and Clifford and Altman understood that the key issue would be whether the shareholders were nominees for BCCI. Thus, in October 1989, Altman, instead of his past practice in routing communications with shareholders through BCCI, wrote Adham and other shareholders directly to seek their position regarding the possible sale of the bank.

Clifford and Altman Loans From BCCI And Share Purchases of CCAH/First American

Perhaps the most controversial aspect of Clifford and Altman's relationship with BCCI was their purchase of CCAH shares with loans provided by BCCI, a transaction that not discovered by First American officials until the summer of 1990 and not disclosed to the Federal Reserve until the spring of 1991.

The transaction was controversial for a number of reasons. First, from the beginning, regulators had stated their understanding that BCCI would not be lending funds to BCCI shareholders which would be secured by CCAH shares. Second, when regulators asked Clifford and Altman whether they had been such lending now in the past, Altman's responses did not acknowledge the existence of the loans. Third, the loans had never been disclosed to First American's board of director or other offices. Fourth, the terms of the loans were very unusual in that they were non-recourse, and BCCI could not proceed against Clifford and Altman if they failed to repay them. Moreover, as specified below, there were secret side agreements between Clifford and Altman and BCCI which is essence guaranteed that BCCI would handle the sales of the stock for Clifford and Altman at a price agreed to among the three of them.

In their written testimony to the Subcommittee, Clifford and Altman provided a detailed explanation of how they came to purchase the stock, and how BCCI came to finance the purchase:

The amount paid us by the Company was relatively modest. Mr Clifford, as Chairman, requested, and was paid, $50,000 a year -- a modest amount compared to the substantial annual compensation paid to the top officials of major banks. Mr. Altman . . . received no payments other than the usual director's fees. . . Nor were we given the valuable perquisites that are normally provided senior officers of large corporations. We received no financial bonuses, incentive compensation, or profit sharing. . .

If First American prospered under our leadership, we hoped to have the opportunity to invest in stock and thereby participate with the shareholders in the economic benefits we were creating. In effect, we chose to take our financial rewards as managers by making an investment in stock. . . In 1985, in the light of 4 years of sustained economic growth experienced by First American under our control, we discussed with Sheikh Adham the possibility of acquiring stock in the Company. We also discussed it with Mr. Abedi, as the advisor to the shareholders. We learned the shareholders favored our investment in the company . . .

We had learned that certain of the shares [to be offered in a rights offering] might remain unsubscribed, and that we could purchase such shares at the same price -- book value -- as was paid by the other shareholders.

We determined to acquire shares on this basis, and, after considering alternatives, sought to finance this investment through bank loans, if possible. . .

The first institution we approached for financing was Banque Arabe et Internatinale d'Investissement ("BAII") in Paris, the consortium bank that acted as the lead lender in the syndicate that had lent $50 million in connection with the acquisition of FGB in 1982. . . When problems arose in the negotiation of terms by our counsel, efforts commenced to explore with BCCI financing for the contemplated stock purchase. BCCI, too, was familiar with the [First American/CCAH] stock being offered as collateral and the market for the shares. . .(98)

Thus, by this account, both the share purchase and the lending were intended as compensation by CCAH's grateful shareholders to Clifford and Altman for the superior job they had done in strengthening First American over the first five years of their management. As Clifford testified, "we got to a point where we knew we were over the hump. And I thought the time had come for Mr. Altman and me to participate in the results of this very determined effort that we had made, that was proving to be so successful."(99) Clifford testified that "I wanted to own some stock in my own company."(100)

With the loans that they secured from BCCI, Clifford and Altman purchased stock in CCAH in 1986. In testimony to the Senate, Altman said that he and Clifford participated in a "rights" offering which was confined to the 14 shareholders of CCAH, paying "book price" for the stock, which was $2,216.000.(101)

The account suggests that both the share purchases by Clifford and Altman, and the lending from BCCI were normal arms-length business transaction, such as other banks might contemplate to reward officers and directors. Moreover, it explicitly separates the decision by CCAH shareholders to compensate Clifford and Altman through permitting them to purchase shares in the bank from the decision by BCCI to lend them funds for the purchases. In fact, the two activities were integrated from the beginning, with BCCI committing from the start to arrange no-risk financing for Clifford and Altman as part of the transaction.

Evidence for the integration of the lending by BCCI to Clifford and Altman with the decision by Clifford and Altman to purchase shares, and the intention that the purchase be risk free, is set forth in some detail by the Federal Reserve in its findings against Clifford and Altman.

As the Federal Reserve detailed, prior to coming up with the "rights offering" approach, with lending done against the shares by BCCI, BCCI and Clifford and Altman considered a number of different alternatives by which they would acquire a risk-free interest in First American.

For example, in early drafts of the arrangement, CCAH itself agreed to issue shares to Clifford and Altman, with one draft including a commitment requiring Kamal Adham, with BCCI as a back-up, to repurchase Clifford and Altman's shares at any time at their discretion. Significantly, the requirement that Adham repurchase their shares was never discussed with him, demonstrating the degree to which Clifford and Altman, as well as BCCI, regarding him as no more than a nominee for BCCI.(102)

Ultimately, Clifford, Altman, and BCCI instead decided to provide them shares through a rights offering in which another BCCI nominee, Masriq, would "waive" its rights to shares in order to make them available to Clifford and Altman, at book value or $2216, one day after Masriq had purchased other CCAH shares at the price of $4044.20 a share -- a transaction that would be economically inconceivable if Masriq were a real party at interest rather than a nominee.(103)

In their written and oral testimony, Clifford and Altman never specified exactly what had gone wrong to prevent BAII [the French bank which they had originally contacted for the loans] from agreeing to lend funds to them for their stock, instead suggesting merely that unspecified difficulties with BAII had lead them to open negotiations over loans with BCCI.

In fact, BAII was considering the possibility of issuing such a loan solely on the basis that BCCI would simultaneously provide BAII with a guarantee of the loan -- making BAII effectively acting as a pass through to cover BCCI's involvement, just as it had done in connection in lending money at the outset of the FGB purchase. But Clifford and Altman insisted on the lending being on a non-recourse basis.

Clifford testified that the non-recourse aspect of the loan -- which prevented BCCI from suing him personally if he failed to repay the loan, or interest on the loan -- had been recommended to him by New York counsel who felt his advanced age required such an arrangement.(104) Despite Altman's relative youth -- he was under 40 years old at the time -- Altman's loan was on the same terms. Altman testified that the concern in his case stemmed from "the [lack of] liquidity of the investment."(105) Regardless of Clifford and Altman's actual reason for insisting that they not be at risk for the borrowing necessary to finance their purchases of CCAH shares, BAII refused to provide the lending, even with a backup guarantee from BCCI, on a non-recourse basis, viewing such lending in this circumstance to be inadequately secured. Thus, even with protection from BCCI, and with a BCCI director on its board, BAII viewed the transaction as sufficiently unusual to pull out.(106)

As Clifford testified, ultimately BCCI provided a $15 million loan on a 100% non-recourse basis for 18 months at the London Interbank Rate, which ordinarily runs below the Prime rate. When pressed by Senator Brown as to whether or not First American had ever loaned money to any individual on such favorable terms, Clifford replied, "I do not know."(107) In staff interviews, Virgil Mattingly, General Counsel for the Federal Reserve, has confirmed that First American has never made loans on such favorable terms.

The loans were due on January 1, 1988. The loans, however, were not paid off at that time. Altman explained that

"they [the loans] were not actually in default because we had gone to the lender [BCCI] . . . and asked if they would refinance the loan or roll it over. The lender [BCCI] indicated a willingness to do that, but before the documents were prepared for a second loan, we started the process of disposition of the shares."(108)

Once BCCI lent the money to Clifford and Altman for the loans, it immediately agreed to providing further protection to them to make certain they would never be at risk from their stock purchases, and in fact, committing to help them sell their shares "at such prices as BCCI and [Clifford or Altman] shall mutually determine."(109)

These unusual terms were set forth not in the loan agreements between BCCI and Clifford and Altman, but in a side agreement they executed, which recited the following terms on the loans:

notwithstanding any provision of the Note or Pledge Agreement (or any other document relating to the loan by the undersigned to BCCI) to the contrary, it is understood and agreed that the undersigned shall not be obligated personally to repay to BCCI the loan principal or any interest accrued thereon[, and that] BCCI shall be limited solely to the undersigned's interest in the CCAH shares and any proceeds thereof to repay the loan and interest thereon . . . BCCI shall arrange for the sale of said CCAH shares to . . . interested buyers in such manner, amount, and at such prices as BCCI and [Clifford or Altman] shall mutually determine.(110)

s

Clifford and Altman did not disclose the unique terms of its arrangements with BCCI to anyone, but actively sought to conceal it. In their written testimony to the Subcommittee, they suggest they provided full disclosure in the following terms:

As noted earlier, our investment in CCAH stock was known to and encouraged by the shareholders. In addition, our intended purchase of stock was duly disclosed to and authorized by the Board of CCAH, the parent company of First American. In advance of the 1986 rights offering, Mr. Clifford personally informed Managing Directors Symington and Quesada that we intended to acquire stock in the corporation . . . We also disclosed the acquisition of this stock to the Federal Reserve Board.(111)

In fact, First American itself was never told by Clifford or Altman of their borrowings from BCCI in connection with their purchase of CCAH shares, until the issue arose as First American began to respond to questions arising out of an audit of BCCI-First American wire transactions in the summer of 1990.

As the Federal Reserve found, Clifford and Altman failed to disclose a number of material facts to Symington and Quesada about their stock purchases, including that they were financing their purchases by means of non-recourse, preferential-rate loans from BCCI and that BCCI had agreed to arrange for the subsequent repurchase of their shares at a price to be agreed upon by Clifford, Altman and BCCI later.(112)

First American only learned of the existence of the Clifford and Altman loans, although not all of their unusual terms, when First American officials were conducting a review of BCCI wire transfers to First American accounts in response to matters arising out of the New York criminal investigation into the BCCI-First American relationship. In that review, they discovered millions of dollars in wire transfers from BCCI to Clifford and Altman's accounts, and asked them what these transfers pertained to.

A letter from Clifford and Altman to First American senior vice president James E. Lewis, dated August 1, 1990, details their handling of this inquiry from their own officers at First American. Clifford and Altman replied as follows:

This memorandum is written to provide you with background concerning certain wire transfers in 1988 you have identified between the Bank of Credit and Commerce International (Overseas) lt., and or personal accounts at First American Bank, N.A. . . .

You are informed that in connection with the 1986 Rights Offering to the shareholders of Credit and Commerce American Holdings, N.V., the parent holding company of First American, to raise additional capital for the Company, all of the new rights shares were not subscribed by the shareholders. We determined to acquire a small amount of CCAH shares which were thus available. In this regard, we explored financing of the purchase with possible lenders, including BCCI.

Satisfactory loans with BCCI (Overseas) Ltd. were negotiated by each of us and the purchase of the CCAH shares at the offering price was effected. (Mr. Clifford invested approximately twice as much as Mr. Altman.) . . .

In early 1988 we were interested in selling some of our CCAH stock and upon making inquiries in this regard, learned that a Middle East businessman wished to acquire shares of CCAH. As a result, we each sold him, for cash, a portion of or shares. BCCI serviced that transaction and wired to our respective accounts at First American the sale proceeds. From those proceeds we decided to pay off all outstanding indebtedness to BCCI (including interest) and, accordingly, we arranged to wire monies from or First American accounts to BCCI for that purpose.

We understand this information will be maintained on a confidential and privileged basis.(113)

Notable in this account is what Clifford and Altman did not tell First American on August 1, 1990: that BCCI had held a security interest in their First American shares, in contravention of the understanding of regulators that BCCI would not lend for the purpose of purchases of such shares; that BCCI's lending was made on a non-recourse basis, in which BCCI could recover only Clifford and Altman's interest in First American, rather than against them directly; that BCCI, not Clifford and Altman, had located the "Middle East businessman" who purchased their shares; or that from the beginning, Clifford and Altman had arranged with BCCI for guaranteed buy-backs of their stock to insure them against any possible loss.

Significantly, Clifford and Altman also failed to disclose the existence of these arrangements to their partners at Clifford & Warnke, who under normal partnership rules would have been entitled to a share of Clifford and Altman's profits from the compensation being provided them for their work at First American.

In June 1987, Clifford and Altman met with Abedi and Naqvi in London, and insisted on paying interest on their respective loans from BCCI, despite the fact that the side letters they agreed executed relieved them of any obligation to do so. Two months later, they participated in a second rights offering for CCAH stock. They again paid for the shares with non-recourse loans from BCCI, against which they pledged their shares of CCAH. They again executed side-letters relieving them of any risk on the transaction and insuring that they would be permitted to sell the stock at a price to be determined by BCCI, Clifford and Altman. At this point, Clifford held 5446 shares of CCAH, Altman 2722 shares. All were pledged to BCCI. Nowhere was BCCI's security interest in these shares recorded, including in the Netherland Antilles, where CCAH was incorporated, and where it was legally required.(114)

In early 1988, several events took place which could have given rise to Clifford and Altman's decision to sell enough of their shares in CCAH to eliminate the BCCI lending to them. First, on February 9, 1988, Abedi suffered a heart attack and stroke. The same day, in hearings before the Subcommittee, former Panamanian consul Jose Blandon disclosed that BCCI was handling drug money for General Noriega. In turn, Blandon's testimony prompted the issuance in March of a subpoena by the Foreign Relations Committee to BCCI for Noriega records.

In this very period, Clifford wrote a letter, dated February 8, 1988, to Naqvi, to ask Naqvi to arrange a sale of some or all of Clifford and Altman's stock. Significantly, the Federal Reserve concluded that the letter was not written on February 8, 1988 by Clifford, as dated, but "some time thereafter" and was backdated to make it look as if it were written prior to February 9, the date of the Abedi heart attack and the Blandon testimony.(115)

In March, 1988 the shares of CCAH stock owned by Clifford and Altman were sold for $6,800 per share. Although the stock had been purchased at book value, it was sold at market-value, which essentially meant whatever someone was willing to pay for it. Altman testified to the Subcommittee that "the distinction between a purchase at book value and a subsequent sale of the shares... was not a practice that was unique to Mr. Clifford and me and this transaction."(116) Mr. Mohammed Hammoud, a CCAH shareholder and the purchaser of the shares, was apparently willing to pay $6,800.00 per share -- the highest price ever paid for CCAH stock - which afforded Clifford and Altman a combined gross profit of $9.5 million. Clifford explained the high price by noting that "there were no rights offerings in 1988," the year Mr. Hammoud purchased the stock of Altman and Clifford. (117)

In fact, the price of the stock was set not by Hammoud, and not even by BCCI, but by Clifford and Altman, who told Naqvi the amount of net profit they wanted on the sale, after all taxes had been paid. As the Federal Reserve found:

In late February or early March 1988, Altman met in London with Naqvi. Naqvi called Imam and directed him to speak with Altman concerning the sale of Clifford's and Altman's shares. Altman stated that he wanted a net profit on his shares of $1.5 million, and that Clifford wanted a net profit on his shares of $3 million. These profits were to be after payment of all taxes and repayment of all loans from BCCI. Altman also stated that he and Clifford each wanted to retain a portion of their CCAH shares. Naqvi agreed to this and instructed Imam to work out the details with Altman.

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