Three top officers of MNC Financial Inc. received more than $7 million in salaries and bonuses while the company's banks were making $475 million in risky real estate development and construction loans, according to papers filed in a stockholders' suit.
An amended complaint filed recently in U.S. District Court claims that Baltimore-based MNC and its subsidiary banks -- Maryland National and American Security -- made "numerous loans which presented unacceptable risks" at the same time the officers got paid handsomely for guiding the holding company.
The loans were risky, speculative and "made little or no economic sense" due to a decline in the real estate market, unfavorable loan terms and the "financial weakness of the borrowers," the stockholders claim.
They also allege that the defendants defrauded investors by ignoring or hiding the evolving problems in MNC's real estate portfolio, which made up 21 percent of its total outstanding loans -- a much higher percentage than other large banks in the Northeast.
The stockholders accused MNC, the three top officers and a former board member of securities fraud, negligent misrepresentation and violations of the Exchange Act. The suit claimed MNC failed to maintain adequate loan loss reserves and failed to tell investors that "a substantial portion of [MNC's] outstanding real estate loans were in jeopardy."
The class-action suit was prompted by MNC's $440 million loss last year as it was forced to bolster loan-loss reserves to cover potential defaults.
Stockholders in the suit all bought MNC common stock last year, before its price tumbled below $3 per share. The stock, which sold for more than $29 a share in late 1989, closed Friday at $4.12 1/2 .
Recipients of the lucrative compensation were identified as Alan P. Hoblitzell Jr., MNC's former chairman and chief executive officer, who resigned last September; Daniel J. Callahan 3rd, MNC's former president, who also was American Security's chairman and chief executive officer for six years; and William H. Daiger Jr., MNC's former vice chairman and former president and chief executive of Maryland National. All are defendants in the suit and were on the board when the loans were made.
Hoblitzell received $3,032,306 in cash, incentive and "long-term performance" awards for 1987-89, including $950,000 in compensation in 1989, during the time the loans were beginning to sour, the suit says.
Callahan, now vice chairman of American Security Bank, got more than $1.3 million in incentive and performance awards for 1987-89, plus $685,000 in 1989 compensation, the suit says.
Daiger, now executive vice president of both MNC and Maryland National, is said to have received $575,000 in compensation in 1989, plus nearly $1.4 million in incentives and performance payments for 1987-89.
During much of that same period, MNC's banks are said to have lent at least $150 million to Oliver T. Carr Jr., who was a director of MNC and of American Security from 1983 to 1990.
The banks lent another $325 million to Washington-area developers Dominic F. Antonelli Jr., Robert Kettler, Conrad Cafritz, Eisinger Kilbane Associates and others for projects that have largely gone bust, says the amended complaint.
Hoblitzell and Daniel G. Finney, MNC's corporate affairs officer, declined to comment on allegations in the stockholders' amended complaint. Daiger and Callahan could not be reached for comment.
Carr, Washington's largest real estate developer, also is a defendant in the lawsuit. The plaintiffs accuse him of a conflict of interest as an MNC board member and loan recipient, and contend that he received favored treatment on loans from American Security.
Carr reported a net worth of $135.7 million in 1989.
But the suit says he failed last summer to repay a $27 million loan from American Security on his Lincoln Place commercial development in downtown Washington, and his ability to repay several other loans -- more than $100 million worth -- allegedly waned as his financial empire sagged in a declining market.
The bank denied Carr an extension on the Lincoln Place loan last June. But MNC and American Security officials have not pressed him for repayment, the suit says.
MNC also pumped $171.8 million -- much of it in loans to Carr -- into the East End commercial development in downtown Washington on projects that now have vacancy rates of 78 to 95 percent. The suit calls those loans "egregious" due to a known glut of office space in that area.
Stockholders allege, too, that Maryland National officials described three of the loans to Carr as "undue and unwarranted credit risks" and rated eight more "worse than average."
But MNC "recklessly ignored the likelihood of non-payment" and "cast a blind eye" to the alleged financial deterioration of Carr's companies and partnerships, the suit says.
Carr resigned from the MNC board last October, citing a need to pay more attention to his own businesses.