Troubled S&L; in Potential Treasurer’s Background

A front-runner in the race to fill the vacant state treasurer’s post was a director of a small Carlsbad-based savings and loan that was seized by federal regulators in 1986 and declared insolvent after suffering massive losses in an allegedly illegal commodity futures trading operation.

Ernest J. Dronenburg Jr., a member of the state Board of Equalization, also was a director of a related San Bernardino-based mutual fund that encountered financial problems soon after the collapse of the savings and loan.

Dronenburg said in a recent interview that if he is appointed to serve as state treasurer--a post left vacant in August, 1987, with the death of Jesse M. Unruh--his relationship with Seapointe Savings & Loan Assn. and the YES Fund will not have any bearing on his confirmation by the Legislature.

No Word From Governor

“I don’t feel it should have any effect,” Dronenburg said. Dronenburg said he has apprised Gov. George Deukmejian of his standing on the two boards but there has been no indication from the governor that it would have any effect on his decision in picking a nominee for the post.

An aide to one Assembly leader said the episodes would come under scrutiny at confirmation hearings. But other sources in the Legislature said that such a review would have little effect on Dronenburg’s confirmation because he probably would not be nominated without the prior concurrence of the Senate and Assembly leadership.

And legislative sources say that neither the Democrats nor the Republicans are up for another fight like the one that erupted when Deukmejian nominated Rep. Dan Lungren (R-Long Beach) for the job. Lungren was confirmed by the Assembly but rejected by the Senate after lengthy and bitter hearings that closely examined his background. The state Supreme Court later ruled that both houses must approve the appointee.

Approval Expected

Assembly Speaker Willie Brown (D-San Francisco) has reportedly already assured the governor that Dronenburg, a Republican from El Cajon, would be approved, though a spokesman for Brown said she was not aware of any such assurance.

A spokesman for Senate leader David A. Roberti (D-Los Angeles) said “it’s too early to tell” about Dronenburg’s chances for confirmation if nominated. But one Senate staff member said, “If it can’t be shown that he made the controlling decision on something incredibly stupid,” Dronenburg’s business problems won’t have much effect on legislators.

Other candidates said to be on the governor’s current “short list” are Orange County Supervisor Gaddi Vasquez, San Diego businessman Tom Stickel, former U.S. Treasurer Angela M. Buchanan and Los Angeles County Supervisor Pete Schabarum.

Dronenburg, a three-term member of the state Board of Equalization, was a director of Seapointe Savings when it lost $24 million--or more than half its total assets--in less than one year.

Mutual Fund’s Losses

Several months after the S&L;’s collapse, a related San Bernardino-based mutual fund, at which Dronenburg was also a director, began to report losses in another risky and complex trading scheme. The once high-flying YES Fund was eventually merged with another fund in an effort to stem its losses and flight of investors, but it soon came to be known in the investment community as the “Titanic fund” because it “sank with nearly all hands on board.”

In neither case was Dronenburg or the board of directors held responsible for the problems.

Federal regulators have sued two financial advisers to the S&L;, holding them to blame for the Seapointe collapse. The lawsuit, filed May 2, has not been served on the two defendants to answer the complaints of fraud, breach of contract and breach of fiduciary duties.

Lack of Experience

But in that same lawsuit filed by the Federal Home Loan Bank Board in federal district court in San Diego, regulators said that the board of Seapointe was “inexperienced” and unable to “evaluate intelligently” financial reports it received.

And the regulators pointed out that Seapointe management ignored the federally approved business plan that called for it to be operated as a “traditional” S&L;, taking deposits and making home loans in the community.

Instead, in its 13-month existence Seapointe gathered more than 80% of its deposits in the form of high-rate “jumbo” certificates from large investors nationwide and did not make a single loan, according to federal regulators.

Dronenburg, 44, said in an interview that “Seapointe was a tragedy . . . because it could have been avoided. We had a good plan, top accountants, and a good market but the whole thing came apart because of our financial adviser.”

‘Investment Services’

Strategic Investment Services of Riverside was the trading adviser to both Seapointe and the YES Fund. Dirk Rose, founder and principal of Strategic, brought Dronenburg onto both boards.

Rose and Strategic Treasurer Robert J. Forest Jr. were named as defendants in the lawsuit. Neither Rose nor Forest could be reached to comment on the suit.

Dronenburg said the board of Seapointe “has no responsibility” for what happened. The board, he said, depended on Strategic to trade within strict investment guidelines. When the adviser strayed from those guidelines, there was not much the board could do, Dronenburg said.

Regulators familiar with S&L; failures said it is unusual that the board was not sued for negligence or duplicity.

‘Didn’t Have a Clue’

“These guys didn’t have a clue,” said one federal regulator about the Seapointe board. The directors were “hoodwinked,” another said.

But some observers say that a director like Dronenburg, with an educational and professional background in accounting, economics and tax issues, should have known better. “He should be held to a higher standard,” said one savings and loan official familiar with the case.

Dronenburg said the lack of adequate oversight of Strategic’s trading was due to the nature of boards of directors that meet only once every three months. “There are certain things you can do, and some things you can’t,” he said.

As for the allegation that the board failed to live up to the business plan outlined in its charter, Dronenburg said, “We didn’t want to just jump into the market and make any loan.”

Still, the S&L; was deliberate in gathering as many deposits as possible. Seapointe took in more than $30 million in deposits in its first nine months, even though it assured regulators it would hold deposits to $12 million in its first year and $27 million in the second year of business.

Losses Revealed

Soon after the problems were revealed at Seapointe, losses were beginning to surface at YES Fund. Through some unusual accounting the fund had been able to report high earnings--which attracted investors--while its assets were actually dwindling.

The fund invested mostly in government securities but then attempted to “enhance” its return by trading interest rate futures contracts.

When the Fund began suffering, Dronenburg said, he encouraged the board to drop its contract with Strategic, a bold move in the mutual fund industry, where the advisers to a fund typically have control over the board of directors.

Dronenburg said that in retrospect it is easy to say he should not have been on the boards, but “at a tough time, I acted responsibly.”