Hurwitz in the Hot Seat / Financier's past business practices under fire in FDIC suit

Texas financier Charles Hurwitz is back, but this time as a defendant in a $250 million lawsuit that attacks his past business practices.

As reported, Hurwitz, whose Houston-based Maxxam Inc. controls Pacific Lumber and Kaiser Aluminum, was sued late Wednesday in his hometown by the Federal Deposit Insurance Corp. for his alleged role in the collapse of United Savings Association of Texas (USAT) in 1988.

The failure cost taxpayers an estimated $1.6 billion.

The civil lawsuit comes on top of another recent embarrassment, the Chapter 11 bankruptcy filing of a Houston racetrack, which is partly backed by Hurwitz. The Sam Houston racetrack is expected to emerge from bankruptcy later this summer, however.

Maxxam, the main chunk of Hurwitz's business empire, is generating profits. In fact, Maxxam's income and stock price recently have been on the rise, largely buoyed by a rebound at Kaiser Aluminum.

Maxxam stock closed yesterday at 54 1/2, up 4 1/2, a 52-week high.

Maxxam is not a party to the FDIC lawsuit, which came after years of investigation.

Still, some environmentalists hope the suit will clear the way for a so-called debt-for-nature swap, where Hurwitz would exchange any claim won against him for PL's old-growth redwoods in the 3,000- acre Headwaters Forest in Humboldt County.

But that could be a longshot. Assuming it wins, the FDIC is not going after the timberland specifically. Maxxam has scoffed at the idea of a debt-for-nature swap.

For Hurwitz's part, his lawyer said the suit is without merit and that the agency has acted in an "arbitrary and unreasonable manner." He added: "We trust Mr. Hurwitz's position will be completely vindicated by the federal court."

But the 22-page suit, filed in U.S. District Court in Houston, contends the financier negligently allowed the thrift to fail.

As the "controlling force" of USAT, Hurwitz allegedly let the S&L invest too heavily in high-risk junk bonds underwritten by Drexel Burnham Lambert, because he wanted Drexel to help him finance other hostile takeovers. "Drexel assisted Hurwitz's takeover activities and USAT invested heavily in Drexel underwritten junk bonds," the suit con- tends. "By keeping USAT open and free from regulatory intervention, Hurwitz was able to continue these reciprocal business arrangements with Drexel."

The thrift eventually became the eighth-largest purchaser of Drexel bonds among U.S. S&Ls, it said.

The suit also claims that Hurwitz:

-- "Dramatically increased the liabilities of the association in violation of federal law.

-- "Gambled on large, cumbersome real estate projects with no realistic chance of success.

-- "Invested in complex financial instruments which the officers understood poorly which resulted in staggering losses to the association."

One, an investment in mortgage-backed securities, became known as "Joe's portfolio," named after the analyst who managed it. It suffered a "massive decline in value," the suit said.

As a result, the suit charges, the association fell below regulatory net worth and capital requirements. "Moreover, by failing to honor . . . net worth maintenance obligations, significant wealth was preserved by Hurwitz and his colleagues for distribution to themselves for other investment opportunities," it added.

The suit seeks a jury trial in the case.

Environmentalists and backers of the debt-for-nature swap welcomed the filing of the suit.

"The government needs to seek an immediate injunction to halt logging in the old-growth groves, both to protect the endangered species and preserve the value of the forest asset as collateral against the S&L debts," said Jill Ratner, president of the Rose Foundation, a group that has supported the proposal.