THE FALL OF BRUCE MCNALL BANK FRAUD ALL-STARS
By DAVID MCCLINTICK

(FORTUNE Magazine) – This is a story about a dirty little bank, its drunken president, and a charming swindler.

You may remember the swindler, Bruce McNall. He cut a colorful swath through business and sports headlines a few years back as a roly-poly Los Angeles tycoon and preternatural schmoozer who seemingly could get anyone to lend him money. McNall acquired the L.A. Kings hockey team, a rare-coin business, a movie production company, racehorses, private airplanes, a big house in Bel Air, and pals like Wayne Gretzky and Tom Hanks--all of it with a Ponzi-esque balance sheet. Along the way, he conned upwards of $200 million in loans from the Bank of America and Credit Lyonnais, among others, by lying about his creditworthiness and bribing bank officers. McNall's empire collapsed in bankruptcy in 1994; in March he begins a five-year, ten-month prison term for one of the biggest bank frauds in recent memory.

McNall's misdeeds are already legend, but one of his most outrageous forays into the world of banking has only now come to light. McNall's relationship with the First Los Angeles Bank and its president, Thomas Kempf, was so sordid that at a recent trial, the bank persuaded a federal bankruptcy judge to bar "prejudicial" details pertaining to "the character of Thomas Kempf, his wardrobe, his personal habits, [and] his possible propensity to alcohol." The court was weighing whether to award control of millions of dollars of McNall's assets to First L.A., which had a lien on the money, or to a bankruptcy trustee, who contended that misconduct by First L.A. invalidated the lien.

McNall was bound to cross paths with First L.A. The bank was formed in the 1970s to cater to high-net-worth people in the entertainment industry--just the circles in which McNall aspired to move. He says he was introduced to First L.A. and Kempf in the early 1980s by the bank's founder and chairman, Charles Manatt, a prominent lawyer who headed the Democratic National Committee and whose law partners included former Commerce Secretary Mickey Kantor. (Manatt denies he made the introduction.)

In Kempf, McNall found a man he could do business with. A Kentucky native, Kempf was a gregarious horse player who wore velour sweatsuits to the office and preferred doing business at racetracks to First L.A.'s plush quarters in Century City. McNall--always in need of credit--became one of First L.A.'s largest customers, borrowing more than $15 million and opening at least a dozen accounts, which he kept very active.

It's unclear precisely when McNall's First L.A. dealings became criminal. By 1988, however, McNall was insolvent, and Kempf did not write down or charge off his loans because, it is now apparent, McNall was bribing him. "As McNall was a borrower of First Los Angeles, Tom Kempf was a borrower of McNall," asserts Leonard Gumport, the lawyer for the McNall bankruptcy trustee, in a confidential trial brief obtained by FORTUNE.

The bribery allegedly took the form of more than $400,000 in interests in thoroughbred racehorses, interests that McNall "loaned" to Kempf beginning in 1986. McNall entertained Kempf lavishly, flying him and his girlfriend to the Kentucky Derby. Kempf signed promissory notes covering the horse interests, but he rarely made payments on the notes and McNall did not foreclose on them. "Kempf undoubtedly appreciated McNall's forbearance," Gumport surmises in his brief, citing Kempf's return of McNall's favor by not foreclosing on McNall, even though Kempf knew McNall's empire was in danger of collapse. According to court documents, when another First L.A. officer recommended that McNall's credit be cut off, Kempf threatened to fire him.

Compounding Kempf's corruptibility was his instability. Former associates stated in court papers that he was prone to "bombastic power tirades" and that his word couldn't be trusted in the afternoon because he drank heavily at lunch.

McNall and Kempf nearly brought down First L.A., which was, alleges Gumport, "making and administering millions of dollars of loans to an insolvent borrower, McNall, based on the approvals of a conspicuously impaired alcoholic." Gumport won't comment on his brief, which is under court seal because it discloses details of an investigation of First L.A. by the Federal Deposit Insurance Corp. The FDIC had ordered First L.A. to correct its lending practices, but the bank manipulated its assets, concealing the true extent of its problems. Then Kempf illegally loaned millions more to McNall, knowing that McNall was using collateral already pledged to another bank.

Although Kempf has denied that he concealed anything from the FDIC or consorted improperly with McNall, U.S. bankruptcy judge Lisa Hill Fenning determined that Kempf lied in court testimony. McNall, meanwhile, is still charming people, even the law: At the bankruptcy trial, two U.S. marshals asked for his autograph. --David McClintick