The Trial of Joe Russo

An intimate look at how -- and why -- Houston's high flyer of the '80s was taken apart in court

In February of 1986, federal bank examiners stepped in; they agreed to take no action if Orange kept its liability growth to prescribed limits. But things got worse. During audits, accountants from Coopers & Lybrand discovered $11.7 million in what soon became known around the office as "Unidentified Flying Debits" and recommended that Piperi write them off as losses -- which would have effectively rendered the bank insolvent. Piperi chose not to; the UFDs kept mounting. It was in this ghastly context that Orange made its $1.5 million unsecured loan to Joe Russo.

September 26: Lending in Haste
A careful, schoolmarmy redhead named Kathy Gamel, an 11-year Russo employee who was Ameriway Bank's officer on the Piperi loan, has been rehearsing its unconventional course. She typed up "purchase of S&L" as the loan's purpose after attending a meeting with Russo and the Piperis, she says; learning Piperi had instead used the money to buy computer stock caught her by surprise. By federal rules, a stock-purchase loan called for twice as much collateral as Piperi furnished, Gamel points out; Ameriway "unwillingly" took the computer stock he offered when he indicated he couldn't provide the promised real-estate collateral. Five months later, the computer stock had plunged in value, leaving a serious collateral deficiency that was not rectified until 1988, after Piperi and Russo had bowed out of their troubled institutions.

In the meantime, Ameriway dropped the interest rate on the loan to Piperi at the same time that Orange dropped the interest rate on the loan to Russo. Ameriway, says Gamel, "was asked to do this" by Joe Russo's office.

Diving in for the mop-up, Berg coaxes forth testimony that Russo never asked Gamel to do anything illegal; she seems visibly relieved to opine that Russo wouldn't have done anything to harm Ameriway. When Prosecutor Lewis gets a crack at her, Gamel's discomfort returns: no, Ameriway had no time for the normal due diligence on the Piperi loan, which was funded in great haste; better documentation might have raised questions and slowed down the loan.

Whose choice was it to move so fast? Lewis asks her. There is a long silence. "Well, I would say Mr. Piperi made it clear he would like the money that day," begins Gamel. With Lewis pressing her and Berg making frenzied objections, she finally thrusts her head in the trough and drinks. Who was responsible? "Joe Russo," answers Gamel unhappily.

September 28: Berg Meets His Match
The prosecution is enjoying itself hugely today. They've put on a quick-witted witness who refuses to be cowed by David Berg. Worse, he appears to have been a sane banker during that period when the defense wants the jury to think standards of prudence were so much looser. Larry Linenschmidt, an affable fellow with a clipped beard and glasses, worked as a Wells Fargo loan officer and credit analyst from 1979 until this summer. As manager of the Houston office, he dealt with the real-estate community -- including Joe Russo, to whom Wells Fargo loaned a total of $28

million. Russo had pizzazz, says Linenschmidt, but he also had a lot going while the market was worsening, and Wells Fargo grew "less comfortable about Joe's situation as the '80s progressed."

The defense has insisted from day one that lenders cared more about developers' assets than their cash flow back then. Not so, says Linenschmidt, "cash flow is much more important," and Wells Fargo had projected as early as mid-1985 that Russo's companies would have a negative cash flow of $5.5 million over the next year. Wells Fargo cared about the contingent partnership liabilities that the defense has pooh-poohed, too, because "that was where surprises could come from." Russo began having trouble making his loan payments, and by late 1985 Linenschmidt was trying to get every scrap of additional collateral he could. By 1986, Linenschmidt says, he thought Russo might have to declare bankruptcy.

The usually impassive Russo is reacting visibly: turning to look at the spectators, rocking in his chair, which is as far in the corner as he can get it and still be in the room. For once, Berg can't get a witness to contradict himself, and he grows discombobulated. When Berg fingers the Russo Companies' president, Harold Klinger, as architect of Russo's financial statements (a drumbeat in the rising crescendo that will become The Klinger Defense) Linenschmidt replies coolly, "I think Joe was in charge of everything."

Berg tags Wells Fargo's views of the Houston market as "a doomsday approach," but Linenschmidt will have none of it. "We did take a more conservative view than a developer might," he says, to muffled laughter in the courtroom. Finally, Berg and DeGeurin can do no more than try to gin up jury xenophobia by mocking Linenschmidt as a "belt and suspenders banker" for $50-billion-dollar Wells Fargo. But the jury is left with the indelible sense that not all transactions back in those troubled days resembled the Russo and Piperi loans.

October 3: The Power of Positive Thinking
Donna Wright, an unflappable, articulate accountant who was once Russo's controller, is testifying for the second day about the real-estate companies' mid-80s slide toward bankruptcy; hers is an archetypal Houston tale that still induces a sick-making vertigo. With Houston on the leading edge of the state's real-estate bust, things grew much tighter for Russo in the year that spawned the slogan, "Stay Alive in '85"; by l986, the year of the disputed loans, tenants weren't paying, leasing had fallen off and landscapers, cleaners and suppliers were calling Wright daily, begging to be paid. Russo's leap into the downtown office market had proven exquisitely ill-timed; Wright's 1986 projections showed the Lyric Center losing $4 million to $5 million a year.

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