HBS Prof. Defaulted On Numerous Loans

SEPULVEDA, Calif.--From a first-floor suite in the two-story yellow and brown building on Woodley Ave. here, Visiting Professor of Business Administration Marc J. Epstein created a small empire of businesses.

Records obtained through the California Secretary of State show the empire included 73 business in California alone, operating under names ranging from Alameda-Washington Properties to Forman Apartments.

In the late 1980s, however, the empire built in the earthquake country of the San Fernando Valley was shaken by management decisions and a sagging real estate market. Four years ago, several of Epstein's businesses crumbled.

"When the real estate market went into the tank, the companies couldn't repay [their] loans," Los Angeles attorney Richard Burdge said in an interview last year.

The plushy carpeted suite at 8718 Woodley Ave. is vacant now. The old occupant is elsewhere employed--teaching ethics at the Harvard Business School.

Epstein and his sometimes business partner, Beverly Hills attorney Harold Klein, did not return phone calls seeking comment for this story. But he insisted in interviews last spring that his role in the companies run out of Sepulveda was minimal.

He said he merely lent his name to friends for various loans and investments. Epstein also said he had little to do with the financial demise of the companies.

Harvard launched a review of Epstein after the University was named in a suit last spring by California-based Mitsui Manufacturers Bank, which was trying to recoup $2.7 million that Epstein owed them. As a result of that review, University officials have said they accept Epstein's explanations.

"He tried to do something good for some people so they wouldn't lose money," Dickinson Professor of Accounting Robert S. Kaplan said after the review was completed. "There was a partnership in which he was involved."

But Epstein was far more involved spring, the professor himself ran numerousbusinesses from his office here.

In addition, Business School Officials werewrong when they indicated last spring that theMitsui loan was the only one Epstein did not payon time. Epstein defaulted on loans worth millionsof dollars to at least six different banks,according to Los Angeles County court documents.

In fact, according to George Chaves, who runsthe insurance company next door to Epstein'ssuite, the professor was more than just a tenantof the yellow and brown building on Woodley Ave.He owned it.

Chaves, other entrepreneurs and courtrecords do not just deflate Epstein's claims thathe was little more than bystander in the 73California businesses and partnerships he ran.They also paint a less than flattering picture ofhow Epstein ran his businesses, many of which arelisted as "suspended" by the California Secretaryof State's office.

In dozens of civil suits filed against Epsteinin Los Angeles County courts over the past decade,plaintiffs claim the professor either inisledthem, failed to pay them or defrauded themoutright.

Harvard first learned about Epstein's financialpast last year when Mitsui Manufactures Bank filedsuit in Middlesex County court in an attempt tocollect money directly from the professor'spaycheck in order to repay loans.

Bank officials claimed that Epstein, who haddefaulted on a $1.5 million loan in 1989, owed$2.7 million and had departed from Californiawithout leaving the bank a forwarding address.After three years, they tracked him down atHarvard.

Epstein and his lawyer denied that theprofessor tried to elude the bank. Epstein himselfnoted that his name was listed in the New Yorktelephone directory before coming to Harvard in1992.

"As you know, Dr. Epstein travels all over theplace," said James L. Rogal, Epstein'sBoston-based attorney. "I don't think there's anissue of avoiding litigation. In fact, he appearedfor his court date."

After going to court, Mitsui secured a promisefrom Epstein to pay $13,000 a year in equalmonthly installments. At that rate, the $2.7million will be paid off in 207 years.

The University investigated the matterin an attempt to decide whether Epstein's conductin the matter should prevent him from returningfor this academic year.

Participants in the investigation includedSenior Associate Dean Robert H. Hayes, Kaplan, whois the head of Epstein's department, AssistantDean of Educational Affairs Deborah N. Mauger andUniversity Attorney Allan A. Ryan Jr.

After a series of informal interviews withEpstein and financial experts, the reviewconcluded that the lawsuit was a unique situationin which Epstein had tried to help out a friend.

The suggestion that Epstein tried to deceiveMitsui troubled some professors. Still, the reviewshowed that there was nothing to the charge.

"We were very concerned about the allegation offraud," Hayes said last May. "But we talked toProfessor Epstein, talked to people in California.Mr. Ryan called some of his friends out inCalifornia, and they said there was nothing likethis involved."

Ryan acknowledged this week, however, thisweek, however, that he was unaware of the civilfilings against Epstein in Los Angeles County.

"I did not know about it," Ryan said. "The onlything we knew was the case that came here."

Ryan referred other questions about Epstein'sstatus to Business School officials. Professorinvolved in the review and other Business SchoolOfficials, including Director of CommunicationsLoretto F. Crane, did not return phone callsseeking comment for this article.

If Harvard's investigators had made eventhe most cursory check of Los Angeles County courtrecords, they would have found a long list ofcases against Epstein filed to recover moneys fromhim.

For example:

.In May 1990, Southland Commercial Real Estatein Diamond Bar, Calif., sued Epstein and one ofhis companies, Western Business Investors. Thecompany president, Charles Chinea, charged thatEpstein and his partner, Klein, repeatedly misledthem about payments on a $140,000 commission owedto his company.

At one point in an interview with The Crimsonlast year, Chinea asked what Epstein was doingnow. When told he taught accounting and ethics,Chinea said: "That's like Bill Clinton teaching aclass on marital fidelity."

.First Interstate Bank of California twicefiled suit against Epstein in an attempt torecover money promised to the bank. Mike Anderson,an attorney in First Interstate's law division,said the bank loaned Epstein $16 million to builda 288-unit complex called the River GlenApartments in Glendale, Calif.

The project had cost overruns, but Epsteinrepeatedly promised he would pay. In 1991,Anderson said, the bank stopped believing thepromises and foreclosed.

.In October 1990, Executive Bank filed suitagainst Epstein and the Epstein-controlledBroadway Mission Properties to recoup nearly $1.9million in loans and interest.

.The week before Christmas in 1991, a LosAngeles County Superior Court judge orderedEpstein, his wife, a business partner and anotherEpstein-controlled company to pay $789,823.75 toCalifornia United Bank.

While Epstein's California business dealingsran into trouble, his ventures elsewhere wereconsiderably more successful. Records from theTexas Secretary of State's Office show that thebusiness Epstein helps to administer in the LoneStar have done well, with one exception.

Epstein is either a vice president or secretaryin nine Texas companies, most of them real estate.The head of the companies, Donald Ternier ofHouston, would not comment yesterday. All ofTernier's and Epstein's companies are active andconsidered to be "in good standing," according tothe Texas Secretary of State.

The one exception is Texcal Leasing, Inc.,which was founded in October of 1979. Epstein waspresident, and the company, which operated out ofthe Americana Building on Dallas Ave. in Houston,folded in 1982.

Epstein has a two-year appointment as avisiting professor at the Business School. Unlesshis stay is somehow extended, he will leaveHarvard at the end of this academic year.

But Epstein's history raises questions aboutthe standards of behavior expected from a BusinessSchool professor, questions the Business Schoolhas thus far been unwilling to answer.

Speaking on condition of anonymity, ethicistsaround the country interviewed in recent weeksemphasize that they could not pass judgment onEpstein because they did not know his intent ineach of the cases.

Last spring, Lecturer in BusinessAdministration Joseph L. Badaracco, Jr, aspecialist in business ethics, echoed thisopinion.

"I don't know if there are any generalprinciples that apply," Badaracco said. "I imaginethis case and others like it depend on some veryspecific facts."

Epstein, who has not spoken with The Crimsonsince last May, said then that he is pursuingunspecified legal action to recoup his losses. Ina review of Los Angeles County court records, TheCrimson could find no indication of any suchaction.

"There are many other factors...that will beresolved, and what is often the case with civillitigation is that it often drags on for years,"Epstein said. "I expect that when all of this isresolved it will be resolved in my favor."

Jim Ho in Los Angeles and Kathryn M. Meneelycontributed to the reporting of this story.

In addition, Business School Officials werewrong when they indicated last spring that theMitsui loan was the only one Epstein did not payon time. Epstein defaulted on loans worth millionsof dollars to at least six different banks,according to Los Angeles County court documents.

In fact, according to George Chaves, who runsthe insurance company next door to Epstein'ssuite, the professor was more than just a tenantof the yellow and brown building on Woodley Ave.He owned it.

Chaves, other entrepreneurs and courtrecords do not just deflate Epstein's claims thathe was little more than bystander in the 73California businesses and partnerships he ran.They also paint a less than flattering picture ofhow Epstein ran his businesses, many of which arelisted as "suspended" by the California Secretaryof State's office.

In dozens of civil suits filed against Epsteinin Los Angeles County courts over the past decade,plaintiffs claim the professor either inisledthem, failed to pay them or defrauded themoutright.

Harvard first learned about Epstein's financialpast last year when Mitsui Manufactures Bank filedsuit in Middlesex County court in an attempt tocollect money directly from the professor'spaycheck in order to repay loans.

Bank officials claimed that Epstein, who haddefaulted on a $1.5 million loan in 1989, owed$2.7 million and had departed from Californiawithout leaving the bank a forwarding address.After three years, they tracked him down atHarvard.

Epstein and his lawyer denied that theprofessor tried to elude the bank. Epstein himselfnoted that his name was listed in the New Yorktelephone directory before coming to Harvard in1992.

"As you know, Dr. Epstein travels all over theplace," said James L. Rogal, Epstein'sBoston-based attorney. "I don't think there's anissue of avoiding litigation. In fact, he appearedfor his court date."

After going to court, Mitsui secured a promisefrom Epstein to pay $13,000 a year in equalmonthly installments. At that rate, the $2.7million will be paid off in 207 years.

The University investigated the matterin an attempt to decide whether Epstein's conductin the matter should prevent him from returningfor this academic year.

Participants in the investigation includedSenior Associate Dean Robert H. Hayes, Kaplan, whois the head of Epstein's department, AssistantDean of Educational Affairs Deborah N. Mauger andUniversity Attorney Allan A. Ryan Jr.

After a series of informal interviews withEpstein and financial experts, the reviewconcluded that the lawsuit was a unique situationin which Epstein had tried to help out a friend.

The suggestion that Epstein tried to deceiveMitsui troubled some professors. Still, the reviewshowed that there was nothing to the charge.

"We were very concerned about the allegation offraud," Hayes said last May. "But we talked toProfessor Epstein, talked to people in California.Mr. Ryan called some of his friends out inCalifornia, and they said there was nothing likethis involved."

Ryan acknowledged this week, however, thisweek, however, that he was unaware of the civilfilings against Epstein in Los Angeles County.

"I did not know about it," Ryan said. "The onlything we knew was the case that came here."

Ryan referred other questions about Epstein'sstatus to Business School officials. Professorinvolved in the review and other Business SchoolOfficials, including Director of CommunicationsLoretto F. Crane, did not return phone callsseeking comment for this article.

If Harvard's investigators had made eventhe most cursory check of Los Angeles County courtrecords, they would have found a long list ofcases against Epstein filed to recover moneys fromhim.

For example:

.In May 1990, Southland Commercial Real Estatein Diamond Bar, Calif., sued Epstein and one ofhis companies, Western Business Investors. Thecompany president, Charles Chinea, charged thatEpstein and his partner, Klein, repeatedly misledthem about payments on a $140,000 commission owedto his company.

At one point in an interview with The Crimsonlast year, Chinea asked what Epstein was doingnow. When told he taught accounting and ethics,Chinea said: "That's like Bill Clinton teaching aclass on marital fidelity."

.First Interstate Bank of California twicefiled suit against Epstein in an attempt torecover money promised to the bank. Mike Anderson,an attorney in First Interstate's law division,said the bank loaned Epstein $16 million to builda 288-unit complex called the River GlenApartments in Glendale, Calif.

The project had cost overruns, but Epsteinrepeatedly promised he would pay. In 1991,Anderson said, the bank stopped believing thepromises and foreclosed.

.In October 1990, Executive Bank filed suitagainst Epstein and the Epstein-controlledBroadway Mission Properties to recoup nearly $1.9million in loans and interest.

.The week before Christmas in 1991, a LosAngeles County Superior Court judge orderedEpstein, his wife, a business partner and anotherEpstein-controlled company to pay $789,823.75 toCalifornia United Bank.

While Epstein's California business dealingsran into trouble, his ventures elsewhere wereconsiderably more successful. Records from theTexas Secretary of State's Office show that thebusiness Epstein helps to administer in the LoneStar have done well, with one exception.

Epstein is either a vice president or secretaryin nine Texas companies, most of them real estate.The head of the companies, Donald Ternier ofHouston, would not comment yesterday. All ofTernier's and Epstein's companies are active andconsidered to be "in good standing," according tothe Texas Secretary of State.

The one exception is Texcal Leasing, Inc.,which was founded in October of 1979. Epstein waspresident, and the company, which operated out ofthe Americana Building on Dallas Ave. in Houston,folded in 1982.

Epstein has a two-year appointment as avisiting professor at the Business School. Unlesshis stay is somehow extended, he will leaveHarvard at the end of this academic year.

But Epstein's history raises questions aboutthe standards of behavior expected from a BusinessSchool professor, questions the Business Schoolhas thus far been unwilling to answer.

Speaking on condition of anonymity, ethicistsaround the country interviewed in recent weeksemphasize that they could not pass judgment onEpstein because they did not know his intent ineach of the cases.

Last spring, Lecturer in BusinessAdministration Joseph L. Badaracco, Jr, aspecialist in business ethics, echoed thisopinion.

"I don't know if there are any generalprinciples that apply," Badaracco said. "I imaginethis case and others like it depend on some veryspecific facts."

Epstein, who has not spoken with The Crimsonsince last May, said then that he is pursuingunspecified legal action to recoup his losses. Ina review of Los Angeles County court records, TheCrimson could find no indication of any suchaction.

"There are many other factors...that will beresolved, and what is often the case with civillitigation is that it often drags on for years,"Epstein said. "I expect that when all of this isresolved it will be resolved in my favor."

Jim Ho in Los Angeles and Kathryn M. Meneelycontributed to the reporting of this story.