Mr. San Diego in Dutch

In many ways, C. Arnholt Smith seemed to personify the American Dream. A high school dropout and former grocery clerk, he rose to the ownership of a major league baseball team (the San Diego Padres) and became head of a financial empire that included one of California's largest banks and a multimillion-dollar conglomerate with interests that ranged from hotels, real estate and insurance to tuna-fishing fleets, canneries and a commuter airline. He became the chum of a President, so close to Richard Nixon that the two watched the 1968 election returns together on television. He was so respected in his hometown that a local newspaper once dubbed him "Mr. San Diego of the Century."

Last week this classic success story seemed headed for an unhappy ending. Smith, 74, and some of his closest associates found themselves at the receiving end of a double-barreled federal investigation.

The first inkling of Smith's trouble came in mid-May, when the Securities and Exchange Commission suspended trading in shares of Westgate-California Corp., the conglomerate of which Smith is chairman, after its accountants withdrew their certification of the company's 1972 financial statements. Then last week two lengthy federal investigations into Smith's affairs suddenly bore fruit. The SEC filed a suit in San Diego federal court alleging that Smith, Westgate President Philip A. Toft, Michael J. Coen, a former Westgage director, and several corporate defendants had systematically looted the conglomerate of some $100 million in assets. In a separate action, the U.S. Comptroller of the Currency moved against the U.S. National Bank, California's tenth largest (assets: $1 billion), on charges that the bank had lent more than the legally permissible 10% of its capital to Smith's various enterprises. Only a week before, Smith had resigned as the bank's chairman.

To make matters even hairier for Smith, an Internal Revenue Service task force that has been investigating his books for the past two years turned over the results of the audit to the tax agency's intelligence division for investigation of suspected criminal fraud. And a former member of a federal anticrime strike force accused high Administration officials of calling off a grand jury probe into the "laundering" of illegal contributions to Nixon's 1968 campaign by the Barnes-Champ Advertising Agency, which was controlled by Smith.

The details of the alleged looting of Westgate's holdings are exceedingly complex. Essentially the SEC charges, which Smith dismisses as "unfounded," say that he, Coen and Toft arranged sales of the company's holdings to various co-defendants at bargain prices. The purchases purportedly were made for cash, but the SEC says that they were actually financed by loans from U.S. National. To hide the fact that Smith was on all sides of the transactions, the SEC says, the loans were channeled through a thicket of holding companies that were also under Smith's control.

At the same time, the SEC alleges, Smith's co-defendants were selling Westgate a number of far less valuable properties at inflated prices. To make these investments appear sound, Smith and Toft supposedly manufactured $17.5 million worth of phony profits for the new acquisitions between 1969 and 1972 and fraudulently reported them in annual reports to the SEC. On top of that, Westgate shifted control of the grossly overvalued companies to other cogs in Smith's financial machine, which used their assets as collateral to obtain huge loans from U.S. National. These funds were diverted to Smith's and his codefendants' use.

One Look. The SEC'S civil complaint asks that Westgate be put into the hands of a receiver and that Smith and Toft be barred from running any publicly owned companies--about the harshest penalty the SEC can ask for, since it cannot bring criminal charges. The IRS investigation, which could result in criminal prosecution, reportedly covers much of the same ground as the SEC complaint and also looks into the possibility that Smith-controlled firms made contributions to Nixon's 1972 campaign, in violation of federal laws that prohibit corporate political gifts.

Similar charges surfaced last week about Smith and Nixon's 1968 campaign. According to David Stutz, an ex-IRS agent who now works for San Diego's district attorney, a federal anticrime strike force and grand jury in 1970 heard testimony from Charles Pratt, owner of a San Diego cab company, about illegal contributions. Pratt said that Smith had asked him to buy a ticket to a $1,000-a-plate Nixon campaign dinner in 1968. When Pratt replied that he did not have the money, Smith allegedly told him that it could "come out of the business." Pratt used company funds to buy two tickets to the dinner, and the ad agency billed him $2,068 for a nonexistent "wage and hour survey"--the $68 being thrown in so that the even amount would not look suspicious. That way, says Stutz, "Nixon got the contribution, and Pratt could take it off his income tax."

Armed with the Pratt testimony, Stutz and other members of the strike force began to examine the books of the ad agency controlled by Smith. "It appeared that there were tens of thousands of dollars in contributions that had been handled in the same manner, and most of them were from companies owned by Smith," says Stutz, but "one look was all we got before we were stopped." Stutz claims that the investigation was called off by San Diego's U.S. Attorney Harry Steward, who had publicly stated that he owed his position to Smith's backing. Stutz also says that former Presidential Assistant John Caulfield, a prominent figure in the Watergate coverup, asked him three times to meet secretly and discuss the status of the investigation of Smith prior to Steward's action.

On top of all that, Smith is the target of a $300 million damage suit filed by some Westgate shareholders. Smith seems to have realized that the roof was caving in on him, and has been trying to dissociate himself from both his bank and his conglomerate. Last week his attempt to sell out his interest to Barclays Bank of London for $50 million fell through. That leaves Smith in the same position as Westgate shareholders, who cannot trade their stock: all have to sit tight.

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