Dead Bridgeport banker routinely hid bad loans from federal regulators, trial shows

John F. Gembara took over the small Bridgeport bank that his father and grandfather had run for decades, and he ran it into the ground.

That much already was clear from the government-ordered shutdown of Washington Federal Bank for Savings, one of the rare failures in recent years of an American bank.

But now testimony in the first trial to focus heavily on the bank’s collapse has laid bare how Gembara kept giving away money and real estate to customers in an elite circle who came to be known to his trusted employees as “Friends of John.” 

These “friends” got millions of dollars in loans from Washington Federal with what prosecutors have described as the kind of terms most people could only dream of getting: They would never have to repay any of it.

When the bank’s computers spit out “pink slips” for customers who’d fallen behind on repaying their loans, Gembara ordered a loyal employee to shred any involving his friends, according to testimony during the first two weeks of the embezzlement trial of his close friend and business partner Robert M. Kowalski, a lawyer and developer who was one of the bank’s biggest clients.

When other borrowers fell behind on their mortgages and ended up surrendering their homes, apartments and other collateral to the bank to avoid foreclosure, Gembara didn’t resell their property to recover the bank’s money, testimony has shown. Instead, witnesses have testified, he gave it to Kowalski.

Witnesses have testified that Gembara — who was president, chief executive officer and the major shareholder of Washington Federal — ordered employees to remove the names of delinquent borrowers who walked away and put the loans in the names of his friends. They said he had his staff manipulate loan records, telling them to lower or raise the amounts of the debts and to forge borrowers’ signatures.

And he covered up what he was doing for years, ordering his secretary to delete dozens of delinquent loans from reports that Washington Federal was required to give auditors and federal banking regulators. 

This created the illusion that Washington Federal had no customers who were behind on their loans, which would be a very peculiar situation for any bank in the United States to find itself in. 

More than five years after federal regulators shut down the bank in December 2017 and Gembara was found dead at the home of a bank customer, new details of his scheme have been coming out as Kowalski faces trial on charges he embezzled $8 million from the bank, hid assets when he pursued bankruptcy court protection and cheated on his federal income taxes. He’s one of 14 people indicted in connection with the bank’s collapse.

Kowalski’s defense? Blame the dead man. Presenting his defense himself, he made that clear in his opening statement. He’s set to begin presenting witnesses Monday. 

Kowalski is trying to convince jurors he was a victim of Gembara, that the bank’s records — which federal authorities have said were nonexistent for many loans — can’t be trusted and that he would not even be on trial if Gembara were still alive.

The judge has told him that no matter what anyone else might have done that was illegal, he is on trial for crimes that prosecutors say he committed.

The roots of the case date at least as far back as September 2017.

That’s when authorities say Washington Federal filed its final fraudulent report with banking regulators.

Already at that point, they had discovered, after a tip from a bank official who has not been identified, that Gembara’s bank kept different sets of books in an effort to conceal a “massive fraud” that initially cost the Federal Deposit Insurance Corp. $90 million, the Chicago Sun-Times previously has reported.

Gembara’s reign as the head of the bank ended on Nov. 28, 2017. That’s when, acting on orders from banking regulators, Washington Federal’s board of directors — which included his only sister and a top City Hall official who is part of the Daley family’s political organization that ruled Bridgeport for decades and borrowed money from the bank — placed Gembara on suspension.

Five days after that, Gembara, 56, was found dead, seated in a chair, with a rope around his neck and around the railing of a spiral staircase, in the main bedroom of the million-dollar home of a Park Ridge contractor who owed the bank millions of dollars and had lost much of that gambling at casinos, according to court records.

The Park Ridge police said Gembara died by suicide, and the Cook County medical examiner’s office agreed, though the bank CEO’s widow and Kowalski have questioned whether someone else actually killed him.

Soon after Gembara’s death, federal regulators shut down the bank on Dec. 15, 2017. 

Since then, a federal grand jury investigation has resulted in criminal charges against three members of Washington Federal’s board, including Gembara’s sister, five more bank employees and five customers, including Kowalski and his brother, accused of embezzling money with Gembara’s help. Also, Kowalski’s only sister Jan Kowalski has pleaded guilty to helping him conceal assets from the bankruptcy court.

The investigation also led to criminal charges against then-Ald. Patrick Daley Thompson (11th) and his conviction last year for cheating on his income taxes regarding money he borrowed from Gembara’s bank.

For all of the prosecution testimony regarding Gembara’s role in looting his own bank, Kowalski’s trial so far has provided no answers about why the bank boss would have stolen from his own bank, where his wife and many other relatives had worked.

Another question that’s so far gone unanswered: When did the embezzlement scheme begin?

But a hint of how long it might have been going on was contained in an email that Kowalski sent Gembara on Oct. 26, 2012 —  more than five years before the bank collapsed. In it, Kowalski warned Gembara that they could end up in prison with former Gov. Rod Blagojevich.

“There will be no trailer retirement. More likely time with Blagojevich in orange jumpsuits is on the horizon,” Kowalski said in the email, which federal prosecutors presented to the jurors who’ll decide his fate.

That email was among evidence and testimony from four dozen witnesses that prosecutors have presented to jurors in U.S. District Judge Virginia Kendall’s courtroom.

In response, Kowalski, 60, plans to present testimony from witnesses including Therese Gembara, Gembara’s widow. 

She had called the police in Palos Hills, where the couple lived, telling them her husband was involved in unspecified “illegal activity” and that she planned to call the FBI five years before the bank was ordered closed, the Sun-Times reported last May. It’s unclear whether she did.