Broke and Beleaguered : American Continental Bondholders Battle to Get Their Money Back

It was late in the day, and Don Mikami could barely talk. His throat was raw, his voice was hoarse and his spirits were low. Mikami had spent the past 8 hours on the telephone, he said, listening to “calls of misery” that had left him heartbroken.

The hundreds of callers who got through the jammed switchboard of Mikami’s Fountain Valley dental office were not seeking medical attention. Like Mikami, they had purchased bonds issued by American Continental Corp., the troubled parent company of Irvine-based Lincoln Savings and Loan Assn., and they had heard that the dentist was trying to do battle on their behalf.

Their bonds have plummeted in value now that American Continental has filed for bankruptcy-court protection and Lincoln has been seized by regulators. And the calls that Mikami received barely scratched the surface of the some 14,000 bondholders who overall may have lost up to $192 million.

The bonds “make great wallpaper, like stocks after the Depression,” said William J. Crawford, California’s savings and loan commissioner.

The aggressive marketing of American Continental bonds to Lincoln depositors has created a new class of victims in the nation’s continuing thrift debacle and has raised a ticklish problem for savings and loan regulators. Unlike ordinary S&L; depositors, whose accounts are protected up to $100,000 each, the bondholders must stand in line with other American Continental creditors as the company attempts to reorganize its financial affairs.

The past 2 weeks have rendered many of American Continental’s bondholders broke and beleaguered. But while they are tied together by tales of loss and bad luck, some are also beginning to unite to fight the company that they contend has taken their money and run.

Some bondholders contend that they bought the securities without fully comprehending that they were, in effect, high-risk “junk bonds” that were not backed by the federal government’s deposit-insurance program.

Because holders of the company’s secured debt are legally entitled to recover their funds first, the possibility exists that the army of small investors who hold American Continental’s unsecured, high-risk bonds will get back little, if any, of their money. American Continental already has stopped making monthly interest payments on the bonds.

Jean and Donald Bowman invested $120,000 in these American Continental bonds, which technically are known as subordinated debentures. Jean Bowman said that sales representatives at a Lincoln branch office in the San Fernando Valley told her that American Continental Chairman Charles H. Keating Jr. had “one of the most successful private enterprises in the U.S.”

“They implied that everything he touched was very safe, and that’s what I fell for,” she said. “They said what good condition Lincoln was in. They weren’t high pressure, but they made you feel like you were very safe. They were very sweet.”

Mikami said that callers such as the Bowmans “have been unanimous in their opinion that they were defrauded and misled . . . at the tellers’ windows of Lincoln offices.”

Mikami himself purchased $25,000 of American Continental bonds last summer at a Lincoln branch in Huntington Beach. The fact that the bonds were sold through Lincoln offices, peddled by overwhelmingly upbeat salesmen, led him to invest.

“It was the personality of the salesperson that sold it,” Mikami said. “He said that American Continental is the parent of Lincoln, which is a safe, insured institution, that American Continental is backed by umpteen million dollars in assets and that he’d recommended (the bonds) to his family and friends.”

According to Mikami and others, the same scene was repeated over and over at Lincoln Savings offices throughout the Southland.

Thousands of Lincoln depositors who went to Lincoln offices with the intention of investing their personal savings or retirement funds in federally insured certificates of deposit were steered instead into American Continental debentures, bondholders said.

“This is a type of borrowing that American Continental was doing using depositors’ money--money that would otherwise have been going into deposit accounts,” said James M. Marks, an analyst with SNL Securities in Hoboken, N.J. Customers “were brought into branches and tempted by yield to buy products that were not suited for them.”

Many American Continental bondholders said they were assured that the subordinated debentures were as safe as certificates of deposit. And they generally paid about 1 1/2 percentage points more than the CDs available at Lincoln.

Harriet Mulac, 67, of Los Angeles, was one of those investors. In 1985, she bought a $20,000 Lincoln certificate of deposit, which was fully insured by the government. When it matured in 1986, she renewed it.

But when it matured again in 1987, the teller introduced Mulac to the office’s American Continental salesman, who told her about the subordinated debentures.

“It sounded attractive to me,” Mulac said. “I went for the attractive increase in rate. They told me the things they (American Continental) owned and stuff. I felt it was OK. They talked about the reputation of Lincoln Savings, that they have 29 branches and so forth. I thought it was completely safe.”

But when American Continental filed for bankruptcy-court protection on April 13 and federal regulators seized Lincoln the following day, the bonds that Mulac and others bought suddenly lost their allure.

American Continental spokesman Mark Connally said that his company is guilty of no wrongdoing and that the bondholders’ concerns “would be a normal reaction of any investor whose investment value has come into question.”

He said the company “is very, very comfortable” that it provided adequate disclosure to bond buyers. “There is no way, when you look at the disclosure statement, that we did not make full and adequate disclosure,” he said.

The Federal Home Loan Bank Board is investigating Lincoln, and it has asked the Department of Justice to look into possible criminal violations. Bank Board officials have declined to disclose the nature of the criminal referral. But Bank Board spokeswoman Martha Gravlee said that her agency is continuing to investigate “all aspects of Lincoln,” including the bond sales.

“We are naturally concerned about how any kind of debt offering was represented,” Gravlee said. “The key is if it was properly disclosed. If we find anything we believe to be improper, we will make the appropriate referral.”

Gravlee said that while American is not the first parent company to sell its debt through savings and loan branches, “as far as we know, it’s not a common occurrence.”

According to state regulators, Lincoln is the first S&L; in California to sell subordinated debentures on a retail basis directly to consumers. While the practice apparently is not illegal, it raises ethical issues.

Normally, when S&Ls; sell such bonds, they offer the securities through stockbrokers, said William Davis, chief deputy commissioner for the state Department of Savings and Loan.

“A person who is used to going through a broker knows that those are speculative investments,” Davis said. “ . . . Our fear all along was that people would confuse the investment with an insured savings account.”

In fact, the fashion in which Lincoln sold American’s debt brought it to the attention of the state’s savings and loan department in 1988.

Two years earlier, Lincoln officials had asked the savings and loan department for permission to sublease space in Lincoln offices to American Continental so that the parent company could sell bonds to Lincoln customers, Crawford said. Permission was granted.

But in July, 1988, the department refused to allow Lincoln to renew its lease with American Continental, which, in effect, told the S&L; that it couldn’t sell its parent’s debt through its own offices.

“We looked for ways to stop it,” Crawford said.

The department had sent examiners around to various Lincoln branches to see how the bond operation was run. Nothing illegal was found, he said, but the department decided that the American Continental sales operation should be conducted elsewhere.

“The S&L;’s job is to sell insured savings,” Crawford said. “Why would you say: ‘Go next door and get some of that subordinated debt instead?’ We were worried about the potential conflict.”

Andrea Kennon of West Los Angeles said she is a victim of that conflict. When her mother-in-law died, she left Kennon’s family $30,000. Of that gift, Kennon and her husband purchased two $10,000 Lincoln CDs for their two young daughters.

In December, 1987, the Kennons went to the Lincoln branch in West Hollywood to buy yet another $10,000 CD, this one for themselves. Instead, they got “an aggressive sales pitch” for American Continental bonds. So they sunk the whole $10,000 into the company’s subordinated debentures.

“The risk part was definitely played down,” Kennon said. “They really emphasized the great things about this man Charles Keating in terms of his real estate holdings and hotels. . . . They did not mention anything about the risk. . . . “

A year later, when the CDs and the bond matured at the same time, Kennon said, “we got an aggressive sales pitch to continue with American Continental.”

Soon after, the Kennons sensed that something was wrong. They had purchased their first bond in a Lincoln office. When they went back for their second, American Continental had moved to a separate office down the street--at the insistence of the Department of Savings and Loan.

And early this year, Andrea Kennon noticed that the American Continental office had closed down completely. The Kennons became so concerned that they drafted a letter to American Continental, demanding that their money be returned.

They planned to mail it on April 14. But the company had filed for bankruptcy the day before. They sent the letter anyway, Kennon said, and have heard nothing since.

Keating, a fiery Phoenix financier, has been battling regulators over the S&L;’s investments almost since he bought Lincoln in 1984. On Friday, a federal judge ruled that Keating has a right to challenge the competence of regulators to run 11 bankrupt Lincoln subsidiaries.

Lincoln itself is not included in American Continental’s bankruptcy filing, but it was closed by regulators who charged that it was being run under unsafe and unsound conditions and that its assets were being substantially dissipated.

The recourse for bondholders like the Kennons is not clear. Mikami is trying to organize the group. Attorney Ronald Rus of the Orange firm of Alvarado, Rus & McClellan has consulted with more than 100 bondholders and agreed to work with them.

“I have talked with a number of these people,” Rus said. “We are still in the exploration stage. One potential vehicle for the bondholders is to file a class-action suit.”

The Philadelphia law firm of Greenfield & Chimicles, through its Los Angeles office, had already filed a class-action suit for shareholders in state and federal courts in Los Angeles 9 days before American filed for bankruptcy. One of the firm’s attorneys, Kevin P. Roddy, said that he plans to amend the suits to include bondholders, too.

Connally, the American Continental spokesman, said that he has seen the suits, which were filed April 4. “We would disagree and take exception with the allegations,” he said.

Federal law prohibits suits from being filed against a company after it has sought protection from creditors in bankruptcy court. The Roddy suit was filed earlier and can be amended. Rus said that any suit his firm may file will not be against American Continental but will focus on officers and directors in the company, as well as professionals who may have wrongfully assisted the company.

Mikami insists that something must be done. He keeps pictures of American Continental’s officers pinned to his office bulletin board because “it revives me to continue in my efforts on behalf of all of the bondholders, to ensure some kind of return of their lifetime savings and earnings.”

“Thousands of investers in the Southwest have been scammed out of their life savings and hard-earned after-tax dollars,” he said. “The magnitude of this crime far outweighs a lot of the other scams that have victimized Southern California residents.”

Times staff writers James S. Granelli and John O’Dell contributed to this report.

AMERICAN CONTINENTAL’S DEBT SECURITIES

Secured and unsecured debt of American Continental Corp. and the 11 subsidiaries in its Chapter 11 bankruptcy-law filing. Many of the unsecured bonds were marketed by American Continental at some Lincoln Savings & Loan branches. Total debt is $3.22 billion, of which $920 million is unsecured.

Secured Debt Unsecured Bonds Company (millions) Holders (millions) Holders American Continental Corp. $60.6 12 $283.3 21,900 Crescent Lending Corp. 72.7 1 0 0 Linfin Corp. 859.3 52 0 0 Phoenician Financial Corp. 162.9 4 0 0 Amcor Funding Corp. 641.2 100 0 0 Phoenician Commercial Properties 144.1 13 0 0 SSFLC 19.6 1 0 0 Cresfin Corp. 0 0 0 0 Amcor Investments Corp. 326.3 40 0 0 Provident Mortgage Corp. 31.1 2 0 0 Crescent Hotel Group 0 0 0 0 Castle Meadows Inc. 5.1 4 0 0 TOTAL $2,300.0 229 $283.3 21,900

Source: American Continental Corp.

Other Unsecured Debt Company (millions) Holders American Continental Corp. 15.0 50 Crescent Lending Corp. 5.4 5 Linfin Corp. 20.8 15 Phoenician Financial Corp. 56.5 2 Amcor Funding Corp. 179.5 50 Phoenician Commercial Properties 134.3 10 SSFLC 7.7 1 Cresfin Corp. 1.5 1 Amcor Investments Corp. 205.8 60 Provident Mortgage Corp. 1.5 15 Crescent Hotel Group 3.8 1 Castle Meadows Inc. 4.9 20 TOTAL $636.7 230

Source: American Continental Corp.