Bondholders of Lincoln Savings & Loan's parent company have sued directors, officers, outside accountants and law firms associated with the company, alleging fraud and deceit in the apparent loss of more than $250 million in funds.
The class action claims that American Continental Corp. in Phoenix and others perpetrated a "massive" scheme that wiped out substantial amounts of savings of thousands of people.
More than 22,000 bondholders may have lost their investments in American Continental bonds after the company filed for bankruptcy on April 13. Regulators seized Lincoln the next day, alleging it was being operated in an "unsafe and unsound" manner.
Bondholders, who are parties in other lawsuits in Orange County and Phoenix, in general have complained that they were led to believe that their investments were safe. Many contend that they transferred funds from insured deposit accounts into the bonds under the mistaken impression that their new investments were also insured.
The effort to persuade depositors to buy bonds "was aimed at people who were not sophisticated in understanding the risks of this investment," said Ronald Rus of Orange, one of the lawyers who filed the class-action suit in Orange County Superior Court.
In talking to 450 bondholders, Rus said, he and Burlingame lawyer Joseph W. Cotchett found that the vast majority were more than 60 years old and stood to lose from $25,000 to $40,000 each.
With interest rates only slightly higher than rates on certificates of deposit--9.5% for 1-year bonds and 10.5% for 2-year bonds--the offering was "designed to attract this kind of depositor," Rus said.
"It would never fly with sophisticated investors," he said. Savvy investors would have demanded a higher interest and would have known the bonds were risky investments, he said.
The lawsuit does not name American Continental or Lincoln because of the delays and hurdles the suit would encounter in Bankruptcy Court and in U.S. District Court in Phoenix, where a tangle of litigation has already tied up the courts.
Instead, the suit goes after the company's chairman, Charles H. Keating Jr., and other officers and directors. It also names the Big 8 accounting firms of Arthur Young & Co., Arthur Andersen & Co. and Touche, Ross & Co. for their auditing statements on American Continental and Lincoln.
In Phoenix, meanwhile, several dozen lawyers attended hearings Friday in Bankruptcy Court and, later, in U.S. District Court in regard to various issues in the cases. One of those issues--whether American Continental's attorneys should be disqualified because they once represented regulatory agencies--was not decided by the federal judge.
The bankruptcy judge, however, issued a temporary order allowing American Continental to keep its attorneys but appointing new attorneys for 11 of Lincoln's subsidiaries, which also were put into bankruptcy.