For Leisure World Buyers, High-Risk Bonds Are Just That

Frances Hicks, 78, was already upset about the $20,000 she had invested in bonds sold by the parent company of Irvine-based Lincoln Savings & Loan Assn.

But as she listened to fellow Leisure World residents Thursday night, she became even more distressed. Some had invested five times that much and more--and all of them face the possibility of losing everything.

Hicks was one of about 150 senior citizens who met at a Leisure World clubhouse to discuss their status as bondholders in American Continental Corp. of Phoenix.

Last month, the Phoenix holding company filed for protection from creditors in federal bankruptcy court. The next day, federal regulators seized its Lincoln subsidiary, alleging that it was engaging in unsound business practices.

Federal officials are investigating an alleged scheme by American Continental and Lincoln executives to persuade investors--many of them retired--to buy high-risk, high-yield American Continental bonds. Many of the bond sales were arranged in Lincoln branch offices across Southern California.

“Some of my CDs were coming due,” Hicks said about certificates of deposit. “There was a gentleman at Lincoln Savings & Loan in Laguna Hills who suggested I might like to put my money into American Continental debentures, which I did.”

She was not alone. About 23,000 Lincoln customers invested more than $200 million in American Continental bonds, which may be worthless as a result of American Continental’s bankruptcy filing.

“I’ve been an attorney for 14 years, but never have I been as outraged as I am tonight,” said Ronald Rus, an Orange lawyer who has filed a class-action lawsuit on behalf of bondholders against accounting companies, law firms and others allegedly involved in the bond sales.

Fielding questions from the audience, Rus told Leisure World residents that he has no idea when they might get back their money--if ever.

In fact, because of a bankruptcy court regulation, bondholders may be forced to return some of the interest they received during the 90 days before American Continental’s bankruptcy filing, he said.

After the meeting, organizers distributed a petition among the bondholders so their names can be submitted to U.S. Bankruptcy Court, which will decide what relief they are entitled to receive.

Rus said an informal survey of 500 bondholders contacted by his office found that close to 70% were over age 60.

“This company preyed upon people who were very prudent during their lives--and too prudent to invest in something risky,” Rus said.

Several bondholders said they mistakenly believed that the American Continental bonds would be insured by the Federal Savings and Loan Insurance Corp., as are traditional CDs.

Rus said he received a call from a woman who is 82 and legally blind. “Somebody at Lincoln came out and drove her to the bank to buy these bonds,” he said.

He told senior citizens that they should “recognize how many other people have been scammed, so you don’t have a feeling of foolishness.”

In a letter received by many Leisure World residents this week, American Continental Chairman Charles H. Keating Jr. said they are among thousands of worried bondholders.

“I sincerely wish that we were able to respond to each of you with a personal phone call, but with 23,000 bondholders, that is impossible,” he wrote.

American Continental has denied allegations that it tricked people into buying the so-called junk bonds in lieu of more traditional CDs.

The Federal Home Loan Bank Board, which is investigating Lincoln, has asked the Department of Justice to look into possible criminal violations.