Big-Name Staff at Issue in Lincoln S&L; Furor
It was November, 1985, and Charlie Keating was perturbed.
His company had bought Lincoln Savings & Loan in Irvine less than two years earlier, and federal regulators were trying to curtail his use of new state and federal laws that gave him wide discretion to invest S&L; funds--mainly customer deposits--in an array of ventures.
It was then that Keating offered a high-paying job to Edwin J. Gray, the nation’s top S&L; regulator at the time. Gray turned the job down flat. A year later, he characterized it as a brazen attempt to “buy me out.”
Others were not so quick to reject Keating’s overtures. Since purchasing Lincoln in 1984, the Phoenix financier has hired or retained at least half a dozen former state and federal government officials, including the head of a regulatory team that was examining the thrift. Five years ago, he even retained prominent economist Alan Greenspan, former head of the President’s Council of Economic Advisers who is now chairman of the Federal Reserve Board.
Those hirings have become a major issue in the controversy surrounding Charles H. Keating Jr., chairman of American Continental Corp. On April 13, the Phoenix holding company filed for protection from creditors in federal bankruptcy court. The next day, Lincoln was seized by regulators, who claimed that the thrift was engaging in unsafe and unsound business practices.
‘Not Unique’
Critics claim that Keating has used his political connections and financial resources to buy influence in government circles. By contributing hundreds of thousands of dollars to elected officials and by hiring former state and federal agency officials to represent him, the critics allege, Keating kept regulators at bay while he mismanaged Lincoln’s assets for his own benefit.
While the migration of government workers to positions in private industry is not unique to American Continental, “I’m seeing this pattern in a very great extreme with Lincoln,” said Bert Ely, an Alexandria, Va., industry consultant.
In the words of one federal regulator in San Francisco, “Keating stands in a league of his own” when it comes to seeking political influence.
Whether it has worked is subject to debate.
“If he’s trying to buy influence, he’s wasted his money,” said Roger Martin, one of the three members of the Federal Home Loan Bank Board in Washington, which oversees the nation’s federally insured savings and loans. Martin said he has never encountered any “political interference” as a board member.
While Keating’s campaign contributions may have gained him access to elected politicians, his employment decisions have not been based on political considerations, an American Continental spokesman said.
“That is absolutely not the intent at all,” said Mark M. Connally, the spokesman. Connally is the son of former Texas Gov. John B. Connally, whose unsuccessful campaign for the Republican presidential nomination in 1980 was managed by Keating at one point.
Mark Connally said Greenspan was retained at the suggestion of a New York law firm that American Continental had retained to fight proposed restrictions on the ability of thrifts to make direct investments in real estate. The law firm decided that it needed an expert to render an opinion on the economic damage the restrictions would cause, he said, and Keating was not trying to capitalize on Greenspan’s political prominence.
Keating’s political connections are being scrutinized as part of a lawsuit filed recently on behalf of 22,000 bondholders who may have lost more than $250 million that they invested in debt securities issued by American Continental.
The suit claims that Keating and other directors and officers of American Continental perpetrated a “massive fraud” on unsuspecting, unsophisticated investors. Many had gone to Lincoln offices with the intention of placing their savings in insured certificates of deposit but were persuaded instead to buy uninsured bonds issued by American Continental, the suit claims.
Connally said the company “absolutely denies” that it defrauded the bondholders.
The suit is aimed at the company’s directors and officers as well as the lawyers and accountants who advised them. It is being handled by two of the lawyers who won more than $70 million from advisers of convicted San Diego swindler J. David Dominelli, who bilked millions of dollars from investors.
Keating and his cohorts, the suit alleges, tried to “cover their tracks and buy extra time” over the last five years by hiring or retaining former government officials who could use their connections to keep American Continental operating while the company sold more bonds.
“Without the assistance of these and other paid professionals, the multimillion-dollar scheme alleged in this complaint would not have been possible,” the suit states.
The lawsuit names only one former government official--Franklin Tom--as a defendant.
Tom, as commissioner of the California Department of Corporations, gave American Continental approval for a $200-million bond offering in December, 1986. After leaving office in early 1987, he returned to private practice with his former Los Angeles law firm. In that capacity, he represented American Continental before the Department of Corporations. The firm, Parker, Milliken, Clark, O’Hara & Samuelian, is named as a defendant in the suit.
Lobbied to Kill Restrictions
Other government officials hired or retained by Keating are not named as defendants in the suit. Except for Greenspan, the lawsuit identifies them only by their former positions. But Ronald Rus of Orange and Joseph W. Cotchett of Burlingame, the lawyers handling the suit, acknowledged that they are:
- Lawrence Taggart, former commissioner of the California Department of Savings and Loan. On behalf of American Continental, Taggart lobbied lawmakers in an effort to kill restrictions on new powers that allowed S&Ls; to make direct investments.
- John Rousselot, former U.S. congressman from San Gabriel who tried to buy Lincoln before regulators seized it. After leaving the presidency of an industry trade group last year, Rousselot was hired by American Continental as a consultant. - A. Melvin McDonald, a former U.S. attorney in Phoenix. Since leaving his post in 1985, McDonald has handled legal work for American Continental, including an investigation into alleged leaks by regulators about confidential information on the condition of Lincoln.
- Joseph Kotrys, head of a controversial 1986 examination team from the Federal Home Loan Bank of San Francisco. Regulators in Washington threw out the team’s report on Lincoln after it was completed in 1988 and stripped the San Francisco office of its supervisory responsibility for Lincoln. Kotrys works for Lincoln in Irvine, handling regulatory compliance matters.
The suit also contends that Keating “enlisted the active assistance and intervention of many public officeholders.”
Those officeholders included five U.S. senators who met with regulators in April, 1987, to question a lengthy regulatory examination of Lincoln’s books. The group consisted of John Glenn (D-Ohio), Alan Cranston (D-Calif.), John McCain (R-Ariz.), Dennis DeConcini (D-Ariz.) and Donald W. Riegle Jr. (D-Mich).
All five senators are from states in which American Continental and Lincoln operate.
The five had received a total of more than $300,000 in campaign contributions from Keating, his family and American and Lincoln executives. Riegle subsequently returned the $76,000 he had been given.
Connally said none of the people identified in the suit was hired or retained for political reasons.
American Continental had already retained the Parker, Milliken firm before Tom returned to the firm from the Department of Corporations.
After leaving his government post, Taggart joined an old friend in a company partially owned by Lincoln. Since his views were similar to Keating’s, he was “a natural” for American Continental to hire in the fight to maintain the rules on direct investments, Connally said.
Keating’s involvement with Greenspan arose from that same lobbying effort. The New York law firm retained Greenspan as an expert on the economic validity of the restrictions that regulators wanted to adopt.
Connally said Kotrys and Atchison came to Keating looking for jobs. Keating did not lure them into the company, he said.
“We can’t stop people from saying what they want to say,” Connally said. “But Charlie Keating was not buying influence.”
