Hiring of Ex-Government Officials Cited : Lincoln S&L; Owner Buys Influence, Critics Charge

It was November, 1985, and Charlie Keating was perturbed.

His company had bought Lincoln Savings & Loan in Irvine less than 2 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; money--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 as quick to reject Keating’s overtures. Since purchasing Lincoln in 1984, the Phoenix financier has hired or retained at least a half-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 chairman 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.

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, Keating kept regulators at bay while he mismanaged Lincoln’s assets for his own benefit, critics allege.

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’s 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.

For instance, Connally said that 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 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.

Joseph Coyne, a Federal Reserve Board spokesman, said Greenspan was not in government service at the time and was retained by Arthur L. Liman, the lawyer handling the matter for American Continental.

Keating’s political connections are being scrutinized as part of a lawsuit recently filed on behalf of 22,000 bondholders who may have lost more than $250 million 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 deposits, but they 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 directors and officers, and the lawyers and accountants who advised them. It is being handled by two of the lawyers who won more than $70 million from advisers to 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 5 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 was commissioner of the California Department of Corporations when American Continental obtained approval for a $200-million bond offering in December, 1986. After leaving office in March, 1987, he returned to private practice with the Los Angeles law firm of Parker, Milliken, Clark, O’Hara & Samuelian.

In that capacity, he represented American Continental before the Department of Corporations, which was then headed by his former assistant, Christine Bender. She also had worked at the Los Angeles law firm, which is named as a defendant in the suit.

“There are rules that govern the conduct of former state employees. Suffice it to say, I did not breach any of those rules,” Tom said.

“I have long represented clients at the Department of Corporations,” he said. “Certainly, my having spent 4 years as commissioner enhanced my technical capability for later representing clients before the department. So it seems perfectly in order for me to do so.”

Tom said he had not been served with the lawsuit and could not comment on it.

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 state and federal lawmakers in an effort to kill restrictions on new powers that allowed S&Ls; to make direct investments in real estate ventures such as hotels, office buildings and residential developments.

* 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 retained by American Continental as a consultant to help with industry relations and to find a buyer for Lincoln. Rousselot acknowledged that Keating--like other Rousselot clients--expected him to provide access and exercise influence with government officials.

* 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. McDonald said Keating is “absolutely not” using him for any political purposes and called him the “most decent man I know.”

* Joseph Kotrys, head of a 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. It is unclear what Kotrys’ role in the audit had to do with Washington’s action. Kotrys, who now works for Lincoln in Irvine handling regulatory compliance matters, said he approached Keating for a job last year, long after he had finished his part of the examination. He denied he was hired to exert influence with regulators, maintaining he had been “too low on the totem pole” to have much clout.

The lawsuit also claims that one of the officials who helped buy time for American Continental was a “former administrative assistant” to a U.S. senator, an apparent reference to James Grogan, an American Continental staff lawyer who is named as a defendant.

But Grogan’s clout is questionable. He was never an administrative assistant. While in college, he worked as an intern for 5 months in 1975 in U.S. Sen. John Glenn’s Washington office and later as an intern in one of the Democrat’s Ohio offices.

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 Sens. Glenn, 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 more than $300,000 in campaign contributions from Keating, his family and American and Lincoln executives.

Riegle later returned the $76,000 he had been given, saying at the time that he wanted to avoid the appearance of a conflict since he was about to become chairman of the Senate Banking Committee. The other senators, or their aides, have said that they saw no potential conflicts and were simply helping a constituent. McCain, however, has expressed concern that the meeting might foster the appearance of impropriety.

Keating also used his political influence to propose or support friends for top regulatory appointments. Connally said Keating pushed for the appointment of Atlanta lawyer Lee H. Hinkel Jr. to one of two seats on the three-member Federal Home Loan Bank Board in 1986. He also endorsed the nomination of George J. Benston, then a University of Rochester (N.Y.) finance professor, for the other seat.

Hinkel was appointed in the fall of 1986 by President Ronald Reagan, even though he had acknowledged receiving $61.9 million in loans from Lincoln for his real estate company. But he quit in early 1987 amid conflict-of-interest charges after voting for a change in the real estate investment rules for S&Ls.; Regulators said Lincoln would have benefited from the change, which was rejected.

Benston’s nomination was withdrawn. He had used funds from Keating to conduct research on the S&L; industry, and concluded that the direct investments in real estate that Keating favored were not the cause of the wave of S&L; failures.

Keating also turned at times to the private sector to hire people in sensitive positions, the lawsuit claims.

Last spring, Keating recruited Jack Atchison from the national accounting firm of Arthur Young & Co., then the company’s independent auditor. Atchison was the partner in charge of American Continental’s account. Several months after hiring Atchison, the company fired Arthur Young in a dispute over how to account for a stock swap. Atchison, Arthur Young and two other major accounting firms used by the company--Arthur Andersen & Co. and Touche, Ross & Co.--also are named as defendants in the lawsuit.

Connally said none of the people identified in the suit were hired or retained for political reasons.

American Continental already had retained the Parker Milliken firm before Tom returned to his old 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 and Benston 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. The law firm also brought in Benston to do an economic study that resulted in a monograph opposing the restrictions and validating the new powers.

Connally said that Kotrys and Atchison came to Keating looking for a job because of their dissatisfaction with their previous 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.”