Federal authorities, as part of a criminal investigation of Irvine-based Lincoln Savings & Loan, are looking into allegations that the thrift tried to evade regulations by transferring $300 million in assets between subsidiaries, a company attorney said Wednesday.
Authorities in Los Angeles have subpoenaed documents involving the asset transfers, said A. Melvin McDonald, an attorney for Lincoln's Phoenix-based parent company, American Continental Corp.
American Continental filed for protection from creditors under Chapter 11 of federal bankruptcy laws on April 13. Regulators seized Lincoln the next day, claiming that the parent company was operating the S&L; in an "unsafe and unsound" manner and dissipating its $5.3 billion in assets.
The Federal Home Loan Bank Board has asked the FBI to launch a criminal investigation of allegations that American Continental Chairman Charles H. Keating Jr. and other officers of the company profited illegally from their operation of Lincoln.
A federal official said Tuesday that the alleged misdeeds include improper insider loans, fraudulent land sales and manipulation of stock prices, but he declined to disclose specific transactions.
McDonald, however, said the transfer of assets is one of the specific matters that the bank board has referred to federal authorities in Los Angeles, who confirmed in early April that they were conducting a criminal probe of Lincoln.
Investigators are looking into the transfer of $300 million in assets--primarily direct investments in residential neighborhoods that Lincoln was developing in Arizona--from one Lincoln subsidiary to another, called a service company.
Under S&L; regulations, a service company can engage in direct investments that other subsidiaries cannot.
When he bought Lincoln in early 1984, Keating had wanted to take advantage of California laws that allowed S&Ls; to forgo home loans and instead put depositor funds in an array of direct investments, such as securities and land development.
But the bank board soon wanted to restrict those direct investments and adopted a rule in January, 1985, limiting the amount of direct investments that most state-chartered S&Ls; could hold to about 10% of their total assets.
The rule included a grandfathering clause allowing S&Ls; to keep direct investments exceeding the new limits as long as those assets were held before Dec. 10, 1984. If those investments were sold, the S&L; could not replace them with equity stakes in other ventures.
But service companies were allowed to exceed the new limits and to replace old direct investments with new ones. The S&Ls;, however, could not transfer any new investments to them after Dec. 10.
Lincoln, for instance, should be able to maintain a higher level of direct investments in the future because its records show that the $300 million in investments was held by the service company as of Dec. 10, instead of by the other subsidiary.
McDonald said Lincoln had transferred the $300 million in assets to its service company by Nov. 30, 1984, only days ahead of the grandfathering cutoff. He said the transfers were made to take advantage of tax benefits, not to enable the thrift to evade the investment limits.
But McDonald acknowledged that the paper work documenting the transfers was not completed and recorded until early in 1985, after the cutoff date.
S&L; regulators claimed that the transfers actually occurred after Dec. 10 and that Lincoln executives backdated documents to allow them to maintain a higher level of direct investments.
Regulators investigated the incident as part of a 1986 audit of Lincoln's finances. They brought in experts to go over American Continental's computer data, reviewed the transfer documents and took 29 depositions, McDonald said.
Eventually, he said, regulators cleared the S&L; of any wrongdoing.
The transfers have become an issue again because authorities are "on a fishing expedition to dredge up what they can," said another American Continental spokesman who requested anonymity.
In another matter, a regulatory spokesman confirmed Wednesday that the FBI has investigated allegations that American Continental destroyed company documents the day the company filed for bankruptcy last month.
The spokesman said that investigators concluded that the shredding was done during the normal course of business, and no further action is being taken.