Seized O.C. S & L Offers Painful Lesson : Many Bond Buyers Fear Being Preyed On in Efforts to Recoup Losses

Last month, about 300 neighbors jammed into the Women’s Club of Van Nuys hoping to learn how they could recover money they had invested in debt securities sold through a nearby branch of Irvine-based Lincoln Savings & Loan.

Instead, they heard how much it would cost them to hire a Beverly Hills law firm to file a lawsuit on their behalf. “It sounded to me like a boiler-room operation,” said Norm Keller, a Northridge resident who attended the session but refused to participate in the suit.

The experience is part of the sometimes painful education that Keller and other investors are receiving as a result of the collapse of Lincoln’s parent company, American Continental Corp. of Phoenix.

About 22,000 people stand to lose all or part of the $200 million they invested in debt securities issued by American Continental. Having been burned once already, they are afraid they could be preyed upon a second time as they attempt to recoup their money.

American Continental filed for bankruptcy court protection on April 13. Federal regulators seized Lincoln the next day. The parent company has stopped making interest payments on its debt securities, and it is uncertain if bondholders will recover any of their money.

Some bondholders are confused by the proliferation of lawsuits and legal theories advanced by competing groups of attorneys, all of whom claim to have bondholders’ best interests at heart. More than a dozen lawsuits have been filed already, and others are likely to follow.

Prospective Solicitations

And they may soon be solicited by prospective financial advisers: one firm plans a pitch to bondholders on reverse mortgage arrangements that would provide a substitute source of monthly income but could leave them without their homes.

“It’s just sad that people who already are victimized by fraud are going to be further victimized by others,” said William S. Lerach, a San Diego lawyer handling a class-action lawsuit filed on behalf of bondholders.

“What I think bondholders should do at the moment is nothing,” Lerach said. “The way they can get hurt is by doing something quickly or precipitously. They should let the situation sort itself out.”

A number of bondholders agree.

“People are cautious--and bitter,” said Norman Lapin, a Sherman Oaks accountant whose parents invested a large portion of their estate in American Continental debt securities. “Anybody coming to help them now, they look over twice.”

The 22,000 bondholders, mostly Southern Californians, make up an unusual group. For the most part, they were not sophisticated investors with the ability to evaluate the risks of the subordinated debentures sold by American Continental. Debentures are a type of corporate IOU that tend to have shorter maturities than traditional bonds.

Many bondholders were elderly S&L; customers who went to Lincoln Savings offices with the intention of placing their

savings in traditional certificates of deposit but were persuaded by company representatives to buy American Continental debentures instead.

Some say they did not realize that the debentures would not be protected by federal deposit insurance as CDs are. Nor did they know that the debt securities were considered to be among the riskiest on the market, so risky, several brokers said, that American Continental would have had difficulty selling them to sophisticated investors. Nor did they know that they would stand near the end of the creditors’ line if American Continental were to file for bankruptcy.

Now they know. And they are hardening in their resolve to get back what in some cases would have been their children’s inheritance, or what had been given to them as their own inheritance.

A major dilemma faced by bondholders is trying to decide what lawsuit to join and which lawyers to retain. Some don’t even like the idea that attorneys stand to get rich off lawsuits that will recover only part of their losses.

One North Hollywood bondholder said he went to a meeting at a San Fernando Valley law firm and was “appointed” to head a five-member committee expected to raise $150,000 to cover initial costs of a lawsuit and responsible for raising more money if needed. The lawyers were to receive a third of any recovery, he said. The bondholder, who requested anonymity, said he walked out of the meeting.

And a Sherman Oaks woman blanched when she went to a private lawyer and figured out that he would end up collecting 60% of any recovery.

Many Were Disappointed

Many of the bondholders who attended the meeting in Van Nuys last month walked away disappointed and upset after hearing little about action and a lot about attorney fees, according to a number of bondholders in attendance.

“I felt as though it was a sales job,” said accountant Lapin. “They stand to make a lot of money from it. And they didn’t represent the downside. Even if we win something, they get a million dollars and we get a piddling amount.”

The lawyers, from the Beverly Hills firm of Cooper, Epstein & Hurewitz, wanted bondholders to kick in 2% of the face amount of their debt securities to cover initial costs. More money could be asked for later, if needed. The lawyers were to receive 33% of the first $1 million recovered and 25% of anything over that amount, bondholders said.

The discussion of the law firm’s litigation plans left many bondholders scratching their heads.

“There was a lot of confusion over the difference between a class action and a non-class action,” said Keller, the Northridge bondholder. Another bondholder, Etta Horn, said she thought that the lawyers’ explanations were “all twisted so they came out on top” and that the plan was “a rip-off.”

A class action is a lawsuit brought by a number of plaintiffs on behalf of all people who are not named in the suit but who complain about the same wrongs. A court decides if the facts and the law in the case apply to all “class” members before letting the case go forward. Plaintiffs share in any settlement or award recovered, and the judge decides how much lawyers will be awarded in fees and court costs, usually from a separate pool of funds.

Lawsuit More Routine

An individual lawsuit is a more routine action in which named plaintiffs sue for specific damages. Plaintiffs typically pay court costs up front and, in contingency fee arrangements, agree to pay lawyers a percentage, often 30% to 40%, of any recovery.

Alan L. Isaacman, the lawyer who headed the Cooper, Epstein team at the meeting in Van Nuys, said the firm has enlisted close to 100 bondholder clients who are willing to make the 2% up-front payment to finance a suit that would name each of them individually as plaintiffs. He wouldn’t discuss the fee arrangement mentioned by bondholders.

He said he told bondholders at the meeting that his 50-member firm does not want to file a class action. The advantages of an individual suit, he said, are that it would get to trial quicker, lawyers could use testimony that possibly could not be used in a class action, a settlement could come sooner and any recovery would give plaintiffs the first shot at the defendants’ money, in case defense funds are limited.

About the only major advantage in class actions, he said, is that plaintiffs don’t usually pay any costs of litigation up front.

Isaacman acknowledged, though, that the courts could wind up consolidating all bondholder lawsuits to manage the litigation more efficiently, which is the very purpose of a class action. Consolidation, he said, would thwart his hopes for early recoveries.

Lawyers who have filed class-action suits on behalf of American Continental bondholders lambasted Isaacman’s approach as well as efforts by other attorneys to charge high costs in preparing complex, time-consuming lawsuits.

“Everyone knows that when you have massive fraud on thousands of people, the suits are only going to be settled as part of a massive package,” said Lerach, the San Diego class-action lawyer.

Fees Set by Courts

Lerach and other class-action lawyers said that plaintiffs in their suits will recover as much as plaintiffs in individual suits and that the courts will determine attorney fees.

In a $200-million recovery against brokerage houses involved in the 1983 collapse of Baldwin-United Corp. in Cincinnati, for instance, the 165,000 holders of the insurance firm’s annuities recovered their investments in full. Attorney fees were only 7%, far less than the big contingency fees being proposed to bondholders by some attorneys, said Richard D. Greenfield, a Philadelphia lawyer handling a class-action suit against American Continental executives.

Lerach, Greenfield and attorneys Joseph W. Cotchett of Burlingame and Ronald Rus of Orange are playing major roles in coordinating class actions for bondholders. The first three specialize in class actions and are nationally known.

“Many, many lawsuits are being brought,” Lerach said. “The courts will take control, and nobody’s rights will be affected by waiting and watching and making an informed decision later. Everyone will get notice later by the court through the class actions. Everyone’s rights are protected.”

Donald Mikami, a Fountain Valley dentist and bondholder who has been a resource center for hundreds of bondholders, plans to take a wait-and-see approach. He said he hopes that things will “start to crystallize” toward the end of the year.

“The lawyers don’t even know what’s going to happen,” Mikami said. “There’s so much paper work, smoke and hot air out there that it’s almost impossible to get a handle on anything.”

Company Has Offer

Meanwhile, American Continental bondholders may be forced to contend with more than lawyers and litigation. They soon may be hit with advertisements from a Marina del Rey company offering to provide a substitute source of income through reverse mortgages, deals that eventually may leave home owners without their homes.

Paul Shlensky, president of Reverse Mortgage Corp., said he plans to send out a test mailing to 100 bondholders to see if they are interested in loans or reverse mortgages to provide them with monthly income to replace the lost interest payments on their debt securities.

Under a reverse mortgage, homeowners sell their homes but continue to live in them. The buyer makes monthly payments to the previous owners over periods ranging from 10 to 30 years.

Shlensky, who bought a copy of an American Continental bondholder list filed in U.S. Bankruptcy Court in Phoenix, said he would suggest reverse mortgages only to those bondholders over 62 years of age.

Depending on how the deals are structured, the sellers may be able to stay in their homes for life or may have to leave once the payments are completed, Shlensky said.

Shlensky said he was unsure if his firm would pitch American Continental bondholders on the merits of reverse mortgages, standard lines of credit secured by home equity, or both.

“If we can be of any help to the bondholders, we’d be happy to talk with them,” he said.

Bondholders may not be too happy to talk with him, though.

‘Shame of Stupidity’

“I think they’re trying to make a profit out of someone’s misery,” said one Venice bondholder, who requested anonymity because she has to live “with the shame of my stupidity” for buying the debentures.

Several dozen bondholders, some of whom are helping to coordinate bondholder support groups, said they are growing increasingly wary of those who say they want to help.

Many bondholders are “running around scared” and “can’t afford or don’t want to invest any more money in this cause,” dentist Mikami said.

“Bondholders are still confused,” said Leah Kane, a resident of the Leisure World retirement community in Laguna Hills. “They are worried about their investment, and they want to know if there is any chance of getting their money back. And they are very angry.”

One Leisure World retiree, she said, is trying to get a group of elderly neighbors together to picket the local Lincoln Savings branch.

Kane acts as a coordinator for a group of 160 Leisure World residents who bought $4 million in debentures. Living on fixed incomes and missing the monthly income from interest on the debentures, she said, “these people are suffering.”

In the Hemet area, Madison Payne of Yucaipa is trying to organize bondholders. He ran an advertisement in the local weekly newspaper asking that others join him in a class-action suit against corporate executives like Charles H. Keating Jr., the Arizona financier who heads American Continental.

“Keating knew very well that many of us senior citizens had been dealing with Lincoln since 1959 or earlier,” Payne said. “They had won our confidence, and they took advantage of us.”

A Sherman Oaks woman who is coordinating one group of bondholders told of a couple who sunk $180,000 in American Continental debentures. “The wife said her husband had Alzheimer’s disease and put the money in the bonds without her knowledge,” she said. “This is their life savings, and they can’t ever make that back. It’s so sad.”

Some Want Revenge

Some bondholders want not only their money but a measure of revenge.

Mikami, for instance, plans to form a political action committee made up of bondholders to lobby lawmakers, much in the same way that Keating and American Continental executives contributed more than $700,000 to political campaigns and won support from lawmakers.

After the dust settles a little, Mikami said, he plans to ask bondholders to contribute $25 each each, plus $1 for every $1,000 in debentures they bought. With that money, he hopes to hire a staff to lobby lawmakers, make campaign contributions and send out monthly newsletters to bondholders about matters of interest to them.

Under a reorganization plan recently outlined by American Continental, the company is offering to pay bondholders all their money back at 5% interest over 11 years. But that’s not good news for elderly victims of American Continental’s financial collapse. They may not live that long, and many were getting monthly payments at rates twice as high and were expecting to get their money back soon. Most of the debentures matured in six months to five years.

Lois D. Clayton of Pismo Beach, for instance, said she had been receiving $600 a month in dividends from her $60,000 American Continental bond. Her only other source of funds is her Social Security retirement payments.

Under the reorganization plan, she would receive only about $300 a month from her debentures.

“Who wants to wait 11 years to get their money back?” asked Walter Pedroski, a 34-year-old actor from Sherman Oaks. “If I have to wait 11 years with money in American Continental’s hands, I’m not going to feel comfortable.”

Some bondholders, though, think American Continental should be given a chance to reorganize its financial affairs, even if it takes 11 years.

“I think it’s a workable plan,” said Ray Hebert of Huntington Beach, a 78-year-old retired firefighter. “I think if they can get involved in selling Lincoln Savings, they can get back on their feet and can start paying their obligations in full and on time.”

Hebert said he and his wife attended the first meeting of creditors in U.S. Bankruptcy Court in Phoenix earlier this month and then spent four days touring American Continental’s real estate holdings in the Phoenix area.

He said he was impressed with the company’s achievements and believed that Keating, the company’s chairman, is a “very honest person” who did not misrepresent the corporate debt securities.

“I don’t think the man was crooked, but he might have had some sales people who were a little overactive,” Hebert said. “Who knows how many lies they told?”