Cranston Calls for Probe of Note Sales by Lincoln’s Parent

Sen. Alan Cranston called Friday for a government probe to determine whether federal deposit insurance funds should be used to pay back about 22,000 people who bought $200 million in high-risk debt securities issued by the parent company of Lincoln Savings & Loan in Irvine.

The California Democrat said he has asked the General Accounting Office to investigate the sales of subordinated debentures--a form of corporate IOU--issued through Lincoln branches by its parent company, American Continental Corp. in Phoenix.

American Continental filed for bankruptcy protection on April 13, and regulators seized the S&L; the following day. The firm has stopped making interest payments on the debentures, and it is uncertain if the holders will recover any of the funds they invested in the notes.

“If Congress were to study legislation to indemnify the bondholders, the first step in that process would be to have the GAO make a study,” Cranston said Friday.

Cranston stopped short of saying such legislation would be proposed or that state or federal regulators were partly at fault for action or inaction that led to the apparent losses.

Cranston and four other senators have been criticized for trying to help American Continental Chairman Charles Keating in his battles with federal regulators. A group of about 60 people, including Keating, members of his family and American Continental executives, have contributed about $300,000 to the campaigns of the five senators. Of that amount, about $39,000 went to Cranston.

The senators questioned regulators two years ago about an unusually long examination of Lincoln by regulators. Earlier this year, Cranston asked two bank board members to consider more seriously a proposed sale of Lincoln that later fell through.

The senators claimed that they were only helping a constituent, noting that the failure of American Continental could damage the Arizona economy and devastate bondholders.

Tellers Pitched Bonds

Bondholder representatives have said that the customers, mostly Southern Californians, did not have the ability to evaluate the risks of the subordinated debentures. Many were elderly S&L; customers who had been living off the income from insured certificates of deposits before they were persuaded to buy the uninsured debt securities.

A number of bondholders have said Lincoln tellers pitched the merits of the bonds to them and led them to American Continental desks located in the lobbies of Lincoln branches in Southern California. They said they were assured by tellers or American Continental representatives that the debentures were safe, the company was “solid as a rock” and they had little to fear.

In a letter to the GAO, Cranston asked the investigative arm of Congress to determine the answers to 11 questions, including the role state or federal regulators played in approving and monitoring the debenture sales, actions they took to make sure purchasers were protected, any improprieties Lincoln and American Continental sales representatives may have committed, and what investors were told about the debt securities.

“The bondholders allege that they were misled by marketing techniques or verbal comments into believing that the bonds were insured by the Federal Savings and Loan Insurance (Corp.) fund,” Cranston said in the letter.

Reaction Mixed

He also asked the agency to analyze “whether federal regulators were responsible, by any action or failure to take action, for events which led to the losses . . . and whether it would be appropriate to have the federal government indemnify them through the FSLIC.”