State Defends Role in Sale of ‘Junk Bonds’ : Says It Tried to Stop Issue by Lincoln S&L; Parent

California thrift regulators said Friday that they tried last year to halt the sale of a second issue of “junk bonds” by the parent company of Irvine-based Lincoln Savings & Loan but that the state had no choice other than to approve the high-risk offering.

The parent firm, American Continental Corp. of Phoenix, sold the bonds through Lincoln branches. Many were bought by unsophisticated investors who say they were given the impression that their investments in the bonds were insured or had some equivalent protection.

“We expressed our concerns to members of the Department of Corporations (which reviews the sale of securities in California), but according to the law under which they operate, they did not have a basis for denying approval,” William B. Davis, chief deputy commissioner of the State Department of Savings and Loan, said in an interview.

Heavily Investigated

“When we first heard (American Continental’s) ads, we became concerned,” Davis said. “They were selling what we considered fairly high-risk investments, but the inference from the ads was, ‘Come into a Lincoln office.’ We could immediately see the confusion investors might have between a risky investment and a safer one.”

The company’s offering in 1988--the second of two that raised a total of $200 million for the firm--was one of the “most investigated” offerings in some time, said Christine W. Bender, commissioner of the Corporations Department. The first was approved in late 1986.

American Continental was a healthy company then and had a clean record of paying back investors, Bender said.

But on April 13 of this year, American Continental filed for protection from creditors under Chapter 11 of federal bankruptcy laws. Federal regulators took over the operations of Lincoln the following day, saying American Continental was operating it in an unsafe manner and was dissipating its $5.3 billion in assets.

Likely to lose their investments are about 22,000 people who bought the junk bonds. More than a dozen class-action lawsuits have been filed seeking the return of the money.