Lincoln S&L; Put $100 Million With Boesky, Sources Say
Lincoln Savings & Loan, the insolvent Irvine-based thrift, played a prominent role in major corporate takeover bids in the 1980s and invested $100 million with inside trader Ivan F. Boesky, according to sources familiar with the S&L;’s operations.
Lincoln’s nine-figure investments in high-yield corporate securities--better known as junk bonds--have already made headlines and raised questions about whether federally insured deposits ought to be used in such risky ways.
But a picture of Lincoln’s other deals is now emerging in civil litigation and in bankruptcy proceedings involving its parent corporation, American Continental Corp. of Phoenix. Regulators seized Lincoln last April 14, the day after American Continental filed for bankruptcy protection. The failure could become the costliest ever, requiring more than $2.5 billion in federal funds.
Among the Lincoln deals now coming to light, and perhaps the most unusual, was the placement of $100 million by Lincoln-affiliated companies in Boesky’s Hudson Funding Corp.
Boesky, a Wall Street arbitrager, made millions investing in companies that frequently became takeover targets. It turned out that much of his seeming prescience was based on illegal insider information. In November, 1986, Boesky pleaded guilty to felony insider trading. He paid a $100-million fine and is serving a three-year federal prison term.
There is no evidence that Lincoln officials had any knowledge of Boesky’s illegal activity. And the thrift apparently made profits by investing in takeover stocks or junk bonds.
Sources familiar with current federal examinations of Lincoln said the institution’s other investments include:
- A reported $50 million with Jack Kent Cooke to help his purchase of a cable television network and the Los Angeles Daily News.
- A reported $31.7 million in certain Eastern Airlines bonds designed to help Texas Air’s takeover of the carrier in 1988.
- A $34-million investment in a fund set up by Farley Industries Inc. and owner William Farley to help with acquisitions. Farley’s most spectacular deal was the hostile takeover of West Point-Pepperell earlier this year.
Regulators said Tuesday that the investments with Cooke and Farley remain as part of the $400 million in junk bonds left in Lincoln’s securities portfolio.
James Lacher, an executive with Cooke Media Group, said the firm had placed $550 million of debt securities privately and later registered the paper with the Securities and Exchange Commission. He could not find American Continental, its chairman, Charles H. Keating, Jr., or Lincoln among the original investors.
Among Lincoln’s and American Continental’s more well-known ventures was its investment of $179 million in corporate raider Sir James Goldsmith’s General Oriental Investments Ltd., based in the Cayman Islands. Money from Lincoln and American Continental helped finance Goldsmith’s raid on Crown Zellerbach.
American Continental still holds a 20% stake in General Oriental Investments Ltd. as well as timberland gained from the Crown Zellerbach takeover fight. Both assets are tied up in bankruptcy court.
Spokesmen for Goldsmith and Farley could not be reached.
Federal examiners discovered the investments during separate audits of Lincoln completed in March, 1986, and June, 1988. Both of the reports remain confidential.
The Federal Home Loan Bank Board--now the Office of Thrift Supervision--found that Lincoln made a myriad of risky investments with federally insured deposits, even after regulators issued a highly critical report in March, 1987, that cited the Boesky investment.
According to Lincoln statements, the company had hoped to reap a 29% return on the investment in the fund. But Boesky’s criminal charges got in the way. After collecting its principal, Lincoln realized a profit of about 9%, sources familiar with the transaction say.
Consultants called in by regulators to review the junk bond portfolio concluded that Lincoln’s junk bond investments in merger contests were riskier than those made by other S&Ls;, sources said. One consultant said Lincoln’s bonds have “higher probabilities of default, on average,” than those of most New York Stock Exchange companies.
Officials Unavailable
The collapse of the two institutions continues to attract attention, in part, because Keating and his associates donated $300,000 to five U.S. senators, including Alan Cranston (D-Calif.), and $850,000 to three voter registration organizations at Cranston’s behest.
Cranston and the other senators have intervened on Lincoln’s behalf during the two-year examination of the S&L; that started in March, 1986.
By May, 1986, Lincoln’s junk-bond portfolio had reached nearly $300 million.
In May, 1987, the Federal Home Loan Bank of San Francisco, which had jurisdiction over Lincoln, recommended that it be closed. But bank board officials in Washington overruled the San Francisco office and allowed Lincoln to continue operating while a new set of federal examiners performed a second audit.
Attorneys for depositors and some officials familiar with the thrift have charged that the government’s failure to promptly take control of Lincoln allowed it to lose an extra $1.5 billion.
Neither Keating or other Lincoln or American Continental officials could be reached for comment.
The House Banking Committee plans to reopen an investigation into Lincoln’s collapse, including a review of its junk bond investments.
