Lincoln S&L; Backed Boesky Takeover Bids : Irvine-Based Thrift Invested $100 Million, Apparently Profited

Lincoln Savings & Loan, the insolvent Irvine-based institution, played a prominent role in some of the bigger corporate takeover bids in the 1980s and provided Ivan F. Boesky with $100 million in investment funds, according to sources familiar with the S&L;’s operations.

The investments in high-yield corporate securities--often known as junk bonds--made possible by the industry’s deregulation in the early 1980s, put Lincoln in the forefront of high-flying thrifts which grew rapidly and sought out riskier, non-traditional investments.

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.

However, Boesky’s knack for making money turned out to be linked to illegal, insider knowledge. In November, 1986, he agreed to plead guilty to a felony count relating to such trading and paid a $100-million fine. He is now 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 significant profits by investing in takeover stocks or junk bonds.

More Than Average Risk

Still, federal regulators were troubled by the use of federally insured funds for risky investments. But the regulators attempted unsuccessfully to curb Lincoln’s penchant for purchasing junk bonds.

Lincoln’s high-yield corporate securities carried more than the average risk of junk bonds held by other S&Ls;, federal thrift regulators have said, and a House banking panel plans to reopen an investigation into Lincoln’s collapse, including a review of its junk bond investments.

Regulators seized the S&L; on April 14, one day after its parent, American Continental Corp. in Phoenix, filed for bankruptcy protection. The failure could become the costliest ever, requiring more than $2.5 billion in federal funds.

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 issuing a highly critical report in March, 1987, that cited the Boesky investment.

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.

Neither Keating nor other Lincoln or American Continental officials could be reached for comment.

Lincoln’s practice of using deposits to invest in junk bonds has been known for two years, but many of the specifics have not been widely known.

Litigation Uncovers Details

They include the March, 1986, investment of $100 million in the Boesky fund. 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.

Many details of Lincoln’s other investments are emerging in civil litigation, American Continental’s bankruptcy and other sources.

The collapse of the two institutions continues to attract attention, in part, because its owner, Charles H. Keating Jr., 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.

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 in 1984 and 1985. American Continental holds a 20% stake in Goldsmith’s General Oriental, as well as timberland gained from the Crown Zellerbach takeover fight. Both assets are tied up in bankruptcy court.

Sources familiar with federal examinations of Lincoln said that among the institution’s less well-known 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 attempt of the carrier in 1988.

-A $34-million investment in a fund set up by Farley Industries Inc., and its owner William Farley, to help with acquisitions.

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 Keating, Lincoln or American Continental among the original investors.

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.

By May, 1986, Lincoln invested nearly $300 million in junk bonds, which generally are considered to be risky but with high yields and often are used to finance takeovers.

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.

LINCOLN SAVINGS’ INVESTMENTS

Lincoln Savings & Loan played a prominent role in some of the bigger corporate takeover bids in the 1980s and invested heavily in high-yield corporate securities--often known as junk bonds.