U.S. Sues Ex-Lincoln S&L; Operators for $2.4 Billion
Federal regulators filed a civil lawsuit Friday in Phoenix charging that the former operators of Irvine-based Lincoln Savings & Loan devised a racketeering scheme to siphon $1.1 billion in federally insured deposits from the now-insolvent thrift for their own use.
The suit, filed in U.S. District Court, is the largest ever filed against directors and officers of failed institutions. With punitive damages and trebling provisions under the federal Racketeer Influenced and Corrupt Organizations Act, the government is seeking to recover up to $2.4 billion from the defendants.
Industry experts estimated that Lincoln’s collapse will cost taxpayers up to $2.5 billion, which would make it the costliest S&L; failure in history.
‘Pattern of Deception’
The suit alleges that Charles H. Keating Jr., chairman of American Continental Corp., and other executives bought the S&L; in 1984 and began “to divert . . . Lincoln’s deposits and assets to themselves” through a wide range of “illegal, fraudulent and imprudent acts,” including false and misleading statements to regulators, forgery and concealment of illegal cash payments.
The racketeering scheme was devised to fuel the operation’s “speculative” business ventures, from securities trading to real estate deals, the suit said. And to further the scheme, the suit claims, the defendants “engaged in a pattern of deception to mask prohibited and sham transactions from regulatory scrutiny.”
The suit also seeks to freeze the assets of Keating, who is a multimillionaire, and others, allowing each to live on $3,000 a month.
Keating was out of town and could not be reached for comment.
A lawyer for Phoenix-based American Continental called the racketeering charges “mean-spirited” on the part of regulators and denied that Keating and the other 36 defendants were liable for any of the 14 claims made in the lawsuit.
Seized in April
“There are no surprises here,” said Melvin A. McDonald, a lawyer for the company, about the allegations. “This is the same old wine in the same old bottles--the same information regulators have had for years. They’re just trying to put new labels on the bottles.”
The suit stemmed from an in-depth investigation by regulators, said Alan Whitney, spokesman for the Federal Deposit Insurance Corp., which insures deposits at Lincoln.
Regulators seized Lincoln on April 14, a day after American Continental filed for bankruptcy. Regulators declared the S&L; insolvent on Aug. 2 and put it in receivership. The suit is the first major legal action brought by the Resolution Trust Corp. since it was created last month by a new federal law to handle failed banks and thrifts.
The suit alleges four RICO violations and three violations of Arizona’s racketeering laws against Keating and six executives, including his son and two sons-in-law. An additional seven allegations accuse the defendants--20 individuals and 17 companies--of fraud, conspiracy, negligence and violations of regulatory laws.
The defendants include William J. Keating, a former congressman and former publisher of the Cincinnati Enquirer. He is Charles Keating’s brother. Their spouses and those of several other defendants were also named in the suit.
Other Defendants
Keating and the other defendants are accused of wrongdoing in transactions involving high-yield corporate securities known as junk bonds, corporate stock bought by American Continental’s employee stock ownership plan, land sold to related parties allegedly for above-market prices and straw borrowers and straw purchasers allegedly used to avoid direct investment regulations.
The suit also claims that American Continental wrongly appropriated money from Lincoln to pay corporate taxes, resulting in a $125-million loss of income to the S&L.;
Much of the alleged wrongdoing, the suit said, was the result of Keating’s effort to get around federal regulations that limited the amount of money that Lincoln could use to invest in such things as real estate and securities.
In one example cited in the suit, Keating and others sold a residential development to R.A. Homes in Phoenix. The transaction was financed through Lincoln, and Keating entities maintained control over the development. R.A. Homes is operated by Ron Ober, who has been campaign manager for Sen. Dennis DeConcini (D-Ariz).
Cheap Sale Alleged
The suit also alleges that the defendants manipulated a number of stock transactions that will result in more than $22 million in damages to Lincoln.
In one transaction, the defendants allegedly caused Lincoln to sell stock in Memorex International to a third party for $1 million--after the investment banking firm of Drexel Burnham Lambert sent a letter saying the stock was worth $2.8 million. The third party soon sold the stock to American Continental for $2 million, and the company later sold the stock at its market value--$13.3 million. The suit claims the company misappropriated $11.3 million in profits that should have gone to Lincoln.
And the defendants also tried to avoid regulations limiting loans to insiders, the suit said. The primary example involved funds that Lincoln made available to Southmark Corp. in Dallas and its subsidiaries and about $35 million in loans that Southmark’s thrift subsidiary, San Jacinto Savings & Loan Assn., made to a Keating-led partnership that owns the Pontchartrain Hotel in Detroit.
McDonald was angered that the suit named the spouses of some American Continental executives as defendants. Though not named as racketeering defendants, he said, the spouses named in the suit suffer the same “powerful” stigma that attaches to other defendants.
Several sources said regulators had been debating internally for a month about whether to bring racketeering claims and seek to recover of damages from Keating’s assets or sue only for fraud and work out a more certain settlement with the insurance carrier covering director and officer liability.
