Action by American Continental Investors : Corporations Dept. Now Named in Suit

The state Department of Corporations was named a defendant Thursday in a lawsuit originally filed this spring on behalf of about 22,000 investors who stand to lose nearly $200 million from the collapse of American Continental Corp.

In an amended complaint, the agency was accused of acting “in reckless disregard of its own internal findings” in approving the public offering of American Continental bonds, which were sold mostly through its Irvine subsidiary, Lincoln Savings & Loan.

The filing marks the first time that a government agency has been named a defendant in the various lawsuits pending against American Continental, which has filed for Chapter 11 bankruptcy court protection, and Lincoln, which was seized by regulators and in August was declared insolvent.

And it follows the civil racketeering suit filed last week by the Resolution Trust Corp., the government agency dealing with the national S&L; crisis, against American Continental Chairman Charles H. Keating Jr. and most of the company’s officers and directors, claiming they conspired to siphon $1.1 billion in federally insured funds from Lincoln for their personal use.

The investors’ complaint that was amended Thursday now alleges that the Department of Corporations gave American Continental approval to sell its bonds even though the agency had sufficient evidence that the Phoenix-based company could not repay the debt.

“The Department of Corporations staff made its own analysis that the offering didn’t make any sense,” said Ronald Rus of Orange, one of the plaintiffs’ lawyers. “Notwithstanding that, the agency found that a Big 8 accounting firm said it’s OK and then approved it. So who’s fault is it?” he said. “I say they both are at fault.”

The suit also claims that Lincoln’s former operators, its outside accountants and its lawyers engaged in “a massive fraud” to pump up Lincoln’s earnings and net worth artificially and improve the company’s stock price for their own benefit.

Christine Bender, commissioner of the department, said the agency “acted appropriately” in approving the bonds.

“We did what was required under the law and, in fact, more than what was required by law,” she said. “When a court looks at this, I’m convinced it will find that we did nothing wrong.’ Agency officials previously said they contacted numerous state and federal agencies investigating American Continental and Lincoln Savings but could get no concrete evidence to warrant denying American Continental’s application to sell the bonds. Bender said her agency had authority to bar the offering only if it found the public sale to be “unfair, unjust or inequitable.”