State Agency Named Defendant in Suit Involving Lincoln S
The state Department of Corporations was added Thursday as a defendant in a lawsuit filed earlier this year on behalf of about 22,000 investors who stand to lose nearly $200 million from the collapse of American Continental Corp.
The amended complaint alleges that the agency acted “in reckless disregard of its own internal findings” in approving the public sale of American Continental’s debt securities, which were sold mostly through the 29 branches of its Irvine subsidiary, Lincoln Savings & Loan.
The filing marks the first time that a government agency has been named as a defendant in the various lawsuits pending against the operators of American Continental, which has filed for Chapter 11 bankruptcy, and Lincoln, which was seized by regulators and declared insolvent.
And it comes after the Resolution Trust Corp. last week filed a civil suit in Phoenix against American Continental’s Chairman Charles H. Keating Jr. and most of the development company’s officers and directors, claiming that they engaged in a conspiracy to siphon $1.1 billion in federally insured funds from Lincoln for their personal use.
The investors’ complaint, originally filed April 27 in Orange County Superior Court, was amended to include the agency after the state rejected a $250-million claim made by the bondholders. The complaint alleges that the Department of Corporations gave approval to sell the bonds even though it had sufficient evidence to show that Phoenix-based American Continental could not repay the debt it would accumulate through the sale of the securities.
“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 whose fault is it?” he said. “I say they both are at fault.”
The suit claims that Lincoln’s former operators, its outside accountants and its lawyers were 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.
It also claims that Keating and other American Continental executives used politicians, whose campaigns they had contributed to, and other public officials to intervene in Lincoln’s fight with regulators and to buy “extra time” to continue the scheme.
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 the company and the S&L; but could get no concrete evidence to warrant a denial of American Continental’s application to sell the debt securities. Bender said her agency had authority to bar the offering only if the public sale was found to be “unfair, unjust or inequitable.”
New Allegations
The amended complaint weaves a now-familiar web of political clout with a few bits of new allegations.
Bender and her predecessor, Franklin Tom, had worked at the same Los Angeles law firm before joining the department. Tom, who quit in early 1987, returned to the firm and, within a month, began representing American Continental on its debenture application. A senior partner in the firm is Karl T. Samuelian, who had been Gov. Deukmejian’s chief fund-raiser.
One of Tom’s first acts, the suit claims, was to ask the agency to move the file on American Continental from its San Francisco office to its Los Angeles office. The request came shortly after a staff lawyer in San Francisco warned Tom that the agency might take action against the company “if earnings continued to decline and the quality of earnings deteriorate,” according to an agency report filed with the amended complaint.
In the firm’s Los Angeles office, the suit states, the file was put under the supervision of Robert L. Rifkin, a former law school classmate of Samuelian. Tom and the law firm, Parker, Milliken, Clark, O’Hara & Samuelian, were named as defendants in the original suit.
Rifkin and Samuelian could not be reached for comment.
More than 20,000 people, mostly Southern California depositors, purchased American Continetal’s debentures at Lincoln’s branches. About three-quarters of them were elderly.
