Lincoln S&L; Owner to Get Day in Court : Thrifts: A federal judge has decided to hear Charles H. Keating Jr.’s testimony on four disputed transactions.
Beleaguered Arizona businessman Charles H. Keating Jr. won the right Thursday to a court hearing here on a portion of his claim that federal thrift regulators illegally seized control of his Lincoln Savings & Loan in April.
Declining to rule on a government motion to throw out Keating’s challenge to the takeover, U.S. District Court Judge Stanley Sporkin said he would take testimony on four disputed transactions, including the controversial tax-sharing plan that is the basis for the civil racketeering suit that regulators have filed against Keating and others.
The judge will also hear testimony from Kenneth Leventhal & Co., accountants for the government, and the former Arthur Young & Co., accountants for American Continental. Leventhal’s review of 15 Lincoln transactions led it to accuse American Continental and Arthur Young, now Ernst & Young, of “accounting gimmickry” that created profits where none existed.
Sporkin’s action gives Keating his first day in court on the merits of the Federal Home Loan Bank Board’s rationale for seizing Irvine-based Lincoln on April 14, a day after its parent, American Continental Corp., filed for bankruptcy protection. Keating challenged the government’s action in a lawsuit in May.
The judge’s decision was greeted positively by both sides.
“This is a chance for a fair hearing,” said Robert K. Huffman, a Washington lawyer for American Continental. “It’s no secret that the company thinks the Gonzalez hearings are not fair,” he said, referring to the ongoing House Banking Committee hearings chaired by U.S. Rep. Henry B. Gonzalez (D-Texas) into Lincoln’s failure.
“The judge wants to test whether the facts in the administrative record are accurate,” said James P. Murphy, a Washington lawyer for the Office of Thrift Supervision, the successor agency to the bank board. “We are confident they are, and we welcome a chance to prove them.”
Lawyers in the case said it was unclear whether the judge would make a ruling on the legality of the seizure after the hearing on the limited issues.
To seize an institution, regulators must have one of three grounds: insolvency, substantial dissipation of assets caused by violations of regulations or operating conditions that are unsafe or unsound to transact business.
The bank board did not allege insolvency, but did allege the other two grounds. On Aug. 2, the board determined that Lincoln was insolvent and put it in receivership.
American Continental claims that the statutory grounds never existed for either the conservatorship or the receivership.
Sporkin allowed the Office of Thrift Supervision to pick the four transactions for the hearing, which begins Dec. 6. Murphy said he picked the tax-sharing plan, a Memorex stock transaction and two deals involving Hidden Valley Ranch, an 8,500-acre planned community 35 miles southwest of Phoenix.
Under the tax-sharing plan, Lincoln forwarded $95 million in taxes to American Continental to pay on a consolidated basis, but regulators claim that Lincoln didn’t owe any taxes and the company didn’t pay any on Lincoln’s behalf. In the racketeering suit, regulators allege Lincoln lost $125 million under the plan.
Regulators also claim that American Continental took a gain on Memorex stock that should have gone to Lincoln. Lincoln bought the stock and sold it to a third party for $1 million. The third party sold it to American Continental four months later for $2 million. Six months later, the company sold the stock for $13.3 million.
In 10 Hidden Valley transactions, including the two Sporkin will hear, regulators allege that Lincoln used straw buyers and straw borrowers to boost profits artificially and hide the true control of the property.
