SEC Draws Fire Over Bond Sales by Lincoln S&L; : Thrifts: Critics say the agency was in the best position to block the sales in 1987 and ’88. But the SEC says it didn’t have enough evidence.

Just as the Lincoln Savings & Loan debacle has claimed federal regulator M. Danny Wall as its latest victim, the Securities and Exchange Commission is coming under increasing fire for allowing the sale of high-risk junk bonds to customers of the Irvine-based thrift.

“This is a hell of a deal,” said John Stoia of San Diego, a lawyer for some of the bondholders and a former SEC staff attorney. “Everybody who’s a regulator knows Lincoln’s a ticking time bomb in 1987 and 1988, and still the SEC lets them sell $200 million in bonds.”

Although the SEC is not empowered to approve or disapprove securities offerings, it chose not to exercise other authority to block the sale of the junk bonds by Lincoln’s parent company, American Continental Corp. of Phoenix.

It let the sale proceed even after reviewing the findings of savings and loan regulators calling for the federal seizure of Lincoln in May, 1987. American Continental’s bankruptcy rendered worthless the nearly $200 million in bonds that about 22,000 investors had bought.

Richard C. Breeden, the newly installed SEC chairman, told the House Banking Committee last month that the agency took no action to prevent the bond sale because it decided that it lacked sufficient evidence to survive a court challenge if it had tried.

But Edwin J. Gray, the nation’s former chief savings and loan regulator, said he “can’t imagine the rationale” that led the SEC to allow the securities sales to proceed in the face of the evidence it had received about Lincoln and its parent company.

Richard Greenfield, a Philadelphia lawyer who is representing buyers of the junk bonds, said detailed information about the shaky financial condition of Lincoln and American Continental “was handed to the SEC on a silver platter,” but still it chose not to intervene.

And Ronald Rus of Orange, another plaintiffs’ attorney, said, “The SEC has been an insiders’ group just like the California Department of Corporations is.”

Lawyers for the debt holders have sued the California Department of Corporations for approving the bond sales, but they said they have no plans yet to sue the SEC.

Many of the 22,000 investors are elderly Lincoln depositors who bought the junk bonds at the thrift’s 29 branch offices in Southern California. In lawsuits, some have said they were led to believe the debt securities were federally insured, which they were not.

While the state Corporations Department has been heavily criticized for its role in approving the bond sales, congressional testimony indicates the SEC had far more detailed information about Lincoln’s problems than the state agency had.

Federal S&L; regulators notified the SEC as early as December, 1986, about questions they had over American Continental’s financial statements, said Julie Williams, deputy chief counsel for securities at the Office of Thrift Supervision, which was created in August to replace the Federal Home Loan Bank Board, the primary agency regulating S&Ls.;

In a Jan. 30, 1987, letter to the SEC, one of Williams’ colleagues said evidence during a regulatory examination showed a “possibility” that American Continental was selling securities based upon “false and misleading” information, according to a letter obtained by The Times.

The SEC launched an investigation. At the time, American Continental’s common stock was traded publicly and the first of two debt issues was being sold at Lincoln’s branches.

Under federal law, the SEC has civil and criminal powers to enforce full and accurate disclosure by companies seeking to sell stocks, bonds or other securities. It can halt ongoing sales of securities and issue so-called stop orders to prevent a proposed offering from going public if the disclosures are false and misleading.

But the agency has no power to consider the merits of any offering. A bankrupt firm can sell securities as long as it discloses fully its financial condition, said Mary McCue, an SEC spokeswoman.

As part of its investigation into possible wrongdoing by American Continental, the SEC received information continuously from thrift regulators, including the controversial May, 1987, examination report on Lincoln’s financial condition, Williams said. That report was the basis for a recommendation by federal S&L; regulators in San Francisco to seize Lincoln.

“We provided the SEC with other examination information as it was developed,” she said. “The whole thrust was our concern over the sale of securities.”

By February, 1988, the SEC had reviewed that report as well as 14,000 pages of work papers from American Continental’s auditor, Arthur Young & Co., and other materials gained through subpoenas. The investigation widened and is still pending three years after the bank board first notified the SEC, Breeden acknowledged in his House testimony.

Meantime, in April, 1988, American Continental’s authority to sell its debt securities had run out and it filed another application with the SEC and the state Department of Corporations to continue selling the securities. The SEC did not inform thrift regulators in Washington about the new filing, Williams said.

Executives at the California Department of Savings and Loan met several times with Corporations Department executives to try to thwart any approval. But William D. Davis, deputy chief commissioner of the state S&L; agency, said he did not recall notifying the SEC.

Still, with the evidence it had gathered and reviewed by then, the SEC was aware of serious questions about American Continental’s accounting procedures and financial health. And, Breeden told the House committee, the agency’s staff “affords special consideration” to filings from companies it already is investigating.

But he said that, under federal law, the SEC would have been required to show that American Continental’s disclosures were fraudulent in order to block the bond sales. And the Arthur Young accountants were giving the company a clean bill of financial health for 1986 and 1987.

“The staff determined that the (SEC) did not have adequate evidence at that point in its investigation to prevail in a stop order or injunctive proceeding,” he told the House committee.

That excuse--a lack of hard evidence--is the same one that the state Corporations Department used to approve the sale of the bonds in May, 1988. The state agency also has cited the SEC’s clearance as another major reason it decided to approve the offering.

A lack of evidence also was the excuse that thrift regulators in Washington used to reject its field office recommendations a year earlier to seize Lincoln or curtail its investments in real estate projects, high-risk securities and other non-traditional activities.

The failure to halt the bond sales for want of adequate proof shows that “no one had the evidence” against American Continental in 1987 and 1988, said Karl T. Hoyle, a spokesman for the Office of Thrift Supervision.

“We all suffered from the same problem,” Hoyle said. “We’ve got to have evidence and proof. It’s not sufficient to have smoke, you have to have the fire.”