Testimony to Begin in Keating’s Bid to Regain Lincoln : Thrifts: The Arizona businessman claims that regulators lacked sufficient cause to seize his Irvine S&L;.

Beleaguered Arizona businessman Charles H. Keating Jr. will get his day in court today as he tries to wrest control of Lincoln Savings & Loan from federal regulators who seized the Irvine thrift in April.

Keating, who spurned a chance to testify before the House Banking Committee two weeks ago, has been subpoenaed by the government to testify in federal court here about his operation of Lincoln. It was not clear whether he would be called to testify today or later in the trial.

Keating’s firm, American Continental Corp. in Phoenix, claims that regulators did not have sufficient statutory cause to seize the S&L; on April 14. It wants the court to remove a conservatorship and receivership that regulators have placed on Lincoln.

Lincoln’s collapse is expected to cost taxpayers as much as $2.3 billion, which would make it the costliest thrift repair job ever.

The parent firm, which filed for bankruptcy protection on April 13, wants certain Lincoln assets so that it can reorganize its finances and pay back creditors, including about 22,000 small investors who bought $200 million in now-worthless American Continental debt securities.

U.S. District Judge Stanley Sporkin is scheduled to start hearing testimony today on selected parts of the company’s complaint.

The trial will cover four disputed transactions, including a controversial tax-sharing plan that is the basis for a $1.1-billion civil racketeering suit filed by regulators against Keating and others.

Sporkin is using the trial as a way of testing the accuracy of information contained in regulatory files about Lincoln. But it is unclear what he will do about other contested matters once he rules on the four transactions.

Nevertheless, attorneys for both sides believe that the case is a critical test of the government’s legal actions against Keating and his company.

“This is an important case because we think Lincoln was terribly mismanaged and it would be a travesty to return the thrift to Charles Keating,” said James Murphy, a lawyer for the Office of Thrift Supervision, the successor agency to the Federal Home Loan Bank Board, which seized the S&L.; “We want Lincoln to stay in the hands of the government.”

An American Continental lawyer said he views the trial as something that could set a precedent for a host of pending and future litigation involving the company and its executives.

“This is extremely important in the life of ACC’s reorganization,” said James Feder of Los Angeles, one of the company’s lawyers. “And it could be considerably damaging to the (regulatory) agency’s ability to take summary actions without accountability to anyone.”

Under the tax-sharing plan, Lincoln forwarded $95 million to American Continental as its share of the parent company’s consolidated taxes, but regulators claim that Lincoln did not owe any taxes and that the company did not pay any taxes on Lincoln’s behalf.

The tax-sharing agreement is illegal on its face, Murphy said. But American Continental said that it changed the agreement to conform with regulatory wishes and that regulators approved the revisions.

Testimony in the trial also will involve a stock transaction and two deals involving Hidden Valley Ranch, an 8,500-acre planned community southwest of Phoenix.

Regulators contend that American Continental recorded a profit that should have gone to Lincoln on a stock deal involving shares of Memorex, the magnetic tape maker based in Milpitas.

Lincoln bought the Memorex 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 the two Hidden Valley transactions, the government alleges that loans were made imprudently to borrowers who could not repay them and who acted as “straw men” to artificially boost the S&L;’s profits.

Lincoln recorded nearly $15 million in profits on the two transactions and sent 40% of that to American Continental for taxes when it should not have recorded any profits on the deals, the government contends.