Keating Culpability Easy to Prove, U.S. Lawyer Tells Judge

Federal regulators told a judge today that they can prove with just four transactions that Phoenix millionaire Charles H. Keating Jr. was operating Lincoln Savings & Loan Assn. “unsafely and unsoundly” in violation of the law.

“We have literally just the tip of the iceberg,” James P. Murphy, an attorney for the Treasury Department’s office of thrift supervision, said at the opening of a two-day hearing on Keating’s suit against the government.

The thrift office’s predecessor, the Federal Home Loan Bank Board, seized control of the Irvine S & L last April and placed it into receivership in August in what regulators call the largest thrift collapse in history.

However, in his suit before U.S. District Judge Stanley Sporkin, Keating and his attorneys allege that Lincoln was being operated soundly and that the government’s seizure of it was “capricious and arbitrary.”

Before hearing testimony, Sporkin denied efforts by Keating’s attorneys to quash as evidence four letters from one of Lincoln’s attorneys prior to the imposition of the conservatorship last April 14.

Charles M. Stern, a Los Angeles attorney representing Keating, said allowing the government to use the letters would violate his client’s attorney-client privilege. “We should not be forced to have our own lawyers used against us,” he said.

However, attorneys for the thrift regulators said the letters effectively became government property once the government seized Lincoln.

Sporkin, however, granted Keating’s request for government records dating to 1985 on tax-sharing agreements between hundreds of thrifts around the country and their holding companies.

A key element of the government’s case against Keating is that Lincoln and its holding company abused a tax-sharing agreement to effectively siphon off nearly $95 million in federally insured deposits.

Regulators have filed a suit of their own against Keating, alleging that he and nearly a dozen associates engaged in widespread illegal acts of fraud and racketeering culminating in the loss of up to $2.5 billion in federally insured deposits from Lincoln.

As chairman of American Continental Corp., Lincoln’s holding company, Keating is among the witnesses summoned to testify on his lawsuit against the government. Whether he will is in doubt.

The target of a federal criminal grand jury investigation in Los Angeles, Keating invoked his Fifth Amendment right against self-incrimination and refused to answer questions in a subpoenaed appearance last month before the House Banking Committee.