Government Dealt a Blow in Lincoln Case : Thrifts: A Phoenix businessman testifies that alleged sham transactions were legitimate.

A Phoenix businessman dealt a blow Friday to the government’s case against the former operators of Lincoln Savings & Loan in Irvine by testifying that two land deals federal regulators had characterized as sham transactions were legitimate sales.

The businessman, Phillip Gordon, also said in federal court here that some of the loan documentation that regulators required of Lincoln went beyond normal business practices in the purchase and sale of undeveloped land in Arizona.

Gordon’s testimony appeared to undermine the government’s contention that the deals were representative of a series of fraudulent transactions in which the S&L; recorded bogus profits so it could send tax payments to its parent company, American Continental Corp. of Phoenix.

Gordon, who also is a member of the Phoenix planning commission, was called by the government to testify in the second day of hearings in a lawsuit brought by American Continental to challenge the April 14 seizure of Lincoln by federal regulators.

The company, which filed for bankruptcy on April 13, claims that regulators lacked sufficient grounds to seize Lincoln, which is expected to become the most expensive thrift failure ever at a cost to taxpayers of $2 billion or more.

American Continental Chairman Charles H. Keating Jr. had been subpoenaed to testify at the hearing but he was not called to the stand Friday and will not be required to appear until the hearing resumes in early January.

Lawyers for American Continental were clearly encouraged by Gordon’s testimony about the land deals, which included his partnership’s purchase of 445 acres in Hidden Valley Ranch, an undeveloped master-planned community 35 miles southwest of Phoenix.

Gordon’s testimony showed that the deals had “economic substance” for Lincoln and that “fair value” was paid, said John Lundin, one of American Continental’s lawyers.

But James P. Murphy, a lawyer for the Office of Thrift Supervision, said that the testimony provided the necessary facts to show that Lincoln and Gordon had simply engaged in a land swap, not separate property sales, and that the S&L; wrongly booked profits from the deals.

After the day’s hearing, Murphy said the circular transaction was “exactly the kind of speculative deals” that led to Lincoln’s downfall. “And now we’re paying for it,” he said, referring to the taxpayer bailout.