Judge Questions Keating Intensely in Lincoln Case

Under intense questioning from a federal judge, beleaguered Arizona businessman Charles H. Keating Jr. denied Friday that he engaged in sham transactions while operating Lincoln Savings & Loan, arguing that regulators never understood the deregulation laws that allowed his unorthodox business strategy.

The remarks came in an unusual court proceeding in which U.S. District Judge Stanley Sporkin, a former enforcement chief at the Securities and Exchange Commission, personally handled the questioning of Keating. Government lawyers were silent as Sporkin spent many hours asking Keating about his business and accounting practices.

Generally, Sporkin’s tone was matter-of-fact and businesslike, but at times the questioning became quite pointed.

Testifying about his strained relations with federal savings and loan regulators, Keating told Sporkin that “if they would have left us alone, we’d still be making $100 million a year.”

Keating blamed regulators for insinuating themselves in the business operations of Lincoln and other thrifts across the country, causing losses that he estimated will cost taxpayers $500 billion to $1 trillion.

Government officials have projected that the industry bailout will cost taxpayers more than $200 billion, with Lincoln being the single biggest loss at more than $2 billion.

Keating’s testimony came as the government closed its portion of a hearing called by Sporkin to test the accuracy of records that regulators relied upon to justify their April 14 takeover of the Irvine thrift.

The court hearing has focused on four transactions identified by regulators as typical of the failure of Lincoln’s former parent firm, American Continental Corp., to operate the S&L; safely and soundly and conserve assets.

After acquiring Lincoln in 1984, Keating transformed it from a traditional thrift into a high-flying S&L; that planned to build entire communities on raw land, traded in stocks and high-risk junk bonds, and joined in corporate takeover attempts.

American Continental filed for bankruptcy protection April 13, the day before the federal seizure. The company sued regulators a week later, claiming that they lacked sufficient evidence to show that Lincoln was being operated unsafely and unsoundly and was substantially dissipating assets, the grounds cited for the takeover.

Sporkin is the first judge to review the merits of some of the longstanding differences between regulators and American Continental executives over the operation of Lincoln.

In one dispute, the government has alleged that a tax-sharing agreement under which Lincoln forwarded funds to American Continental to pay its share of the parent company’s tax bill was a subterfuge to move $94.8 million from the thrift to the parent.

But Keating rejected the charge. “With all my heart and soul I categorically deny that,” he said. “I had no concept remotely related to that.”

Keating said he simply suggested that the company look into a tax-sharing plan, which is a common arrangement between holding companies and their subsidiaries. Other executives completed the arrangement, he said, and he never paid much attention to it.

Sporkin seemed particularly interested in the accounting documentation for a $14-million sale of 1,000 acres of Arizona desert owned by Lincoln.

Keating testified that he negotiated the deal with Tucson developer Ernest C. Garcia. Lincoln records, however, show that another firm, Westcontinental Mortgage & Investment Co., put down $3.5 million down and took title to the property, agreeing to pay Lincoln $10.5 million more over time.

Transferring title to Westcon without any reference in the S&L;’s files to Garcia’s role “hides” the true relationship and the true owner, the judge said.

“There is one thing I think the regulators can insist on,” Sporkin said. “Whatever the transaction is, it should be accurately reflected on the books.”

Regulators contend that the deal was a sham because Lincoln provided a series of loans to Garcia, and he used part of those proceeds to lend the $3.5 million down payment to Westcon.

The result, they allege, is that Lincoln booked a profit on a sale in which it provided all the money for the transaction, a violation of accounting rules. That profit, in turn, resulted in Lincoln transferring money to the parent company under the tax-sharing agreement.

After his testimony, a beaming Keating contended that the government has failed to prove that it had sufficient grounds to seize Lincoln.

“They took away an association with $5.5 billion in assets, and they’re supposed to have some reasons,” he told reporters.

American Continental will present its side of the case when the hearing continues at an unspecified date.

But James P. Murphy, an attorney for the Office of Thrift Supervision, the nation’s chief S&L; regulatory body, seemed equally pleased with Friday’s hearing.

“What Keating described was the structure of a high-risk operation, not a savings and loan,” Murphy said. “He showed his antipathy for regulation and his readiness to call any regulator who pins him down ‘biased.’ ”

He noted Keating’s testimony that he considered eliminating Lincoln’s network of 29 branch offices servicing traditional customer accounts and replacing them with sales of $100,000 jumbo certificates of deposit brokered by investment houses such as Merrill Lynch.

Such deposits have been highly criticized by regulators because they pay relatively high interest rates and because brokers are likely to move them quickly to another S&L; paying even higher rates. But Keating said he was able to lock in the deposits for longer periods, thereby reducing the risk of investor flight.

The lively courtroom exchange between Sporkin and Keating covered topics ranging from the businessman’s background in Cincinnati and Sporkin’s days at the Securities and Exchange Commission to details on the specific allegations in the case.

Keating said his firm bought Lincoln in early 1984 because he saw an opportunity under newly passed deregulation laws to expand American Continental’s land development projects, most of which were located in Arizona.

But later that year, as regulators started restricting thrift operations they felt were harming the deposit insurance fund, he spoke out publicly against the new rules. For that, he said, he was targeted for harassment.

“The power of the government is awesome,” he said, as Sporkin smiled and nodded in apparent agreement. “When you don’t comply (with a rule), you become subject to an audit,” Keating said.

He said regulators made “horrendous” claims on the S&L;’s time and resources and required Lincoln to reduce the value of assets they did not understand, he said.