Lincoln Litigation Is Massive, Complex, Costly : Thrifts: With 24 lawsuits and investigations by seven state and federal agencies, prosecutors and lawyers are likely to be busy for years.
A courtroom full of lawyers had gathered for their weekly meeting in Phoenix a few months ago to go over some legal matters in the bankruptcy of American Continental Corp., parent of the failed Lincoln Savings & Loan in Irvine.
Ronald E. Warnicke, a Phoenix lawyer who was appointed an examiner in bankruptcy, contended that the way the company’s chairman, Charles H. Keating Jr., was spending money to fight federal thrift regulators, there soon would be no money left for creditors.
The accusation prompted U.S. District Judge Richard M. Bilby to warn the lawyers about the vast amount of litigation and investigations involving Lincoln, which could become the biggest thrift bailout in history with a $2 billion bill to taxpayers.
“I would hate for this case’s epitaph five years from now to be that the public lost, the regulators lost, American Continental lost, the creditors lost, Mr. Keating lost--but the lawyers got rich,” Judge Bilby said.
Good Deal for Lawyers
Indeed, the lawyers are doing well. Lincoln is arguably the most investigated financial institution in the nation’s history. To date, at least seven state and federal agencies are investigating possible criminal wrongdoing. In addition, small investors and government authorities have filed at least 24 major civil lawsuits seeking millions of dollars in damages from Keating and his top executives.
“I can’t imagine anyone being more investigated,” said Donald Gaffney, a Phoenix lawyer for a bankruptcy committee of unsecured American Continental creditors. “Other than the CIA, everyone’s investigating Lincoln.”
The web of investigations and lawsuits will take years to untangle. Much of the effort may be for naught. Keating and his corporate executives have claimed in court documents that they’re out of money, making any recovery of claims against them questionable.
American Continental, which has worked with more than 75 law firms in the last few years, is paying its army of lawyers more than $1 million a month to battle regulators and other litigants and to bring the company out of bankruptcy. And the government is estimated to be spending twice that on its hired hands in an all-out war to put Keating and his cohorts totally out of business and behind bars.
Much of the spending appears to be unnecessary because of duplicative efforts. Federal authorities, for instance, are not sharing information with state investigators or other parties who are on the same side. And state authorities, Gaffney said, appear to be going over the same ground that federal investigators and others already have covered.
Keating and American Continental have helped run up the bills by filing several lawsuits against regulators as well. The company has challenged the federal seizure of Lincoln last year. U.S. District Judge Stanley Sporkin has been hearing testimony over the last several months.
Document Depository
While the Lincoln collapse is a boon to lawyers, Gaffney quips that the big winners are paper manufacturers.
A document depository was created in Phoenix to maintain the originals of all documents filed by American Continental, Lincoln, federal regulators, several accounting firms and others. The depository has more than 20 million pages of documents in some 10,000 boxes, which, if set end to end, would create a Great Wall of Lincoln--a foot-wide, foot-high mound of paper stretching for nearly four miles.
“You can read from now until your demise and still not read everything,” said John Quinn of Los Angeles, a lawyer for Keating and his family. “I’ve never seen anything like this.”
But there’s a reason for all the paper, beyond the fact that fraud cases typically include a large amount of documents.
“This is the financial scandal of our age,” said William S. Lerach of San Diego, one of the lawyers in 17 lawsuits brought by small investors who bought American Continental debt securities.
David B. Gold of San Francisco, another plaintiffs’ lawyer, points out that the litigation involves more than just the loss of $250 million to more than 23,000 debt holders. The civil suits include charges of improper political pressure by Keating and his company.
“This case goes to the very essence of the way our government works,” Gold said. “If political pressure is going to be put on our regulators, it undermines the function of government.”
Before American Continental filed for bankruptcy last April 13 and regulators seized Lincoln the next day, Keating wielded great influence among politicians. He and his family and business executives, as well as his company, contributed more than $1.7 million to about three dozen state and federal politicians or their causes. And he frequently called office holders to express his views on thrift law regulation.
His group spent most of its money----more than $1.3 million----on five influential U.S. senators, including Alan Cranston (D-Calif.), who raised more than $900,000 from the Keating group, mostly for voter registration groups the senator supported.
Senators Called In
When Keating had trouble with regulators over an unusually long federal audit of Lincoln in early 1987, he called on the five senators to help end the audit. The Keating Five, as they now are known, held two meetings with regulators, who have since claimed the senators pressured them and sought to make a deal for Keating.
The senators have vehemently denied applying pressure or seeking any deal and they have called for some of the investigations that now are part of the litigation landscape.
Cranston, for instance, had asked the General Accounting Office to look into ways to get money back to the American Continental debt holders but the GAO declined to act, citing ongoing litigation elsewhere. Some Keating Five senators, such as John McCain (R-Ariz.), were among those who asked the Federal Elections Commission to look into possible campaign law violations on the part of himself and the other senators.
Meantime, the Senate Ethics Committee is probing their contacts with federal thrift regulators on behalf of Lincoln. The senators have vigorously defended their actions in that forum.
The pending litigation and investigations come from three groups: federal authorities, state agencies and creditors, primarily debt holders. Most of the small investors were part of a group that bought the biggest chunk of debt securities, or bonds----nearly $200 million worth----at Lincoln’s 29 Southern California branches.
James J. Feder of Los Angeles, a lawyer for American Continental, admits that his client has its share of legal problems, particularly the $250 million in class-action claims from bondholders. But he said the case does not rival the problems caused by some previous bank failures.
Bondholders Sued
The list of pending lawsuits against Keating and others includes a recent civil action filed by the California Department of Corporations, a suit many lawyers involved in the massive amount of litigation say is inadequate and hypocritical. Bondholders have sued the agency in some of their class-action suits, accusing it of wrongly approving the bond sales when there was clear evidence that American Continental couldn’t repay the debt.
“The Corporations Department sued three people who claim not to have any money at all and almost negligently failed to go after those who are just as culpable and have money,” said Joseph W. Cotchett of Burlingame, another bondholder lawyer. “They manifest a complete lack of understanding of what happened.”
The bondholders are looking to recover from the professionals--accountants and lawyers--who advised Keating, as well as from insurance carriers for Keating, his lawyers and his accountants.
The list of pending investigations against Keating and his executives includes Los Angeles County Dist. Atty. Ira Reiner’s call for a special state grand jury to investigate the possibility of criminal wrongdoing, an action some lawyers think might help but others call superfluous and politically motivated.
Reiner, acting as a special state attorney general, may be able to move faster than federal authorities and secure a conviction that could help the bondholder cases move more quickly, Cotchett said. But plaintiffs lawyer David B. Gold said the investigation covers the same area that federal officials are probing and Reiner’s only motivation is political. A Democrat, Reiner is running for attorney general and wants to reach as high as possible into Deukmejian’s Republican administration for wrongdoers, Gold claims. Reiner denies the charge.
Orange County Dist. Atty. Michael Capizzi, invited to join the state investigation, said he declined because his office has “too many cases to spend our resources on without duplicating what another agency has done.” He gave the federal task force two county investigators and will supply staff lawyers if needed.
Capizzi, a Republican, said his decision was nonpartisan and based on the best interests of the investigation, the victims and the taxpayers.
Atty. Gen. John K. Van de Kamp, a Democrat who is running for governor, has been criticized for playing politics with the Lincoln case. Caught between his dual role of defending state officials and prosecuting state fraud cases, he did nothing through last summer, then appeared to flip-flop between investigating Lincoln and defending the state.
In December, he decided to pass the criminal investigation off to Reiner and Sacramento County Dist. Atty. Steve White, a former Van de Kamp aide. The attorney general also decided to launch a separate civil investigation while defending the state against bondholder litigation. This litigation alleged negligence on the part of the Corporations Department for approving the debt sales when the agency knew American Continental could not repay the debt.
A month later, Van de Kamp decided that state officials had to get their own lawyers, at state expense, because his office would have a conflict of interest in investigating securities improprieties while representing the state agency that may have wrongly approved the securities sales.
Corporations Commissioner Christine Bender was fuming. She charged that Van de Kamp was abandoning his clients and that he already had an attorney-client relationship with them. Worse, she said, he was withdrawing when the state had a vital interest in any statements she made in upcoming depositions in the bondholder litigation because her comments could bind the state and make it liable. She termed his conflicts argument a “thin excuse.”
