Management of S&L; by Keating Called ‘Pure Case of Fraud’

Charles H. Keating Jr.’s management of Lincoln Savings & Loan Assn. amounted to a “pure case of fraud” costing taxpayers more than $1.5 billion, a government attorney said today.

Keating arranged “accounting-driven” land and stock deals to book false profits that allowed the Irvine, Calif., thrift to improperly funnel money to Keating’s Arizona holding company, American Continental Corp., said James Murphy, representing the Office of Thrift Supervision.

Murphy, summarizing regulators’ arguments, told U.S. District Judge Stanley Sporkin that Lincoln “was not a true savings and loan association.”

“In its essence, it was a real estate investment and development company and it was being operated in a very high-risk strategy and what was being used were federally insured deposits,” Murphy said.

The government is defending itself against Keating’s bid to overturn the April, 1989, seizure of Lincoln as “arbitrary and capricious.” Keating’s attorneys were to present their closing arguments after Murphy.

Sporkin, who has conducted 30 days of hearings over six months, will rule on the government’s motion for dismissal. The judge could uphold the seizure, find it invalid or order a full trial on the matter, which could take several years.

Murphy noted that Lincoln’s failure, perhaps the nation’s costliest thrift collapse, will cost taxpayers “in excess of $1.5 billion.” The government has already pumped in $1.2 billion just to keep it afloat, he said.

Murphy portrayed Keating as a man who unreasonably believed that he was the target of a vendetta by federal regulators. In fact, at Keating’s instigation, the thrift office’s predecessor, the Federal Home Loan Bank Board, went out of its way to ensure its examiners were unbiased. In 1988, jurisdiction of Lincoln was transferred from its San Francisco office to Washington, he said.

“In retrospect, I think it’s fair to say the bank board got taken in,” he said.

Keating, Murphy said, ran Lincoln for the benefit of his holding company, American Continental, betraying “a fundamental misunderstanding of what it is to operate an insured financial institution.”

The mechanism for funneling money from Lincoln to the holding company was a tax-sharing agreement that sent $95 million to American Continental in what amounted to a tax-free loan that was never repaid, Murphy said.

Some of the land and stock deals Lincoln entered into, often to its detriment, were timed to create accounting profits that would in turn create a tax liability and a reason for transferring money from Lincoln to the holding company, he said.

Separately, American Continental in 1988 promised the bank board to inject $10 million in capital into its S&L.; But in a series of complex transactions, “Lincoln’s money got put into Lincoln,” he said, saying it amounted to a “pure case of fraud.”

Keating said Monday he believes that he has received a fair hearing.

“We sure feel we’ve had our day in court,” he said. “I can’t think of anything that to me would have been more fulfilling.”

His case has attracted great attention because of Keating’s involvement with five senators who met with regulators on his behalf after accepting political contributions.

They are Sens. Alan Cranston, Dennis DeConcini, Donald Riegle, John Glenn and John McCain.