Prosecutors Label Lincoln Failure ‘Pure Fraud’ : S&Ls;: Attorneys for the Irvine thrift say the government did not have sufficient cause to seize it. The case now may go to a jury trial.
The failure of Lincoln Savings & Loan was a “pure case of fraud” perpetrated on the taxpaying public, government attorneys charged Tuesday in closing arguments of a legal proceeding that could affect federal authorities’ future ability to seize ailing S&Ls.;
Attorneys for Lincoln, however, argued that federal regulators misunderstood Lincoln’s business dealings and that the Irvine-based thrift was not insolvent when the government took control of it on April 14, 1989.
The suit by Lincoln’s parent, American Continental Corp., contends that the government did not have sufficient cause to seize Lincoln. It asks that ownership of the troubled S&L; be returned to the Phoenix real estate firm headed by Charles H. Keating Jr.
When both sides presented their final oral arguments before U.S. District Judge Stanley L. Sporkin, it brought to a close seven months of sporadic proceedings in a court hearing originally scheduled to last two days.
Instead of proceeding with a jury trial on the issues raised in American Continental’s lawsuit, Sporkin limited initial hearings on a government motion to dismiss the suit to four disputed transactions between Lincoln and its parent firm.
The transactions included a tax-sharing agreement under which Lincoln transferred $95 million to American Continental. Federal regulators charge that the arrangement allowed the parent company to get its hands on federally insured funds from the thrift.
Sporkin must now determine whether to dismiss the case or allow it to proceed to a jury trial, which could stretch out several years.
In doing so, the judge will review whether the government had just cause to seize Lincoln, which, at a cost to taxpayers of at least $1.5 billion, is expected to be among the most expensive S&L; bailouts. Attorneys in the case said Sporkin’s decision could help set parameters for the government when it takes control of other thrifts it suspects are being mismanaged.
The government emphasized in its final arguments that, under American Continental’s management, Lincoln directors entered into business arrangements that benefited the parent company at Lincoln’s expense.
It maintained that many of Lincoln’s business dealings were risky enough to warrant censure as “unsafe and unsound” practices, justifying seizure of the institution under federal statutes.
But lawyers for Lincoln said the standards under which Lincoln was seized were “extremely elastic” and that the government had “no direct information with respect to insolvency.”
They charged that government officials acted in an “arbitrary and capricious” manner in seizing Lincoln. They also said “there are gaping, unanswered questions not only in regard to the government’s motives, but in the (government’s) record itself.”
In questioning the two sides, Sporkin raised several issues that appeared to call into question government policy toward the troubled S&L; industry.
Under federal regulations, a thrift cannot issue a loan to its parent company. The government contends that several transactions between Lincoln and American Continental amounted to loans from the S&L; to the real estate development firm.
Sporkin noted that outlawing such loans was a “very dangerous situation” because it forces the government to “watch them like a hawk,” despite the difficulties of doing so. He said he is troubled that the government had “(singled) out these people who seem to be doing what other people are doing.”
The judge also criticized Lincoln’s lawyers, who repeatedly said the thrift’s transactions were too complicated to be considered in isolation. “A lot of imagination went into this,” Sporkin said, referring to a particularly complex stock transfer, “and everybody got money.”
Sporkin said the extended hearing was necessary because the plaintiffs were entitled to “some kind of due process hearing.” The policies of the now-defunct Federal Home Loan Bank Board, the agency that seized Lincoln, did not offer them that opportunity, he said.
According to federal records, Keating and his family earned more than $34 million in salaries, stock and other benefits over the five years he operated Lincoln.
Several other suits involving Lincoln and American Continental are pending. One, filed by the federal agency supervising the S&L; clean-up, accuses American Continental officers and their families of racketeering and fraud. It seeks $1.1 billion in damages.
In addition, about 23,000 holders of uninsured American Continental securities have filed 17 lawsuits in state and federal courts in California and Arizona, charging the company with fraud, racketeering and misrepresentation. Most of the securities were sold through Lincoln’s 29 branches in Southern California.
Several criminal investigations also are under way. A joint task force, including the FBI, the U.S. Attorney’s office and the Orange County District Attorney’s office, is working with a federal grand jury in Los Angeles to investigate allegations of securities violations, bank fraud and illegal political contributions by Lincoln directors, including Keating.
