U.S. Judge Denies Keating Challenge to Seizure of S

Arizona real estate developer Charles H. Keating Jr. lost his court challenge Thursday to the government’s takeover of Lincoln Savings & Loan of Irvine, clearing the way for the sale of assets seized in one of the biggest thrift failures on record.

In a sharply worded opinion, U.S. District Judge Stanley Sporkin ruled that the government was “fully justified” in its seizure of Lincoln last year, noting that the California thrift was “in an unsafe and unsound condition to transact business.”

Sporkin declared that Keating, chairman of Lincoln’s former parent company, and other top officers “abused their positions” through actions that “amounted to a looting of Lincoln.”

The judge cited at least 12 instances of “skulduggery . . . and spurious transactions” that he said had served to enrich Keating’s American Continental Corp. at the expense of the thrift’s customers.

The ruling was the second court setback for Keating in two days, coming on the heels of a Los Angeles federal judge’s decision Wednesday partially freezing Keating’s assets and requiring him to disclose his personal finances to government regulators within five days.

Keating, reportedly worth as much as $39 million in 1987, now claims that he is broke.

T. Timothy Ryan Jr., director of the federal Office of Thrift Supervision, hailed Sporkin’s ruling as “an extremely important victory in a very significant case.”

Ryan, however, gave no clue as to how soon the government might start selling Lincoln’s assets. Other officials said it would occur “as soon as practicable” but that Keating might try to postpone such action by going to the U.S. Court of Appeals.

Bradley Boland, Keating’s son-in-law and a spokesman for American Continental, said the company “is reviewing all of its options and has no comment at this time.”

Ryan said the decision confirms that his agency “has the authority, and will continue to exercise the authority, to see that those who have abused the savings and loan system and the American taxpayer will not be permitted to do so again.”

He added that such operators “will not be permitted to retain 1 cent of their ill-gotten gains.”

The failure of Lincoln, which was seized by federal regulators in April, 1989, is expected to cost taxpayers as much as $2 billion once all assets are sold and all depositors paid off. It is the biggest failure among the hundreds of collapsed thrifts that have contributed to an industrywide debacle expected to cost the nation as much as $500 billion.

After the Federal Home Loan Bank Board seized Lincoln, Keating filed a lawsuit alleging that the takeover was “capricious and arbitrary.” Sporkin’s ruling on the suit followed 30 days of hearings that began last December.

Sporkin portrayed Lincoln as a leading example of how deregulation by Congress and the Reagan Administration, combined with fraud on the part of thrift operators, had led to the S&L; crisis that has become a major campaign issue this year.

“This is a saga that demonstrates the excesses of a misconceived and misapplied regulatory program along with a group of individuals who were bent on exploiting these excesses,” said Sporkin, whom President Ronald Reagan appointed to the federal bench in 1985.

Referring to the case before him, he added: “Bluntly speaking, their actions amounted to a looting of Lincoln. This was not done crudely. Indeed, it was done with a great deal of sophistication.”

Sporkin traced Lincoln’s decline to 1984, when Keating sought to add an S&L; to his real estate empire by having American Continental acquire Lincoln.

American Continental officials replaced the thrift’s former management team, and Lincoln soon deviated from its primary business of lending money to purchasers of single-family homes in Southern California, the judge noted.

Lincoln subsequently “took equity participations in emerging new businesses and made a number of high-risk loans to individuals engaged in speculative endeavors,” he said.

Sporkin reserved some of his sharpest criticism for a questionable tax-sharing arrangement in which he said Lincoln improperly passed $94 million “upstream” to American Continental at a time when the parent company needed financial assistance.

“Plaintiffs (American Continental and Lincoln) used the concept of tax sharing as a way of dipping into Lincoln’s coffers and taking money which under no circumstances were plaintiffs entitled to have,” he said. “Although ACC owned 100% of the stock of Lincoln, this did not give ACC license to strip Lincoln of its funds.”

Calling this a “dishonest scheme,” Sporkin said there was no legal justification for the payments because Lincoln, standing alone, would not have been liable for such tax payments.

He also criticized at least 11 other transactions, most of them real estate deals, as “unsafe and unsound practices” designed to funnel money to American Continental at Lincoln’s expense. These were “akin to an adult taking candy from a helpless child,” Sporkin said.

He concluded his opinion by deploring the fact that accountants and lawyers working for Keating had approved so many “clearly improper transactions.”

“What is difficult to understand is that with all the professional talent involved--both accounting and legal--why at least one professional would not have blown the whistle,” Sporkin said.