Keating Indicted for Fraud, Jailed : S&L; probe: Three associates at Lincoln Savings and American Continental also are charged. A grand jury says they victimized investors in the sale of bonds.

By JAMES S. GRANELLI

Sept. 19, 1990 12 AM PT

TIMES STAFF WRITER

Charles H. Keating Jr., blamed by regulators for one of the nation’s biggest savings and loan failures, was jailed Tuesday after being indicted on 42 counts of state securities fraud and other violations.

Three of Keating’s business associates were also charged under state grand jury indictments unsealed Tuesday. The criminal charges are the first to arise from investigations into the failure of Irvine-based Lincoln Savings & Loan and its parent company, American Continental Corp.

Los Angeles Superior Court Judge Gary Klausner set bail at $5 million for Keating, former chairman of American Continental. When Keating was unable to post the bond, he was led away in handcuffs to Los Angeles County Jail.

The other defendants--Keating’s top aide, Judy J. Wischer, and former Lincoln presidents Ray C. Fidel and Robin S. Symes--are being held on bonds of $1 million each.

Keating, defiant in the face of regulatory scrutiny and willing to go out on the stump to seek support for his views, became a lightning rod for criticism about S&L; deregulation and events that led to the thrift-industry disaster, which regulators now estimate will cost U.S. taxpayers more than $500 billion over the next 30 years.

His indictment adds to the small but growing list of thrift executives nationwide who have been accused or convicted of fraud. Federal authorities estimate that fraud caused or contributed to the downfall of at least 40% of the nation’s failed thrifts.

“Obviously, justice is finally beginning to catch up with Keating,” said Jake Lewis, a spokesman for Rep. Henry B. Gonzalez (D-Tex.), whose House Banking Committee hearings last year on the failure of Lincoln exposed as much bureaucratic bungling as alleged wrongdoing.

The indictments accuse the defendants of victimizing investors who bought American Continental bonds through Lincoln’s 29 Southern California branches in 1987 and 1988. Although more than 15,000 investors bought the bonds, the indictments focus on 20 victims who lost between $50,000 and $100,000 each, said Los Angeles County Dist. Atty. Ira Reiner.

“These victims are people who have lost their life savings and are probably never going to see that money again,” said Reiner, who served as a special state prosecutor in the case at the request of state Atty. Gen. John K. Van De Kamp.

The defendants are accused of making false and misleading statements or wrongly omitting information to the public about the bonds. They also are charged with exceeding the authority given them to sell the securities, lying to the Department of Corporations to obtain approval for the bond sales, and failing to file a copy of the advertisement about the offering with the state agency.

The charges carry a maximum penalty of 10 years in prison.

The indictments are “tightly focused,” Reiner said, so that prosecutors can bring to trial a case the jurors can easily comprehend. He said too many fraud cases are lost at trial because they are too confusing.

Neither Keating nor his attorney, Stephen C. Neal of Chicago, responded to the charges Tuesday.

Previously, Keating has denied that he misled anyone or defrauded American Continental securities holders. He has said that a public prospectus accompanying the bond offering detailed the company’s financial condition and stated clearly on the first page that the securities were not insured.

State regulators said that while monitoring the sales undercover in 1987 they did not find anything wrong with the way the securities were sold.

Keating also has denied that he purposely sold a batch of securities through Lincoln because they were so risky that no brokerage would sell them. He has said that he would have recommended those securities to Mother Teresa, the Nobel Peace Prize-winning missionary from India whose work he supported financially.

The indictments stem from one of several investigations focusing on the April, 1989, failure of Lincoln, a high-flying thrift that invested heavily in high-yield junk bonds and risky real estate projects. Its collapse is expected to cost taxpayers more than $2 billion.

A federal grand jury in Los Angeles is conducting a wide-ranging probe into the collapse of Lincoln. Thrift regulators are seeking $1.1 billion from Keating and others in a civil racketeering lawsuit. Numerous suits have also been filed against Keating and others by bondholders.

William D. Davis, commissioner of the state Department of Savings and Loan, praised the grand jury and the district attorney’s office for their quick action. The grand jury had been investigating the case since mid-April.

Many small investors, mostly elderly Southern Californians, claim they were misled into moving their money from insured deposits to the high-risk, uninsured bonds in a “classic bait and switch” tactic used by Lincoln tellers and American Continental salespeople. The investors bought nearly $200 million in bonds, which are now nearly worthless.

“The nature of these investments were misrepresented,” Reiner said. “When people came in with their life savings, they thought they were dealing with people who had their best interests at heart.”

Reiner said details supporting the charges in the indictments would be released within 10 days.

Klausner stunned Keating, the other defendants and their attorneys when he set the high bail. Defense attorneys had asked that their clients be released without having to post bail. Reiner’s office did not oppose the request but reserved the right to argue later that bond be set.

Klausner said he set the high bail on his own initiative because the charges expose the defendants to up to 10 years in prison and because the amount of money involved was “substantial.” Prosecutors typically seek high bail only when they suspect defendants might flee.

Keating, who had been leaning against a courtroom partition with his right hand in his pocket during much of the hearing, stood up straight but otherwise showed no emotion when the judge set bail.

“I’m shocked,” said Donald Smaltz, attorney for Symes, who was visibly shaken by the judge’s decision. “It was a heavy-duty emotional hit for him. Nobody expected to be remanded to custody.”

David W. Wiechert, attorney for Fidel, said the defense lawyers are joining in a motion to ask Klausner to reduce bail. He said he hopes the papers will be filed by tomorrow.

The four defendants, who had been fingerprinted, photographed and booked before their 9:30 a.m. arraignment by the prosecutor’s office, were taken immediately to jail. They did not enter pleas, postponing that until Oct. 5.

Their clients will remain in jail unless they can post bond. Keating, once with a net worth of $39 million, claims he is now a pauper. The other defendants also cannot afford the bail, lawyers said.

Keating and his colleagues could be released if they post a cash bond for the entire amount, which is unlikely. More likely, they could provide a bail bondsman with collateral of up to 150% of the bond amount plus a fee of 10% in cash. For Keating, that fee would be $500,000, an amount he contends he does not have.

While the high bail surprised and shocked the defendants and their attorneys, the action was cheered by others.

“I’m sure that all the (bond) holders are cheering, but that’s no consolation, we’re still out of our money,” said Steve Roth of San Fernando Valley, who had invested $5,000.

“This will make people stop and think how rough it is on judgment day and will revive in the public eye what an awful thing happened here,” said Ronald Rus of Orange, an attorney for investors who lost more than $250 million in the collapse of Lincoln and American Continental.

“This is a guy who managed to buy influence like nobody we’ve ever seen, but he can’t buy himself out of a cell,” Rus said, referring to the large amount of campaign funds and other donations that Keating generated for politicians such as Sen. Alan Cranston (D-Calif).

Cranston and three others declined to comment on the indictments. Sen. John McCain (R-Ariz.), one of the five U.S. senators whose careers have been damaged by their links to Keating’s political funding, said he is “confident the judicial system will fully and fairly function and reach proper resolution on this issue.”

The so-called Keating Five--which also includes Donald W. Riegle Jr. (D-Mich.), Dennis DeConcini (D-Ariz.) and John Glenn (D-Ohio)--received more than $1.3 million in campaign funds and other donations from Keating fund-raising efforts. They also intervened on his behalf to question regulators in 1987 about the lengthy audit that regulators were conducting.

Keating had reason to be concerned about regulatory wrath. Federal agents in San Francisco wanted to seize the institution in 1987, but were rebuffed by their superiors in Washington.

Times staff writers Sam Fulwood III in Washington and Anne Michaud in Orange County contributed to this story.