THE KEATING CASE : NEWS ANALYSIS : Lincoln Cases Have Long Road Ahead
The state’s criminal securities fraud case unsealed this week against Charles H. Keating Jr. revolves around fairly narrow legal issues, including the key question of how much the Phoenix businessman knew about how securities were sold at his failed Lincoln Savings & Loan.
But broader issues lying at the heart of Lincoln’s failure--and the expected taxpayer price tag of more than $2 billion--still remain unresolved, left for other lawsuits and investigations pending.
A wide-ranging federal grand jury investigation in Los Angeles, for instance, is focusing on bank fraud, federal securities violations and illegal political contributions that led to the April, 1989, collapse of the Irvine-based thrift.
And a $1.1-billion civil racketeering suit brought by federal regulators is aimed at tying in the lawyers and accountants who advised Keating, his American Continental Corp. and its then-subsidiary, Lincoln Savings. American Continental bondholders--who provide the basis for the state’s action--are also suing the same general defendants to recover more than $250 million in lost investments.
Any charges in the federal criminal probe, and trials in the civil cases, may be a year away.
Although the state’s effort is more narrow, it nonetheless illustrates a new aggressiveness on the part of state regulators in S&L; fraud cases.
Typically, federal authorities investigate and prosecute major fraud at financial institutions. Now states are beginning to bring charges under their own laws as well, said Michael Manning, a Phoenix lawyer handling the government’s racketeering suit against Keating.
“In these fraud cases, we’re seeing more instances of state and federal authorities working together and prosecuting cases separately,” Manning said.
Lawyers for American Continental securities holders have said previously that a state grand jury investigation, overseen by Los Angeles County Dist. Atty. Ira Reiner, would probably be able to bring criminal charges more quickly than federal authorities could. A wide-ranging investigation, they pointed out, takes a long time.
The state’s narrow legal focus also is aimed at providing potential jurors with a case they can easily understand, said Reiner, who was appointed a special state prosecutor by state Atty. Gen. John Van De Kamp to investigate Lincoln. But all prosecutors, even in major federal cases, reduce the scope of criminal charges to provide jurors with cases they can grasp quickly.
In the federal prosecution of North America Savings & Loan consultant Janet F. McKinzie, for instance, government lawyers based their case on one series of activities in the failure of the Santa Ana-based thrift. She was convicted earlier this year of racketeering and sentenced to 20 years in prison.
Another motive behind greater state aggressiveness is political grandstanding on the part of publicity-seeking district attorneys and attorneys general, defense lawyers say. One lawyer, for instance, called the Keating indictments “Reiner’s rush to publicity.”
The state’s case--and the jailing of Keating on Tuesday--also brings home the harsh realities of the price that savings and loan fraud suspects are increasingly paying in today’s heightened effort to put behind bars the crooks that destroyed the thrift industry and left taxpayers with a potential $500-billion bill over the next 30 years.
“I wouldn’t want to be a defendant being sentenced in an S&L; crime these days,” said another lawyer who frequently defends people accused of white-collar crimes.
“As you look around the country, you’re going to see more and more people crying for the scalps of people involved in white-collar crime,” said Warren L. Ettinger, a prominent criminal defense lawyer in Los Angeles. “If we think (former Drexel Burnham Lambert junk bond king) Michael Milken has problems, he has no problems compared to the collective anger directed at the people involved in the collapse of savings and loans.”
The 66-year-old Keating, facing the first criminal charges filed in the aftermath of the Irvine thrift’s collapse, spent his second night in Los Angeles County Jail on Wednesday as his lawyers prepared for a hearing this morning to seek a reduction in the surprisingly high $5-million bail set by a Los Angeles Superior Court judge on Tuesday.
Keating’s three co-defendants--former top aides charged with the same state crimes--are also asking the court to reduce their bonds, which were set at $1 million each.
The state’s 42-count indictment, unsealed Tuesday, accuses the defendants of violating state securities laws by, among other things, making false and misleading statements about American Continental debt securities sold to mostly elderly Lincoln depositors at the S&L;’s 29 Southern California branches. Convictions in the case carry a maximum of 10 years in prison.
Many depositors have told authorities and the media that they were pushed into buying the risky, uninsured bonds by company sales people who falsely assured them that the securities were safe.
How much Keating and the other defendants--Judy J. Wischer, former American Continental president, and Robin S. Symes and Ray C. Fidel--knew about the way the company’s debt securities were sold through Lincoln is a key issue in the criminal case.
“They would have to have some very strong proof that Mr. Keating instructed people to commit fraud” to win the case, said Howard L. Weitzman, a criminal defense lawyer with Wyman Bautzer Kuchel & Silbert, a Century City law firm that represents American Continental in its bankruptcy proceedings.
An employer can’t be held criminally responsible if an employee exceeded his authority and committed fraud unless the employer directed it or knew about it, he said. “What if the lower guy did it on his own?” he said.
But Lynn Miller, the special counsel hired by Reiner to direct the grand jury investigation, said the evidence gathered since mid-April gives prosecutors “an extremely strong case” that goes beyond legal requirements needed to win guilty verdicts.
She said that the authority given to employees selling securities was broad enough to show that Keating and the others had full knowledge of what was going on.
“The motive and intent of our office is to get this matter to trial as soon as possible,” Miller said. “There are people who would like to see justice done swiftly.”
Separately, Sacramento County Dist. Atty. Steve White--who also was appointed a special state prosecutor in the Lincoln investigation--hopes to conclude within the next two to three weeks a probe of possible misdemeanor violations of the state political reform laws.
Al Locher, the assistant chief deputy heading the investigation, acknowledged that the investigation is aimed primarily at lawyers in the Los Angeles law firm Parker, Milliken, Clark, O’Hara & Samuelian, which helped American Continental win approval of the two debt offerings sold at Lincoln branches. State officials who approved those sales also could be subject to the probe, he said.
LINCOLN’S LEGACY OF LEGAL ACTION
Here are some of the major pending legal actions against Lincoln Savings & Loan; its former parent, American Continental Corp., or former American Continental Chairman Charles H. Keating Jr.:
Major Pending Litigation
Bankruptcy Court: Federal regulators have claims pending against American Continental in federal bankruptcy court to recover losses at Lincoln that were allegedly caused by the parent firm.
OTS Seeks Restitution: The federal Office of Thrift Supervision, which regulates savings and loans, is seeking to force Keating to pay $41 million in restitution for losses incurred by Lincoln. Keating has also reported his personal finances and must report to regulators expenditures of more than $5,000.
Bondholder Suits: About 23,000 holders of five different issues of American Continental’s debt securities have filed 17 lawsuits in various state and federal courts. They allege fraud, misrepresentation and racketeering against American Continental executives and their lawyers and accountants.
RTC Racketeering Suit: The Resolution Trust Corp., which manages failed savings and loans, has a pending lawsuit accusing seven American Continental executives of racketeering and 20 directors, officers and spouses of fraud. The suit seeks $1.1 billion.
State Department of Corporations: The agency has a state securities fraud suit pending that seeks restitution for American Continental bond holders and an injunction against three American Continental executives to prevent further violations of securities laws.
Pending Criminal Investigations
Joint Task Force: 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 on three separate probes. They are investigating allegations of general bank fraud, securities violations and illegal political contributions.
Los Angeles County Grand Jury Indictment: Keating and three associates are indicted on 42 counts of securities fraud and other charges in the first criminal action in the Lincoln case. The indictment centers on wrongdoing in selling debt securities at Lincoln’s branches.
Securities and Exchange Commission: The SEC has been investigating American Continental for more than three years on a variety of disclosure and other securities law matters. The SEC is empowered to bring either criminal charges or civil lawsuits.
Pending Civil Investigations
Thrift Regulators: The OTS and the RTC, which filed the federal racketeering suit, continue to investigate additional allegations of fraud, regulatory violations and other wrongdoing against the same defendants and new targets.
State Actions: California Atty. Gen. John Van de Kamp and others continue to look at possible civil and criminal wrongdoing, primarily in connection with the sale of debt securities at Lincoln branches.
Related Investigations
Senate Ethics Committee: The five U.S. senators who intervened with federal thrift regulators on behalf of Keating look to the Senate Select Committee on Ethics to clear them of any ethical blame for their questioning of regulatory treatment of Lincoln in April, 1987.
Accountants: The state Board of Accountancy is looking into the work of individual accountants at the firms Arthur Young & Co. (now Ernst & Young), Arthur Andersen & Co. and Touche, Ross & Co. (now Deloitte & Touche). Debt holders and others claim that accountants misrepresented American Continental’s financial condition. The board can recommend sanctions including revocation of licenses.
