3 Keating Deals Under Scrutiny by Federal Grand Jury
Lawyers for former Lincoln Savings & Loan owner Charles H. Keating Jr. have identified three activities that they said are being investigated by a federal grand jury in Los Angeles involving the thrift’s $2-billion collapse.
According to documents released Thursday in Washington, Keating and two former associates were notified on Sept. 18 that they are targets of the federal inquiry. That was the same day Keating was jailed in Los Angeles under $5-million bond on separate state charges of securities fraud.
The documents, filed by Keating’s lawyers with federal thrift regulators, listed three subjects of the federal criminal inquiry: the purchase of a Detroit hotel, the use of an employee stock option plan for alleged personal gain and a series of dubious land deals.
Keating’s lawyers acknowledged in court recently that he is a target of the federal inquiry. But the disclosure of the three specific areas of investigation is the first confirmation of what the grand jury is examining.
Being identified as a target of a grand jury is not proof of wrongdoing and may not result in criminal charges.
Regulators have blamed Keating for the April, 1989, failure of the Irvine-based institution, which is expected to cost taxpayers more than $2 billion.
The federal Office of Thrift Supervision is seeking a record $40.9 million in restitution from Keating and five associates in connection with Lincoln’s failure. The OTS has charged in its civil action that Keating and the others diverted money from Lincoln through phony tax schemes and dubious land deals.
The regulators have been pressing for a hearing on the civil charges. In a response filed Sept. 27, Keating’s attorneys asked for a delay until the criminal actions against their client are complete.
The state indictment accuses Keating and three others of victimizing investors who bought worthless bonds of Lincoln’s parent company, American Continental Corp. But, according to the documents, the federal inquiry is more wide-ranging.
The lawyers said the federal grand jury was sought in a 16-page request provided to the Justice Department by the Federal Home Loan Bank Board, which used to oversee thrifts. The request cited three areas of inquiry:
* The purchase of the Hotel Pontchartrain, a downtown Detroit hotel, by a Lincoln subsidiary in December, 1985. The subsidiary sold it the following March for $38 million to a partnership consisting largely of Keating, his family and associates. Another Lincoln subsidiary financed the partnership’s purchase, an action that alarmed regulators, and the hotel eventually went into foreclosure.
* A guarantee by American Continental and Lincoln of a $20-million letter of credit issued by Bankers Trust so American Continental’s employee stock option plan could buy company stock. The ESOP, which also obtained a $3-million loan from a local bank, spent $21 million to buy American Continental stock from Keating, certain family members, other directors and officers, and the brokerage firm of Drexel Burnham Lambert, which had acted as broker for much of Lincoln’s trading in junk bonds.
* The Westcontinental Mortgage & Investment Co. deal, a convoluted arrangement in which Lincoln made loans to developer Ernest C. Garcia, who then loaned $3.5 million to Westcontinental, a limited partnership in which Garcia had an interest. Westcontinental used the money as a down payment on a $14-million purchase of raw desert land from Lincoln, but never repaid the loans. In a letter, the company asked that the property be returned to its rightful owner, suggesting that the partnership was a straw borrower.
Keating, on advice of his lawyers, has refused to talk to the press. He is in the Los Angeles County Jail unable to post a $5-million bond while awaiting trial on the state charges. Previously, he has denied wrongdoing in the three transactions.
The other two targets of the federal grand jury were identified as Judy J. Wischer, the former president and chief executive of Lincoln’s parent company, and Robert J. Kielty, its former senior vice president and general counsel.
Wischer is also charged in the state indictment. Kielty is not.
The same three transactions were part of the OTS civil complaint. As a result, Keating’s lawyers sought a delay in the OTS hearing until the potential criminal charges are resolved. Citing his constitutional protection against self-incrimination, the lawyers said that Keating would not be able to respond to the OTS charges so long as the criminal actions are pending.
