3 of Keating’s Activities Cited in Investigation
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 in the S&L;’s $2-billion collapse.
According to documents released in Washington Thursday, 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 on charges of state 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.
But Keating now says he is broke. The papers filed with the OTS also lowered the estimate of Keating’s negative net worth to $4 million. In August, as well as at a bail hearing two weeks ago, his personal accountant said Keating’s debts exceeded his assets by $5.2 million.
The OTS has been pressing for a hearing on the civil charges against Keating. 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 federal grand jury is looking into alleged bank fraud, securities fraud and illegal political contributions.
The lawyers said the federal grand jury was sought in a 16-page request provided to the Department of Justice 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 funded the sale to the partnership, an action that alarmed regulators. The partnership refinanced the loan, but regulators challenged that transaction as a questionable insider deal. The hotel eventually went into foreclosure.
Keating has claimed that all the deals were aboveboard and that regulators were aware of the transactions.
* 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 Inc., which had acted as broker for much of Lincoln’s trading in junk bonds.
Keating has claimed that he and other insiders sold stock to the ESOP at prices slightly below those then prevailing. He said the insiders were the only ones with sufficient stock to fund the ESOP.
* 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 has testified in a federal court in Washington that his dealings were with Garcia and that he thought Westcontinental was simply a vehicle Garcia used to handle the transaction.
Keating, the former chairman of American Continental, has refused to talk to the press since he was sent to Los Angeles County Jail on Sept. 18. He has been unable to post $5-million bond while awaiting trial on the state charges. He and three co-defendants are scheduled to be arraigned today.
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.
Keating is also one of a number of former American Continental executives named as defendants in a $1.1-billion civil racketeering suit brought by federal regulators last year. And small investors in the company who claim that he defrauded them out of more than $250 million have filed 17 lawsuits against him.
