Bond-Sale Rallies: It Was Showtime : Thrifts: Lincoln Savings & Loan used food, drink and skits to exhort its staff to palm off the instruments, prosecutors say. When the S&L; collapsed, the bonds became worthless.
It was called “The Main Event.”
According to court testimony released Friday, once a year the young sales force whose job it was to sell high-risk American Continental Corp. bonds at its Lincoln Savings & Loan branches would gather one evening at a restaurant for a motivational meeting and evening of food, drink and skits.
Most of the skits revolved around selling bonds to Lincoln customers, typically portrayed as persons 65 to 75 years old and completely ignorant about what they were buying. In one skit parodying Phil Donahue’s talk show, a woman portraying a branch manager said no one ever left her office without buying a bond “even if I have to tackle them in the process.”
At one point during the 1987 meeting, then-Lincoln President Robin S. Symes, dressed as a cowboy, made clear the most important goal of the sales force: “When you get a customer, be sure to sell them a bond. If they say no, offer them a bond. And if they still are not interested, try to sell them a bond.”
Such details of a sales operation run amok emerged in statements by former Lincoln bond salespeople, released Friday among nearly 4,600 pages of sworn testimony before a state grand jury. The testimony was the basis of a 42-count state securities fraud indictment last month against former Lincoln kingpin Charles H. Keating Jr. and three others, alleging that they were responsible for misleading investors into buying some $200 million of now-worthless American Continental bonds through Lincoln’s branch network. The testimony will be used as evidence by prosecutors from the Los Angeles County District Attorney’s office.
What emerges from the testimony is an operation that at times resembled the religion-like sales approach of a revival meeting, with executives obsessed with selling the bonds.
What follows is a description of some of the sales tactics, culled from testimony of such former salespersons as Andre Melikian, Laura Powers, Rudolph Kaplan and Douglas J. Lagerstrom:
Branches competed against each other to sell bonds, with employees at the winning offices given longer lunch breaks and days off. Bonuses of up to $350 a person were paid for exceeding sales goals. On some days, branch employees wore T-shirts that read “Bondzai” and “Bond for Glory.”
The most important goal was to “cross sell,” meaning to get Lincoln customers with certificates of deposit or other conventional accounts to buy the bonds as well. Salespeople were given lists of customers whose CDs were about to expire.
Seminars for prospective customers were an important part of the sales pitch. Tote bags, balloons and pro football tickets were given away. Clocks were raffled as a way to gather phone numbers of prospective bond buyers. Question-and-answer periods were limited to five minutes because, as one sheet of instructions said, a longer period might lead to tough questions.
Leaders of the slide show were ordered to fully memorize their presentations with the instruction: “Please read and reread these presentations until the detailed verbiage . . . flows from your mouth like carbon monoxide from the exhaust pipe of a Mack truck.”
Former salesman Lagerstrom recalled that Keating himself visited a Lincoln Savings branch in Granada Hills in December, 1987, and found a customer buying a bond. “You can have a couple nights’ stay at my Crescent Hotel in Phoenix,” he quoted Keating as saying.
As Lincoln and American Continental’s financial condition deteriorated in late 1988 and early 1989, salesmen were gathered daily for a conference call with two top executives in Irvine. The press was out to get Keating, they were told, and regulators who wanted to shut Lincoln were young, inexperienced zealots. Financial losses only occurred because Keating did not want to sell valuable property just to book a profit, they were told.
Supervisors told them to “dance around the issue” when customers asked tough questions. Customers who did question American Continental’s financial strength were shown a poster-size satellite photograph of Phoenix detailing American Continental’s real estate holdings.
Customers who wondered if they were buying a “junk bond” were told that the term is misleading and that they were really buying a “young bond.” Bulletins were issued advising sales people to be on the lookout for middle-aged professionals in three-piece suits because they probably were regulators dropping in unannounced on the branches to check on the bond sales.
In January, 1989, bond salesmen, increasingly skeptical of American Continental’s condition, were flown to its Phoenix headquarters for reassurance. They met with Keating, toured facilities and were reassured that all was well. Some asked about reports that Arizona was headed for a major real estate recession. They were handed a report from an economist saying that everything was fine.
The group was treated to lunch with Keating and his wife Mary Elaine at the Phoenician, Keating’s spectacular $300-million resort in nearby Scottsdale. One person remarked about the beauty of Keating’s hotel and asked if there was anything Keating could possibly do to make it better.
“I can put a bond office in front of it and sell bonds,” Keating said, according to Lagerstrom’s testimony.
HIGHLIGHTS OF KEATING GRAND JURY TESTIMONY * The grand jury transcripts don’t appear to contain a “smoking gun” showing that former Lincoln Savings & Loan operator Charles H. Keating Jr. ordered salespersons at Lincoln branches to mislead customers buying bonds of Lincoln’s parent, American Continental Corp. But the overall testimony appears to show Keating knew about sales tactics being used.
* Keating admitted to a federal regulator two years ago that Lincoln faced a $2-billion loss even as American Continental was selling bonds to the general public and presenting itself as sound, the regulator testified.
* The prospectus issued with the bonds indicated that no incentives would be paid to sales agents. But various investors and former employees testified that bonuses were paid based on the number of bonds sold. The California Department of Corporations would have suspended the offering had it known of this violation.
* Lawyers for American Continental were told to modify ads placed in the Los Angeles Times and other publications that regulators characterized as misleading. The company was directed to make it clear that Lincoln Savings was not involved and that the securities were not insured by the Federal Deposit Insurance Corp.
* Various investors testified that when their Lincoln certificates of deposit came due for renewal or when they inquired about safe investments at a better rate, they were directed to an American Continental representative who told them about the bonds. They testified that bonds were represented as “a pretty good investment” and “comparable to a CD.” They testified that they were told the bonds were safe (“the bonds would be the first thing paid if anything happened to the company”) and were never told of the risk. Some investors testified that they never received a prospectus. However, other investors testified that they were fully informed of the risks.
* A federal regulator testified that he told Keating and others in 1986 that Lincoln had failed its federal net worth requirement and had failed other aspects of its regulatory examination. Lincoln’s parent still proceeded to sell bonds without informing investors of problems at the thrift.
QUOTES FROM THE TRANSCRIPT
” . . . When the government does it, it’s called deficit financing. When a firm does it, we call it a ‘Ponzi’ scheme.”
--Testimony of Dr. Alfred E. Hofflander, professor, Graduate School of Management at UCLA
” . . . (Keating) would always deviate into other subjects which weren’t pertinent. You couldn’t have a serious discussion. He wanted to completely control the situation and put it in his own perspective and his own control, and it seemed that he was used to paying people to give him the answer that he wanted.”
--Testimony of Alex Barabolak, an official with the Office of Thrift Supervision and a former examiner with the Federal Home Loan Bank Board of Chicago.
Compiled by MELANIE PICKETT
