Testimony Shows Keating Told of Losses
Charles H. Keating Jr. admitted to a federal regulator two years ago that Lincoln Savings & Loan faced a $2-billion loss even as the thrift’s parent firm was selling bonds to the public and presenting itself as financially sound, grand jury testimony released Friday shows.
The admission was a dramatic one for Keating, who made the statement to regulator Alex Barabolak in October, 1988, the testimony shows. Until then, Keating had maintained that Irvine-based Lincoln Savings was in good financial shape.
“If this institution is taken over, you guys will be faced with a $2-billion loss,” Barabolak, a federal thrift examiner, quoted Keating as saying. Lincoln Savings was the principal subsidiary of Phoenix-based American Continental Corp., which Keating controlled.
Barabolak’s testimony to the state grand jury provides a key element in the state of California’s prosecution against Keating and three others, indicted six weeks ago on 42 counts of state securities fraud in connection with the bond sales.
Prosecutors from the office of Los Angeles County Dist. Atty. Ira Reiner believe the information shows that Keating knew his empire was failing but still misled the public into buying bonds.
The grand jury transcripts do not appear to contain a “smoking gun” showing that Keating ordered salespeople at Lincoln branches to mislead customers into buying bonds. Much of the testimony contains previously published information.
Keating, who could not be reached for comment late Friday, has said that he believed his company was in good financial shape and that he never misled buyers of the bonds. He has said American Continental never missed a bond payment until it filed for bankruptcy protection in April, 1989.
More than half a dozen regulators testified to the grand jury about Lincoln’s faltering financial condition and Keating’s response to their concerns. As early as December, 1986, regulators notified Keating personally that Lincoln had failed to meet a required capital level, said Charles A. Deardorff, a federal regulator based in San Francisco. Keating disputed the notice.
Defense attorneys said the testimony presents little new information and no evidence of criminal wrongdoing.
“We are going to mount a strong defense and we think we will demonstrate that we didn’t violate any laws,” said Stephen C. Neal, Keating’s attorney. “And there’s nothing in the transcripts that changes my belief.”
Release of the 45-volume, 4,600-page grand jury testimony is the latest chapter in the rapidly unfolding Keating story. The 66-year-old Phoenix financier has become a symbol of the nation’s savings and loan scandal. Keating has steadfastly maintained his innocence, saying he is the victim of government overkill.
Lincoln Savings collapsed 18 months ago, a failure that is expected to cost taxpayers more than $2 billion. Keating is currently free on $300,000 bond after having spent a month in Los Angeles County Jail.
The grand jury indictment focused on the allegedly fraudulent sale of $200 million in American Continental bonds through Lincoln’s branch office network in Southern California. The bonds were effectively rendered worthless after American Continental filed for bankruptcy protection. Government regulators seized Lincoln a day later.
Lincoln Savings has been open since the seizure, but as a virtual ward of the federal government. On Friday, regulators put the insolvent institution up for sale as part of their continuing taxpayer bailout of the thrift industry.
American Continental began selling bonds for the first time through Lincoln’s 29 Southern California branches. The prospectuses accompanying the bonds failed to point out the thrift’s problems with regulators and its precarious financial state, the regulators charged in testimony.
At the same time, young bond salespeople said they were told by their superiors that the company was strong and solvent, the testimony shows. And when news stories began questioning Lincoln’s financial shape in late 1988, they said they were reassured that any problems were temporary and the company would overcome them, the testimony shows.
Finally, Keating, in a meeting with bond salespeople in Phoenix in mid-January, 1989, told them to “sell more bonds,” even though he knew that regulatory orders a few weeks earlier effectively halted his ability to raise cash by selling debt securities, according to testimony.
The bond sale program was an important factor in American Continental’s continued existence, and the grand jury testimony suggests that its importance grew significantly after Sept. 6, 1988. That was when federal regulators cut off what they considered to be American Continental’s main pipeline of profits--the cash that Lincoln was surrendering to the parent company to pay for the thrift’s share of income taxes.
That tax-sharing plan, which a federal judge in Washington has called the “smoking gun” in Keating’s “looting” of Lincoln, had provided American Continental with more than $94 million over several years. But regulators contended it was illegal and ordered a halt to the payments.
Kayode Kajopaiye, a state thrift regulator, testified that he figured that American Continental no longer had a substantial cash flow and, based on his own calculations, told a company executive that the firm would run out of money by March, 1989.
Kajopaiye said he asked the executive in October, 1988, how the company would resolve the situation, and he quoted the executive as replying, “We just increase the sales of sub-debts (bonds).”
Defense attorneys said prosecutors will have a hard time convicting Keating, based on the testimony.
“There’s a lot of testimony appealing to the sympathetic emotions of jurors, but you’re not going to find traditional criminal information in the transcripts,” said Abbe David Lowell of Washington, attorney for Judy J. Wischer, former president of American Continental and one of the defendants.
The grand jurors had invited Sen. Alan Cranston (D-Calif.) to talk with them about Lincoln, but Cranston refused, in part because he was out of the country. Cranston was one of five U.S. senators who had benefited from Keating political donations and had intervened with regulators on Keating’s behalf.
In the past year, through a public relations counteroffensive, Keating has steadfastly denied he has done anything wrong. He has consistently portrayed himself as a victim of vindictive, inept and meddlesome government officials who did not understand him or his business.
However, the criminal indictment, along with a government civil racketeering suit and other lawsuits, have pictured Keating as a sophisticated con artist who took advantage of unsuspecting people.
Lincoln Savings’ collapse caused a great hue and cry because many of the bondholders were elderly depositors who placed their life’s savings into the bonds.
Internal documents later revealed that the bonds were sold through a high-priority, high-pressure program by a sales force with no special expertise in handling the debt securities, known as subordinated debentures. One internal memo advised the sales force to target the “weak, meek and ignorant.”
Keating’s business activities have also been under investigation by a federal grand jury in Los Angeles, while the federal Office of Thrift Supervision is seeking $40.9 million in restitution from Keating and five associates in connection with Lincoln’s collapse.
According to Keating’s lawyers, the federal criminal inquiry includes the purchase of a hotel in Detroit, the use of an employee stock option plan for alleged personal gain and a series of dubious land deals.
Times staff writer James Bates and researcher Melanie Pickett contributed to this story.
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