Lincoln Probes Seen by Some as Legal Overkill : Courts: There are worries that the profusion of cases against the besieged thrift’s most notorious operators could create duplication and delay justice.
Federal thrift regulators first notified the Securities and Exchange Commission in late 1986 that they thought something was fishy with the financial statements of American Continental Corp., the parent of Lincoln Savings & Loan.
The regulators told the SEC they uncovered evidence during an audit of the Irvine-based thrift that American Continental was selling securities based on “false and misleading” financial information.
While the SEC’s enforcement arm looked into these allegations, the agency gave the company approval in April, 1988, to sell the risky bonds to investors. A year later, the company was bankrupt and its thrift insolvent. And thousands of investors were out nearly $200 million.
Today, the SEC is preparing to file a lawsuit against former American Continental Chairman Charles H. Keating Jr. and other company executives involved with the bond sales. But to many touched by the Lincoln scandal, the SEC is a day late and a dollar short.
The agency’s Johnny-come-lately effort toward Lincoln comes as a basketful of other civil and criminal investigations are moving forward. And to some it raises questions about overkill in the probes of Keating and his associates.
“If this were football, the SEC would be penalized for piling on,” said Abbe David Lowell, lawyer for former American Continental President Judy J. Wischer.
Wischer has been indicted with Keating and two others on state securities charges related to the sale of corporate bonds at Lincoln. She, Keating and others have also been notified that they are targets in a wide-ranging federal grand jury investigation into the failure of Lincoln. And they have been named in numerous other lawsuits over the ill-fated bond sales.
The SEC recently notified Keating, Wischer and others that it intended to file suit to bar them from future securities transactions and to obtain damages for past violations.
In a recent letter to the SEC, Lowell said various parties are seeking a total of $4 billion against Wischer, an amount they could never recover. He further argued that what the agency would seek in its lawsuit is “unnecessary and impractical,” especially since Wischer would agree to be banned from securities-related work.
“I wonder if the public actually knew how little practical effect your new suit would have versus how you might better use your staff time,” he wrote.
With a plethora of state and federal agencies and a mob of small investors going after the bedraggled thrift industry’s most notorious operators, even government lawyers are getting wary about the profusion of investigations and cases.
One government attorney, who asked not to be identified, said he feels as if he spends most of his days simply “orchestrating the allied effort” to avoid land mines inherent in such a huge undertaking. The mines include duplication of effort, competing claims and turf battles.
“Regardless of what Mr. Keating or any of these S&L; people did--assume they did it all--still, enough is enough,” said Linda Pence, who co-chairs an American Bar Assn. committee on complex crimes and litigation.
There are concerns that the extensive investigations and complex litigation will exhaust what little money is left to recover from the defendants. In addition, there are some who contend that the duplicative efforts are wasting taxpayer dollars in a frivolous pursuit of revenge.
“The sad thing in these kinds of cases is that the people who lost money seldom see any of it returned,” Pence said. “By the time the government and all the lawyers are through, there’s no money left.”
Richard C. Breeden, the SEC’s chairman, refused to discuss any issues connected to the agency’s action, referring instead to his 16-month-old testimony before the House Banking Committee during its investigation of Lincoln’s collapse.
But Harris Weinstein, general counsel for the Office of Thrift Supervision, defends the multipronged government actions, saying each agency has sole authority to pursue certain claims and that each case builds on the previous ones.
“The individual agencies do not act in isolation,” he said. “There is cooperation and coordination of these cases. Certainly the Lincoln case, in terms of the importance of the issues and the loss to taxpayers, is one of the most important cases and one most worthy of our resources.”
To be sure, Lincoln warrants the government’s attention.
It is the industry’s biggest single failure, carrying an estimated taxpayer cost of $2.6 billion. Investors lost more than $250 million, much of it borne by elderly Lincoln depositors who didn’t realize they were putting their life savings at risk.
And Keating, who has been vocal about accusing regulators of ruining his thrift, used political contributions to help him wield immense political influence. Five U.S. senators, including Alan Cranston (D-Calif.), were reprimanded by the Senate Ethics Committee.
“This is the biggest case in terms of damages to people, and the wrongdoing is the worst I have ever seen,” said veteran plaintiffs’ lawyer William S. Lerach, one of the lead lawyers for bondholders.
Last year, he and other plaintiffs’ lawyers criticized the growing number of government agency lawsuits as “duplicative and unnecessary.” Now he thinks the various actions may slow down the time it takes to recover losses but should help the bondholders’ effort in the long run.
So vast is the litigation now that many bar leaders and law professors qualified their remarks or wouldn’t talk at all about possible government overkill because they or their firms either represent a party in the litigation or are defendants themselves.
Keating suffered his most devastating defeat in the only case in which a judge so far has reached some of the merits of the government’s claims against him.
Last August, U.S. District Judge Stanley Sporkin, a former SEC chief of enforcement, found that Keating’s activities “amounted to a looting of Lincoln” and criticized the company’s army of outside lawyers and accountants for not blowing the whistle.
Sporkin’s decision has become the blueprint for much of the government’s subsequent action, as well as criticism of the government’s past inaction wi h regard to Lincoln.
“Sporkin said, ‘Where were all the lawyers and accountants?’ Well, you could say, ‘Where was the SEC?’ ” said Geoffrey C. Hazard Jr., a Yale Law School professor who specializes in civil procedure and ethics issues. “A whole bunch of agencies ended up with egg on their faces” because they failed to act when they could have and should have, he said.
Now, the agencies must go after Keating publicly, he said, mainly to remain effective over the long haul in other investigations and in dealings with Congress.
“It’s like your (Los Angeles) Police Department with the Feds looking into it over police brutality charges,” Hazard said. “Nobody can take the political risk anymore of saying someone else is looking into a matter.”
In addition, each federal agency has its own mission prescribed by law to perform, said Arthur Miller, a Harvard Law School civil procedure professor who specializes in complex litigation.
The OTS, for instance, is the only agency that can bar Keating from the thrift industry, which is the heart of its $130.9-million administrative case, and the SEC is the only one that can keep him out of top positions in public companies.
But even so, Miller said, there is often massive duplication in complex cases such as the Lincoln probes or asbestos litigation. For instance, there are about 100,000 lawsuits involving victims of asbestos-related diseases filed in state and federal courts nationwide. There is a “great deal of repetition” in the asbestos cases, he said.
On a more basic level in the Lincoln cases, government lawyers and officials don’t accept Keating’s statement that he is broke. They believe he has stashed millions of dollars from Lincoln somewhere. Keating insists he is more than $5 million in debt.
If he is, lawyers for the bondholders say, he would be judgment-proof, and they would be unable to collect any court settlements from him personally. So they are turning to law firms and accounting firms that advised him and didn’t blow the whistle. Those firms have enough insurance to cover the losses.
Keating and the other executives, though, still need to be named in the litigation.
“You don’t want to have the bad person not in the lawsuit,” said William Humphrey, another lawyer for bondholders. “You don’t want other defendants pointing to the absent chair, putting the blame there and persuading the jury to let everyone else off.”
One key to pulling off the complex web of cases, Miller and Hazard said, is coordination. That means getting the cases before the same judge or sets of judges.
Most of the Lincoln cases--including the actions brought by state agencies--have been transferred to U.S. District Judge Richard M. Bilby, an experienced handler of complex litigation. A veteran of the nationwide litigation over the failure of the Washington Public Power Supply System, Bilby uses all the latest techniques, including computers in the courtroom, to push cases toward settlements.
“But one of the most morbid thoughts,” Miller said, “is that these cases can outlive the judges.” And that means starting over with a new judge.
Cooperation is another key to moving the lawsuits along.
Even among the federal agencies, the OTS’ Weinstein said, the level of cooperation is good. Recently, for instance, the OTS and the U.S. attorney’s office in Los Angeles filed a dual press release that resulted from their joint efforts in investigating the failed Columbia Savings & Loan in Beverly Hills.
While the federal prosecutors announced the recent indictment of a Newport Beach executive and others over fraudulent transactions at Columbia, the OTS announced an administrative action seeking $25 million in restitution from them over essentially the same actions. Weinstein said his agency provided the federal grand jury with information through its investigation in an effort to avoid duplication.
“It was as perfect a form of cooperation as you could want or expect,” he said.
In the Lincoln case, lawyers for bondholders have taken the lead, working on at least six depositions a day, sharing evidence with federal and state agencies and poring over millions of pages of documents.
“The amount of cooperation is unbelievable,” one plaintiffs’ attorney said.
But that cooperation has come with a price: Many of the dozens of law firms and public agencies have attorneys assigned to the task of just keeping track of what everyone else suing Keating is doing. Michael Josephson, a Marina del Rey lawyer and head of the Josephson Institute for the Advancement of Ethics, says that wastes a lot of time and money.
“Someone has to say, ‘What are the obligations to the taxpayers if we keep up this litigation?’ ” he said. “The more spent on defense, the less is available to the plaintiffs, including the government, and each new lawsuit increases the defense costs.”
One plaintiffs’ lawyer sadly agrees, estimating that legal and consulting fees paid by the defense could swell to more than $250 million--the amount the bondholders are seeking. Most of that money, including Keating’s defense costs, come from insurance carriers.
Josephson said an SEC suit against Keating smacks of “piling on,” though he acknowledges that each agency has to maintain its own integrity by bringing claims it alone can pursue.
“It’s not just a question about being fair to Keating and his people. Certainly there are some, like the bondholders, who don’t care about being fair to him,” Josephson said. “It’s more than that. It just makes good sense to find a way to resolve this process. Otherwise, we’ll probably end up with the plaintiffs suing each other.”
In fact, American Continental’s bankruptcy proceedings and the bondholders’ litigation were held up for a year as unsecured creditors, bondholders and the RTC squabbled over who would get what share of the limited pie available. The three groups reached an agreement last August that paved the way for the company’s liquidation and initial payment of 6 cents on the dollar to bondholders.
The bondholders, of course, expect much more from their lawsuits against Keating and nearly 100 other defendants.
Josephson also blames the media for contributing to an “anti-Keating” frenzy. “It makes it politically necessary or politically advantageous for agencies to take a shot at Keating,” he said.
“Every agency now feels it has to justify its existence to Congress, which blames the S&L; debacle on everybody but itself,” said Donald Smaltz, lawyer for Robin S. Symes, a onetime Lincoln president who has been indicted on charges of state securities violations.
LITIGATION SPAWNED BY LINCOLN’S COLLAPSE PENDING CRIMINAL CASES & INVESTIGATIONS Joint Task Force Launches Inquiry: A joint task force including the FBI, the U.S. attorney’s office, the Internal Revenue Service and the Orange County district attorney’s office is working with a federal grand jury in Los Angeles on three separate investigations. They are looking into allegations of general bank fraud, securities violations and illegal political contributions. The grand jury already has told Keating and others that they are targets. So far, a former Lincoln president, Ray C. Fidel, and a major Lincoln borrower, Ernest C. Garcia II, have pleaded guilty to various criminal charges in plea bargains that require them to testify against Keating. Mark S. Sauter, a former Lincoln executive, is expected to enter a plea bargain on Monday. State Grand Jury Issues Indictment: A Los Angeles County grand jury, under the auspices of the state attorney general’s office, indicted Keating, Fidel, former American Continental President Judy J. Wischer and another former Lincoln president, Robin S. Symes, on state securities fraud charges. Part of the remedy includes the possibility of restitution. Fidel has pleaded guilty to six counts in a plea bargain. MAJOR PENDING CIVIL LITIGATION Bondholders Seek $250 Million: About 23,000 holders of five different issues of American Continental Corp.’s unrated, uninsured debt securities have filed more than 18 lawsuits in state and federal courts in California and elsewhere. They allege fraud, misrepresentation and racketeering against executives of Lincoln’s parent firm and their attorneys and accountants. The biggest block of plaintiffs, nearly 22,000 Lincoln depositors, most of them elderly, bought $192.8 million of the lowest-grade securities at the S&L;’s 29 Southern California branches. RTC Files Racketeering Suit: The Resolution Trust Corp., which manages failed savings and loans, filed suit accusing former American Continental Chairman Charles H. Keating Jr. and six other former executives of racketeering and 20 directors, officers and spouses of fraud. The suit, which is expected to be amended soon, so far seeks $2 billion in damages to Lincoln. OTS Seeks Restitution: The Office of Thrift Supervision, the primary federal thrift regulator, wants to bar Keating and six others from the industry for life and to recover $130.9 million for four allegedly fraudulent transactions that damaged Lincoln. Most of the accusations overlap those in the RTC complaint. State Department of Corporations Sues: Christine W. Bender, who as the agency’s commissioner initially approved the Lincoln bond sales, filed a $200-million state securities fraud suit seeking restitution for bondholders and an injunction against Keating and two other former American Continental executives to prevent further violations of securities laws. State Attorney General Weighs In: John K. Van de Kamp, California attorney general at the time, sued Keating, other American Continental executives and the Arthur Young & Co. accounting firm, now known as Ernst & Young, over alleged violations of business laws. The suit seeks, in part, $250 million in restitution to bondholders. SEC to Join the Fray: Lawyers for Keating and other former executives release letters from the Securities and Exchange Commission stating that the SEC staff will recommend that the agency sue Keating and the others to prohibit them from engaging in further securities transactions and to collect restitution for unspecified damages. RELATED CASES Judge Says Keating Looted Lincoln: In one of three federal lawsuits he filed against regulators, Keating finally got a hearing on some of the merits of regulatory claims before U.S. District Judge Stanley Sporkin, a former chief of enforcement at the SEC. Sporkin ruled that Keating’s actions “amounted to a looting of Lincoln” and criticized the attorneys and accountants who helped Keating for not blowing the whistle on fraudulent actions. Senate Ethics Committee Reprimands Five: Five U.S. senators who intervened with federal thrift regulators on behalf of Keating in 1987 while receiving political contributions from him were chastised by the Senate Select Committee on Ethics after a long public hearing. The committee saved its harshest criticism for Sen. Alan Cranston (D-Calif.), who still faces punishment by the Senate. Accountants Face License Action: The state Board of Accountancy is attempting to pull the accounting licenses of Ernst & Young and its predecessor firm, Arthur Young & Co. Debt holders and others claim accountants misrepresented American Continental’s financial condition.
