Keating’s Opening Hearing Proves Inconclusive : Litigation: Critics charge the Office of Thrift Supervision with political grandstanding.
After eight days of arguments and testimony, the effort by federal savings and loan regulators to be the first to confront former thrift owner Charles H. Keating Jr. in a legal forum fell short--both in courtroom decorum and in results.
In an administrative hearing that began July 1, the Office of Thrift Supervision is seeking to ban Keating and six others from the industry for life and win restitution for $130.5 million lost on four deals at now-defunct Lincoln Savings & Loan.
But the agency’s biggest enforcement action ever was put on hold Friday to allow Keating and other former Lincoln operators to prepare for a Aug. 2 trial in Los Angeles Superior Court on securities fraud charges stemming from the Irvine thrift’s 1989 collapse.
Lincoln’s failure--the nation’s largest with an estimated taxpayer cost of $2.6 billion--has spawned mammoth civil fraud and racketeering litigation, the state securities fraud indictment and the likelihood of federal indictments soon.
Against that backdrop, the OTS proceeding over eight days in the first two weeks of July--with lawyers, witnesses and an administrative law judge flown to Los Angeles from the East Coast--seemed like a minor aside in an epic play.
While the agency’s claims may prove to be valid, the manner in which it has pursued Keating--seen nationwide as a symbol of the S&L; scandal--has raised questions about whether it is wasting taxpayer money simply to boost its image as a tough regulator.
The Keating group has offered to consent to a lifetime ban from the industry--which is what the agency has said it wants the most. They also contend they are broke, and could pay no restitution even if the OTS wins the case. Keating’s lawyer further points out that the Resolution Trust Corp., which manages and liquidates failed thrifts, already is suing him in a $2.7 billion civil lawsuit for the same alleged misdeeds.
In addition, the agency ordered the hearings to begin only a month before the scheduled start of the state criminal trial, prompting lawyers for Keating and his top aide, Judy J. Wischer, to charge that the OTS infringed on their clients’ rights to a fair trial.
“The only purpose this hearing fulfills is a political one,” asserted Joseph W. Cotchett Jr., a lead attorney for thousands of small investors who lost more than $250 million in the collapse of Lincoln and its parent company, American Continental Corp. in Phoenix.
“It’s clear that it’s going on just to satisfy the egos of people (in Washington) who should have done something about Lincoln much earlier but failed to do so,” Cotchett charged. “This is a total waste of taxpayers’ money.”
One source close to the litigation said government lawyers in other agencies had different concerns, as well. “What’s more dangerous, besides wasting taxpayer money, is that the OTS hearing stands a chance of creating a record that will let Keating off on the criminal charges and jeopardize the civil cases,” the source said.
Even the Department of Justice and, in a joint request, the RTC and the Federal Deposit Insurance Corp. had asked the OTS to delay its public hearings until federal criminal charges are brought or likely settlements eliminate the need for an agency hearing. But the requests apparently didn’t hold much sway.
“The bottom line of their position at the OTS is that they want the ink,” said the source, who did not want to be identified.
The OTS, said Carolyn Lieberman, the agency’s senior deputy chief counsel, wants S&Ls; to get the message that it is “out there and watching them” and will take “strong enforcement action” against those who violate thrift rules.
For awhile, it seemed as if none of the OTS’ 45 witnesses would ever take the stand during eight days of hearings in the last two weeks. And the testimony of those who did seemed lost to a large extent because of legal objections and sarcasm.
For three hours on the first day of the hearing, lawyers argued over “housekeeping” matters, prompting even Keating to remark during a break, “It would be nice if they let the evidence come out.”
Such matters--ranging from which witnesses would testify next to whether the Keating and the others would invoke their Fifth Amendment privilege against self-incrimination--ate up hours of time almost every day.
The Fifth Amendment issue was finally resolved Friday, when the OTS received signed a signed declaration from Keating that cite his constitutional right if called to testify.
In the informal atmosphere of the administrative hearing, the lawyers for both sides have tried the patience of the administrative law judge, Paul J. Clerman. Keating’s attorney, Stephen C. Neal, frequently fidgeted, often flipping his pen in the air, as lead OTS lawyer Bruce Rinaldi argued a point or questioned witnesses.
At one point, Neal’s pacing and pen flipping unnerved Rinaldi, who stared at Neal until he sat down and stopped. Then Neal began clicking his pen, prompting Rinaldi to ask, “Is this a game, Mr. Neal?”
Almost lost in the lawyer cross-fire was the testimony from eight witnesses about the employee stock ownership plan at American Continental. The OTS charges that the ESOP was illegally structured and was designed to line the pockets of Keating and top officers. Lincoln, which guaranteed $15 million in loans to the ESOP so it could purchase American Continental stock, lost $12.3 million when the company and the S&L; collapsed.
The ESOP is one of four deals that Rinaldi had hoped to present to Clerman in a two-week hearing. But he couldn’t even conclude testimony on the plan before the indefinite hiatus in the hearing.
The OTS believes that the testimony so far shows that Keating and the other respondents knew about the illegal aspects of the ESOP and continued to keep it going for three years.
Neal and other attorneys for the respondents believe the evidence shows that the ESOP transaction was well reviewed by lawyers and that any problems discovered later were corrected.
