Keating Trial Told That Bond Yield Was Poor

Payments on American Continental Corp. bonds to small investors were “woefully inadequate” compared to what sophisticated investors received from the company’s other bond issues, an expert witness testified Tuesday in the criminal fraud trial of Charles H. Keating Jr.

The bonds sold through the company’s Lincoln Savings & Loan branches were the lowest ranking of three bond issues, Alfred E. Hofflander, a professor at UCLA’s Graduate School of Management, told a Los Angeles Superior Court jury.

While the yields on the Phoenix company’s lowest-ranking bonds ranged from 9.5% to 12%, the returns should have provided small investors a range of 13.5% to 29.8% based on what the more senior bonds were paying, Hofflander said.

But under cross-examination, he admitted that he didn’t recall that the senior bond issues were never traded publicly and, thus, had never established a market rate of return that could be used for a true comparison.

He also acknowledged that he didn’t compare the yield to those of similar bonds issued by other companies. A sampling of such comparisons presented in court showed that American Continental paid as much or more than other companies did.

His study of American Continental bonds also did not take into consideration the impact on the bonds of such matters as the October, 1987, stock market crash or the faltering Arizona real estate market, where much of Irvine-based Lincoln’s deposits were invested.

He agreed with the defense that in many respects, American Continental’s bonds were no different from bonds sold by other companies. He also said there appeared to be nothing illegal about selling any of the bonds.

Keating, American Continental’s former chairman, is accused in 20 counts of defrauding 22 small investors of $1.8 million through false statements and omissions of material information in the sale of his company’s bonds.

The investors are part of thousands of bondholders who lost more than $250 million after Lincoln and the Phoenix company collapsed in April, 1989. Lincoln is the biggest thrift failure to date, with a cost to taxpayers of $2.6 billion.

Keating, 67, denies the charges and counters that he used the best legal and accounting help available to structure the bond sale program.