Prosecutors said a year ago, after Charles H. Keating Jr. was indicted on state securities fraud charges, that there would be no smoking gun to show that he defrauded small investors who bought his company's bonds at its Lincoln Savings & Loan branches.
They were right.
No single bit of direct evidence presented in the prosecution's case, which ended Thursday after 35 days of testimony, will likely convict Keating.
Instead, an accumulation of evidence from 53 witnesses provided a portrait of an Arizona land developer who pushed his company's bonds as good investments while flagrantly disregarding the concerns of thrift regulators about the deteriorating condition of his empire--Irvine-based Lincoln and its parent company, American Continental Corp.
The empire collapsed in April, 1989, two months after bond sales ended.
Prosecutors said they are confident that they have proven beyond a reasonable doubt that fraud occurred--that important information about American Continental's financial woes simply wasn't revealed to bond buyers.
But whether prosecutors can connect Keating to helping to foster fraud--whether they can persuade the jury that American Continental's former chairman should be held criminally accountable--is another matter.
The prosecution's case, crafted by Deputy Dist. Attys. William Hodgman and Paul Turley, is based on Keating's failure to disclose a host of bad news that regulators gave him, ever since American Continental began selling bonds in Lincoln's Southern California branches in late 1986.
"The evidence paints a fairly compelling picture that all the information was not getting down to purchasers," lead prosecutor Hodgman said outside court. "Anything good about the company, like good press, Keating puts out there on the counters for customers to see. Anything that's bad is hidden."
In the process, though, the bondholders themselves have become almost irrelevant to the case. What is important is not what some bondholders recall being said to them, it is what was not said to any of the thousands of bondholders who lost more than $250 million after the collapse.
But Keating's defense lawyer Stephen C. Neal isn't conceding anything. He questions whether any fraud occurred. Former bond sellers generally denied customers' contentions that the bonds were misrepresented as insured, secure or without risk.
The thrust of Neal's cross-examinations of prosecution witnesses has focused on two major points: that regulators were indeed wrong about major concerns they had, and that both in-house lawyers and accountants--as well as those in major firms retained by the company--dictated the structure and content of the bond sales program and monitored it.
Testimony he elicited suggested that all material information about the company was disclosed, "warts and all," as one witness put it.
His cross-examinations also laid the groundwork for putting regulators on trial by raising the possibility of a vendetta against Keating for his outspoken opposition to federal efforts to rein in the high-flying, deregulated thrift industry. He had bought the S&L; in 1984 to take advantage of those liberal laws.
Neal sought to minimize the damaging testimony of Raymond C. Fidel, a former Lincoln president, by focusing on whether Keating was connected to the 20 specific counts that alleged he defrauded 22 small investors out of $1.8 million.
Neal is expected to ask Judge Lance A. Ito, probably on Monday after the prosecution formally rests, to dismiss the case. Two counts are expected to be dismissed because bondholders listed as victims in those counts were too sick to testify. If Ito rejects the dismissal motion on the remaining counts, the defense will open its case Tuesday afternoon.
The defense has been helped in part by most of the prosecution witnesses, who tended to provide a surprisingly large amount of favorable evidence along with damaging testimony. For example, Fidel said Keating relentlessly pushed bond sales when he knew his company was seriously troubled. But Fidel also said he followed the dictates of lawyers and accountants--not Keating's wishes--in determining what information customers should be given.
In addition, a number of regulators seemed to hurt their credibility under cross-examination when they could not recall important documents or stammered repeatedly as if they suddenly were caught in a contradiction. Darrel Dochow, who gave damning testimony for the prosecution, failed on cross-examination to remember seeing even memos that he wrote.
But prosecutors contend that the defense is simply exalting form over substance. No matter how much testimony favors Keating, they say, the fact remains that he never told Fidel or anyone else to relay negative information to bond sellers so that customers could be fully informed.
As Hodgman said a month ago: "Would you want to be told (before investing) that Lincoln was failing its net worth test and that a dividend of $20 million couldn't be paid?"
Fidel, who was indicted with Keating in September, 1990, and has pleaded guilty to six fraud counts, raised two important factors that could well weigh on the jurors' minds in determining Keating's fate.
First, Fidel said he realized at some point in late 1988 that the bonds were in fact riskier than what was described in the prospectus, a legal document designed to disclose all material information about the company, good and bad. That was especially true after American Continental posted a third-quarter loss of $36 million.
Second, while lawyers dictated what to disclose in writing and when, Fidel controlled the verbal presentation of the bond sellers. And he faulted himself for not passing along to them such critical information as the sale of Lincoln being crucial to the survival of the money-losing parent company.
"The company's inherent risk changed, but we never changed our verbal program," he said.
Disclosures were made in the written reports given to bondholders, but he doubted that buyers read or understood those reports.
For instance, customers had to turn to the seventh page of a quarterly document, which was submitted to securities regulators in November, 1988, and included in bond information packages, to find out that regulators had ordered the company to halt a tax-sharing plan between Lincoln and American Continental. Under that plan, the S&L; sent the company $94 million in taxes that Lincoln didn't really owe.
Fidel said he learned of the tax-sharing plan only when regulators orally told Keating and other executives at a Sept. 6, 1988, meeting to halt the payments. At first, Fidel said even he didn't understand the impact of the halt. What it did was cut off a major source of cash flow for American Continental.
At that point, the company's only other source of income became the proceeds from the bond sales. Regulators have charged--outside the courtroom--that continued bond sales after that date amounted to a giant Ponzi scheme as the company raised new money simply to pay off older debt.
If jurors believe that Keating was justified in not disclosing concerns of regulators early in the bond sales program, prosecutors hope that jurors would find that in the last five months he failed to provide key information soon enough or effectively enough.
Nine counts relate to bond sales madeafter that Sept. 6 meeting. Conviction on any six counts would subject Keating to the maximum penalty of 10 years in prison and a $250,000 fine.
In general, the prosecution's case has clearly shown that American Continental sold extremely risky bonds to mostly unsuspecting, unsophisticated elderly customers at Lincoln's Southern California branches. The sellers weren't licensed brokers but instead were American Continental employees who said they knew little about what they were doing.
A series of regulators testified that they told Keating as early as December, 1986, that Lincoln was troubled and imposed or tried to impose restrictions. They also testified to brash remarks he made. Patricia McJoynt said Keating was asked in a meeting why he wasn't a director or officer of Lincoln, and she said he replied, "I don't trust the regulators. I don't want to go to jail."
Robin S. Symes, a former Lincoln chairman, who also has pleaded guilty to six fraud counts, said Keating controlled almost every aspect of Lincoln's operations, including what could be hung on the walls of employees' private offices.
Control is a major issue because prosecutors contend that if Keating controlled the bond sales program, he therefore shared in the responsibility for disclosing all pertinent information and could be held criminally liable.
But so far, Judge Ito has decided that the prosecutors must demonstrate much more to convict Keating. They must show that Keating aided and abetted in any fraudulent failure to disclose information. And they must show he intended to help the company's bond sellers defraud customers.