Keating Bonds Called Investment ‘Lemons’

The prosecutor in Charles H. Keating Jr.’s securities fraud trial hammered home the major theme in his case Thursday: Keating never told small investors the important details about the shaky financial condition of his company and of Irvine-based Lincoln Savings & Loan.

In closing arguments, Los Angeles County Deputy Dist. Atty. William W. Hodgman told jurors that the high-risk bonds issued by American Continental Corp.--Lincoln’s parent company--were the investment version of used-car “lemons.”

And just as there are lemon laws to protect auto buyers, he said, there are similar laws to protect investors duped into buying securities through misrepresentations or undisclosed facts.

“I submit to you that the heart and soul of this case is about truth,” Hodgman said. “It is about victimized bond purchasers . . . who did not get the truth about the bonds they were purchasing.”

Ultimately, he said, the case is about Keating, whom he called “the man who is most responsible for those bond purchasers in Southern California not getting the truth.”

Hodgman, recovering from the flu, took most of the day to argue the case against the 67-year-old former chairman of Phoenix-based American Continental, who occasionally took notes as he sat next to his attorney. Neither would comment about the case.

Building his case on testimony from 53 prosecution witnesses, Hodgman argued that the “totality of the evidence” showed that Keating should be convicted of defrauding bondholders.

He said the bond sellers, young college graduates who knew little about the investment they were pitching, passed the securities off as safe and secure even after it was apparent that American Continental was “going down the tubes.”

Hodgman cited 11 examples of important information that were not disclosed to buyers. They included concerns of thrift regulators that Irvine-based Lincoln did not have enough capital and was being operated in an unsafe and unsound manner. Bond purchasers also were not told that Lincoln had been restricted for several months from paying a $20-million dividend to the parent company.

But Keating’s attorney, Stephen C. Neal, who began his closing arguments in the final minutes of the court’s day, alleged that the prosecution’s case consists of “speculation” and contradictory evidence.

One regulator, for example, testified that American Continental had been “pyramiding” debt by selling more bonds. But the regulator’s own report showed that the company had been paying off more than twice the debt it was incurring, Neal said.

He also said there is no testimony showing that bond sellers did anything other than follow the guidelines they were trained to follow--which instructed sellers to tell customers that the bonds were risky, uninsured investments.

In addition, Neal said, regulators approved the sales program, and lawyers policed it.

He said a “glaring and unbridgeable gap” exists in the prosecution’s bid to tie Keating to any false statements or omissions of material information.

The “real heart of the case,” Neal said, is whether the evidence is sufficient to show that any “deliberate, conscious or knowing conduct” by Keating resulted in a failure to provide material information to bond purchasers.

Keating is accused in 18 counts of defrauding 20 small investors. They are among thousands of mostly elderly Lincoln customers who bought American Continental bonds at Lincoln branches in Southern California.

Those investors lost their money after the company went bankrupt and regulators seized Lincoln in April, 1989. Regulators say Lincoln is the nation’s biggest thrift failure to date, expected to cost taxpayers $2.6 billion.