Keating Guilty of Fraud; Faces 10-Year Term : Thrifts: He is convicted on 17 of 18 counts involving sale of junk bonds at Lincoln Savings branches. Possible federal and civil cases are pending against him.

Charles H. Keating Jr., who became a national symbol of greed and excess in the thrift industry, was convicted Wednesday on 17 of 18 counts of securities fraud stemming from the sale of his company’s bonds at Lincoln Savings & Loan branches.

The verdict, issued by a jury sitting in Los Angeles Superior Court, ended a long, complex trial that for the first time probed some of the events surrounding Lincoln’s 1989 collapse, the largest thrift failure in U.S. history.

Keating, who turned 68 Wednesday, stood ramrod straight, stoically taking the jury’s judgment count by count. In the audience, two of his sons-in-law sat grim-faced, one with his head in his hands. Keating’s secretary held back tears, once biting a knuckle to hold herself in check.

A group of bondholders, though, held hands tightly, smiled broadly and barely suppressed cheers each time the court clerk read a guilty verdict.

Keating faces a maximum of 10 years in prison and a $250,000 fine at his sentencing, which is scheduled for Feb. 7. He remained free after the verdict on $100,000 bail, after Judge Lance A. Ito rejected the prosecution’s effort to raise bail to $1 million.

“I firmly believe in myself, my family, my friends and I very much believe in my counsel,” Keating said outside court. “I look forward to the future unafraid, sure that justice will be done.”

Stephen C. Neal, his attorney, said he will ask Ito to overturn the verdicts and, failing that, appeal the decision.

Prosecutors, who faced an uphill battle with a much-criticized case and adverse rulings, were elated.

“We were able to weave a web of circumstantial evidence tightly enough” to prove Keating’s culpability, said William Hodgman, the lead Los Angeles County deputy district attorney who prosecuted the case.

The verdict does not end the threat of further criminal prosecution against the former Arizona businessman. A long-awaited federal grand jury indictment is expected soon. Keating was told more than a year ago that he was a target in that investigation.

He also faces massive civil litigation from 23,000 small investors who purchased more than $250 million in risky bonds from Keating’s American Continental Corp. The company sold most of the junk bonds through Lincoln branches.

“Mr. Keating has left behind him a trail of suffering and human debris,” said bondholder Tom Shelley. “I think he ranks shoulder to shoulder with those villains of history who have adversely affected the good people of America who have trusted--just trusted and trusted--their banks.”

“It don’t get me money, but that’s not the point. We finally found him guilty,” said bondholder Jeri Mellon of Sherman Oaks as she broke down in tears outside the courtroom.

Mellon, who said she lost $40,000 by buying American Continental bonds, said the verdict should help thousands of bondholders recover their investments in civil lawsuits filed in Arizona.

The prosecution’s case attempted to show that Keating withheld important information from customers about the shaky financial condition of Lincoln and American Continental from the start of the bond sales program in early December, 1986.

One aspect about the bond program that greatly impressed the jury was that the company’s condition worsened over time but the sales pitch remained the same to the end of the program in February, 1989, said jury foreman David E. Murphy, 21.

“It was all about trust,” said Murphy, a pharmacy technician.

He said that the jury was convinced that Keating closely controlled the operation, relying on the testimony of former Lincoln Chairman Robin S. Symes and former Lincoln President Ray C. Fidel.

It wasn’t the “color of the napkins” that Keating ordered for the luxurious Phoenician Resort, Murphy said, it was the fact that Symes and Fidel consulted with Keating on almost every major decision.

“He had a very hands-on management technique,” Murphy said. “He OKd a lot.”

The largely blue-collar jury was not emotionally swayed by the suffering of the bondholders, Murphy said. “I don’t think any of us had any super pity for any of the bond buyers. . . . Nobody went in there saying ‘That poor lady . . . that poor man,’ ” he said.

But the consistency of the testimony from 19 bondholders did have an effect, he said. They all said essentially the same thing. Not only were they misled about the safety of the bonds but they also were not told about essential problems at the company and the thrift, he said.

Jurors discounted the primary defense argument that Keating relied on the best lawyers and accountants to structure the bond sales program and to monitor it. Fidel even testified that he followed the orders of lawyers, not Keating, in deciding what to tell bond customers.

“How many lawyers does it take to hide behind?” Murphy said. “That defense got old.”

Neal did not present any defense witnesses, arguing before the jury that the prosecution did not come close to proving its case. Keating never took the stand. Murphy said that Neal’s decision did not play any part in the jury’s decision.

Jury deliberations began Nov. 18 after 11 weeks of testimony, 53 witnesses and more than 300 exhibits.

The acquittal on one count was no surprise. During deliberations, jurors had asked for testimony covering one transaction, determining that the buyer was more at fault for acting as if he already knew about the nature of the bonds.

Keating’s conviction gave Dist. Atty. Ira Reiner room to issue harsh warnings to other corporate executives who might try to insulate themselves from culpability for corporate wrongdoing.

“When you are a corporate executive, you don’t have to be at the scene of the crime to find yourself in prison,” Reiner said.

After Keating’s arrest 14 months ago, Reiner suggested that Keating’s arrest photo should be hung in every corporate boardroom as a reminder of where misdeeds can lead.

“In addition to that,” he said Wednesday after the verdict, “that photograph belongs in the United States Senate and in every state and local legislative body in the United States as a grim reminder of the price you pay for influence peddling.”

Keating’s conviction also was met with enthusiasm at the agency in charge of regulating S&Ls.;

“We are pleased to see that justice has been done,” said Carolyn Lieberman, senior deputy chief counsel of the Office of Thrift Supervision in Washington. “By law, the conviction automatically results in Keating being banned from the banking industry.”

The agency, however, will continue to pursue its $130.5-million enforcement action against Keating and six others for four transactions that caused losses at Lincoln, she said.

Keating, a Cincinnati native who parlayed his business law practice into a top job with financier Carl Lindner, was a well-known figure in the halls of Congress. From the 1950s, when he lobbied for laws against pornography, to the 1980s, when he sought to rein in tighter thrift regulations, Keating used his money and influence to further his company’s ventures in high-risk areas.

Keating entered the thrift business in 1984, when American Continental bought Lincoln Savings for $51 million. He quickly transformed it into a deregulation dynamo, investing several billion dollars in Arizona desert land, junk bonds and other ventures previously barred to thrifts.

Although he once estimated his worth at nearly $40 million, Keating spent more than a month in Los Angeles County Jail last year, claiming he was $5.2 million in debt and could not afford the $5-million bail. He was freed Oct. 18, 1990, after the bail was reduced to $300,000.

The Lincoln scandal has had national repercussions in both the financial and political arenas, becoming a symbol of the national thrift crisis. In the loose regulatory climate of the 1980s, dozens of thrifts nationwide abandoned single-family home loans for risky ventures in real estate and development. As real estate markets collapsed, the thrifts were left with millions in bad loans. Lincoln’s failure is expected to cost taxpayers $2.6 billion.

Politically, the Lincoln bailout has threatened the careers of five congressmen known as the “Keating Five,” who solicited a total of more than $1.3 million in political donations from Keating sources while intervening with regulators on Keating’s behest. Sen. Alan Cranston (D-Calif.) was harshly criticized by the Senate Ethics Committee Nov. 20 because of his alleged intervention on Keating’s behalf with federal regulators. The other four were chastised earlier this year.

More Troubles Ahead

The conviction of Charles H. Keating Jr. on state securities fraud charges may be only a minor defeat for the Arizona businessman, whose company bought Lincoln Savings & Loan and turned the Irvine thrift into a deregulation dynamo. Prosecutors are confident that the guilty verdict rendered Wednesday will be upheld on appeal. The defense contends that the testimony--or the lack of it--will provide sufficient grounds to overturn the verdict on appeal. Regardless, the former chairman of American Continental Corp., who has become a symbol of all the excesses in the thrift industry during the 1980s, still faces major legal issues.

Federal grand jury: The 2 1/2-year-long efforts of a joint task force, including the FBI, the U.S. attorney’s office and the Orange County district attorney’s office, have yet to produce a federal grand jury indictment. Rumors have persisted for a year that an indictment is imminent. The wide-ranging investigation has looked into allegations of general bank fraud, securities violations and illegal political contributions. In the last year, former Lincoln Chairman Robin S. Symes, former Lincoln President Ray C. Fidel, major Lincoln borrower Ernest C. Garcia II and former American Continental executive Mark S. Sauter pleaded guilty to various criminal charges in plea bargains that require them to testify against Keating and others.

Bondholder suits: About 23,000 holders of five different issues of American Continental’s debt securities have filed more than 18 lawsuits in state and federal courts in California and elsewhere. They allege fraud, misrepresentation and racketeering against Keating and other American Continental executives as well as the company’s attorneys and accountants. The biggest block of plaintiffs, nearly 22,000 bondholders, are mostly elderly Lincoln depositors who bought $192.8 million of the lowest-grade securities at the S&L;’s 29 Southern California branches. Cases are consolidated in Arizona before U.S. District Judge Richard M. Bilby, who has scheduled final pretrial motions for Feb. 27 in Tucson.

RTC racketeering suit: The Resolution Trust Corp., which manages failed savings and loans, filed suit accusing Keating and six other former executives of racketeering, and 27 directors, officers, spouses and professionals of fraud or malpractice. The suit seeks $2.7 billion in damages. It is pending before Bilby and will be tried with the bondholder litigation.

OTS action: 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 $130.5 million for four allegedly fraudulent transactions that damaged Lincoln. An administrative hearing started July 1 in Los Angeles and ran eight days before being adjourned until after the criminal proceedings.

SEC threat: Lawyers for Keating and other former executives released letters from the Securities and Exchange Commission, stating that the SEC staff will recommend that the agency sue Keating and the others to prohibit their engaging in further securities transactions and to collect restitution for unspecified damages.

State agency suit: Christine W. Bender, who, as Department of Corporations commissioner 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 state securities laws. The state has asked Bilby to grant its motion to award judgment to the state short of trial. The judge will hear arguments on the motion Dec. 9.

State attorney general suit: 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. Bilby first dismissed the key defendant--the accounting firm--from the action and later dismissed the remaining defendants. His decision is being appealed. The suit seeks, in part, $250 million in restitution to bondholders.

Keating and Lincoln: A Thumbnail Sketch

Almost from the start, Charles H. Keating Jr. battled regulators over his operation of Lincoln Savings & Loan. Here’s a brief history of his stewardship of the Irvine-based thrift and its aftermath:

Feb. 22, 1984--Keating uses his American Continental Corp. real estate development company to acquire 58-year-old Lincoln for $51 million.

Feb. 28, 1985--Keating testifies before Congress in effort to block regulators from imposing new industry restrictions, which hamper Lincoln’s operations.

March 12, 1986--Federal thrift regulators begin regular audit of Lincoln, and it turns into long, bitterly fought examination over costly, luxurious Phoenician resort and other issues.

Nov. 3, 1986--American Continental wins state approval to sell $200 million in corporate bonds. Sales begin early December out of Lincoln’s Southern California branches.

April 2, 1987--At Keating’s behest, four U.S. senators, including Alan Cranston (D-Calif.), meet in private with top federal regulator Edwin J. Gray to discuss length of Lincoln’s audit.

April 9, 1987--At Gray’s suggestion, the senators plus Donald W. Riegle Jr. (D-Mich.) meet with federal thrift executives from San Francisco to discuss Lincoln’s audit.

May 1, 1987--Federal agents in San Francisco recommend to superiors in Washington that Lincoln be seized or be subjected to stiff regulatory orders.

May 20, 1988--Regulators and Lincoln sign memorandum of understanding, aimed at wiping slate clean for new examination.

May 26, 1988--American Continental wins approval to sell additional $300 million in bonds.

Nov. 15, 1988--American Continental reports $36-million loss for third quarter and reveals certain regulatory restrictions.

April 13, 1989--American Continental and 11 Lincoln subsidiaries file for bankruptcy protection.

April 14, 1989--Regulators seize Lincoln. It becomes nation’s biggest failure, costing taxpayers $2.6 billion.

Sept. 15, 1989--Resolution Trust Corp., federal agency managing Lincoln, files fraud and racketeering suit against Keating and others. It is later amended to seek $2.6 billion in damages.

Aug. 23, 1990--A federal judge, accusing Keating of “looting” Lincoln, rejects Keating’s claim that regulators unlawfully seized S&L.;

Sept. 18, 1990--A 42-count indictment charges Keating and three others with violating state securities laws by defrauding bondholders. Keating spends 33 days in jail, unable to post bail until it is reduced from $5 million to $300,000.

Feb. 27, 1991--Senate Ethics Committee chastises four U.S. senators for aiding Keating in battles with regulators while soliciting political funding from him. Decision on fifth senator, Cranston, is delayed until Nov. 20, when he is reprimanded.

Aug. 2, 1991--Trial on state fraud charges begins with pretrial motions, jury selection. Elderly bondholder accosts Keating in courtroom.

Dec. 4, 1991--After 53 prosecution witnesses testify--defense rests without calling witnesses--Keating is convicted.