Keating Indicted on New Charges of Bank Fraud : Probe: U.S. Grand Jury also accuses him and four associates of racketeering and other counts.

Charles H. Keating Jr. and four associates were indicted Thursday on 77 counts of racketeering, bank fraud and other charges, marking the culmination of an intense, 2 1/2-year federal investigation into the failure of Lincoln Savings & Loan.

U.S. Magistrate Rupert J. Groh Jr. set Keating’s bail at $2 million, saying he represented a “serious risk of flight.” Unable to post the bond, Keating was taken into custody and is being held in the federal Metropolitan Detention Center in downtown Los Angeles.

In a separate action Thursday in Washington, the Securities and Exchange Commission filed civil securities fraud and insider trading charges against Keating and eight others, including David Paul, former chairman of Centrust Savings Bank, a failed Miami thrift.

The federal grand jury indictment was unsealed eight days after Keating, who has become a national symbol of excess and arrogance in the thrift industry, was convicted in state court of defrauding investors in Lincoln’s parent company, American Continental Corp.

The 64-page indictment alleges that Keating and his cohorts used five criminal schemes to siphon money out of Lincoln for their own benefit. The schemes purportedly constitute a pattern of criminal conduct needed to show a violation of the U.S. Racketeer Influenced and Corrupt Organizations Act.

The 68-year old former American Continental chairman, who had been free on $100,000 bond while awaiting sentencing in state court Feb. 7, had been expecting the federal indictment since he was notified more than a year ago that he was a target of the federal investigation.

“He’s obviously going to plead not guilty to everything” at his arraignment, which was scheduled for Monday, said his lawyer, Stephen C. Neal. He also said he will seek a lower bail.

Keating would face a maximum sentence of 510 years in prison and $17 million in fines if convicted on all the charges, which consist of racketeering, conspiracy, bank fraud, securities fraud, misapplication of funds and interstate transportation of stolen money.

The indictment also seeks to recover at least $265 million in assets allegedly siphoned from Irvine-based Lincoln. However, Keating and the other defendants claim they are destitute.

Indicted with Keating were his son, Charles H. Keating III, 36; a son-in-law, Robert M. Wurzelbacher Jr., 37; former American Continental President Judy J. Wischer, 43, and Andrew F. Ligget, 34, the company’s chief financial officer. These defendants, who all live in the Phoenix area, face prison terms ranging from 475 years to 525 years and fines of $15 million to $17 million.

Wischer and the younger Keating also were remanded to the federal jail after they were unable to post bail of $500,000 and $300,000, respectively. Wurzelbacher and Ligget were released on surety bonds of $300,000 and $200,000, respectively, but must substitute that with real property bonds within 10 days.

The indictment, alleging five separate criminal schemes, represents “a frontal assault” on the “deception and trickery” that led to Lincoln’s collapse, U.S. Atty. Lourdes Baird said at a Los Angeles press conference announcing the indictment.

“Fraudulent business practices were really the order of the day at Lincoln Savings and American Continental,” she said.

U.S. Atty. Gen. William Barr called the indictment a “graphic example” of the Justice Department’s “aggressive pursuit” of those responsible for fraud in the S&L; industry. Lincoln’s losses, he said in prepared remarks, “made it one of the most significant financial institution failures in the country.” The failure is expected to cost taxpayers $2.6 billion.

Neal said neither he nor his client was surprised by the charges.

“They’re trying retroactively to criminalize a whole host of business activities that complied with the applicable laws, regulations and accounting standards when they were made,” Neal said.

The federal probe began after the failure of Lincoln in April, 1989. In the last 14 months, four lower-ranking Lincoln and American Continental executives and a Lincoln borrower have pleaded guilty to various charges and agreed to testify against Keating. Federal authorities said the continuing investigation is expected to result in additional indictments.

The indictment alleges that American Continental was a criminal enterprise through which Keating and the others stole from Lincoln. The document alleges the following criminal activities:

* Tax-sharing: Lincoln sent income taxes to American Continental based on sham profits from the fraudulent sale of land and other assets, and it transferred some tax payments before they were due. Both actions were to the detriment of Lincoln. At least $32 million from Lincoln was diverted by American Continental for other purposes. Lincoln did not owe any taxes.

* Sham profits: The defendants typically used American Continental, Lincoln and a thrift subsidiary in several transactions with a buyer that resulted in the S&L; lending 100% of the purchase price to the buyer.

The subsidiary would sell undeveloped land or some other asset for a price far above the true value and would finance the bulk of the sale. Meantime, Lincoln or American Continental would verbally promise the buyer that the down payment on the property would be reimbursed. That usually occurred through the company’s purchase at inflated prices of land that the buyer owned. In six transactions listed in the indictment, Lincoln essentially funded the entire transaction, recorded profits and sent tax payments it did not owe to American Continental.

* Bond sales: The defendants sold risky American Continental bonds to unsuspecting customers through Lincoln’s 29 Southern California branches without disclosing the high risk of the securities, the company’s poor financial condition and management’s “untrustworthy and deceitful” nature.

Altogether, about 23,000 small investors lost more than $250 million. Most of the bondholders bought nearly $200 million of that amount at Lincoln branches.

* Rancho Acacias scheme: The defendants used Lincoln funds to bail American Continental out of a money-losing project in Riverside County. The company had participated in a loan on the 51-acre parcel and sold its interest under an agreement to repurchase it at the buyer’s option. The defendants used Lincoln money to repurchase it.

* Insider loan scheme: Facing the prospects of bankruptcy in early 1989, the defendants caused American Continental to transfer funds to a Lincoln subsidiary called Medema Homes of Utah, which was a shell company. Over a few months, Medema loaned a total of $975,000 to Keating, his son, Wurzelbacher and Wischer’s husband. The same day that the younger Keating and Wurzelbacher received a total of $250,000, they gave Keating a total of $228,700. Keating used most of that money to make a $200,000 payment on a personal loan.

Times staff writer Tom Furlong contributed to this story.

(Orange County Edition) Federal Case Against Keating

The racketeering indictment against Charles H. Keating Jr. and four others contends that they used five transactions to defraud Lincoln Savings & Loan and its parent company, American Continental Corp. The transactions allegedly represent a pattern of criminal conduct that prosecutors plan to use to show that the entire operation was a criminal enterprise that the defendants used to enrich themselves. TAX-SHARING AGREEMENT The Deal: Lincoln agreed to give to American Continental any income taxes it owed so that the parent company could pay one consolidated tax bill. The Program: Regulators, in approving the tax-sharing plan, insisted that Lincoln pay only the amount of taxes due at the time they were due. The Practice: Lincoln sent taxes to American Continental based on sham profits from the fraudulent sale of land and other assets, and it also transferred some tax payments before they were due. Both actions were to the detriment of Lincoln. In fact, the S&L; never owed any taxes from 1984 until the plan was halted by regulators in September, 1988. The Results: Lincoln paid a total of about $94 million to American Continental in tax-sharing payments, though the number of deals listed in the indictment results in an aggregate claim of $32 million. FRAUDULENT BOND SALES The Deal: American Continental sold more than $250 million in risky bonds to thousands of Southern Californians, most of whom were elderly Lincoln depositors, from December, 1986, to February, 1989. The Program: The company used employees, not brokers, and described the bonds in a way that made them seem to be a safer investment than they were. The company targeted customers with large certificates-of-deposit accounts, soliciting sales from them when those CDs came due. The Deceit: While telling customers at Lincoln branches that the S&L; was financially sound, American Continental was telling holders of higher-priority bonds that it was financially troubled and might not be able to make future interest payments. It also misled customers into believing that the company’s financial statements were accurate and that its management was honest and trustworthy. The Results: About 23,000 bondholders lost more than $250 million after the company’s collapse. American Continental ended up relying solely on bond sales for its cash flow and, in what regulators term a gigantic Ponzi scheme, for funds to pay interest and principal coming due. SHAM PROFITS FROM SALE OF LAND, ASSETS The Deal: On Jan. 29, 1988, Lincoln subsidiary AMCOR Investments sold a 445-acre parcel of desert land in Hidden Valley Ranch for $6 million to Hidden Valley Properties Ltd. Partnership. HVPLP paid a $1.5-million down payment in cash and signed a $4.5-million loan. Funding: HVPLP, which had $100 in assets, obtained the money for the down payment from a sister company, Sun Olive Ltd. Partnership. SOLP obtained the money a day earlier by selling a 135-acre site in Peoria, Ariz., to American Continental for $4.2 million in cash and debt assumption. Other Circumstances: The property that HVPLP purchased for $6 million was appraised seven months earlier at $5.3 million, while property that American Continental bought the previous day for $4.2 million was appraised six months earlier at $2.7 million. Both HVPLP and SOLP were operated by Phillip Gordon, who negotiated both deals with Robert M. Wurzelbacher Jr. The Results: AMCOR recognized a $4.4 million gain on the sale and sent $1.8 million to American Continental for income taxes under the tax-sharing agreement. Other Deals: The indictment lists five other deals in which the defendants allegedly used phony transactions to paint a false picture of the financial condition of American Continental and Lincoln and to feed tax-sharing payments from the S&L; to the company. AMERICAN CONTINENTAL BAILOUT The Deal: American Continental participated in a loan that Lincoln made to finance the purchase of a vacant, 51-acre parcel known as Rancho Acacias in Riverside County. The Third Party: In December, 1987, the company sold its interest in the loan for $5.4 million to Saudi European Bank, a Paris institution in which American Continental had a stake. As part of the deal, American Continental agreed to repurchase the loan interest if the bank demanded it. About a year later, the bank wanted to return its share of the loan to the company. The Results: The defendants used Lincoln to repurchase the loan interest and, in the process, gave Saudi European Bank a “profit participation” entitling it to 25% of the profits from the sale of Rancho Acacias. The defendants allegedly hid the repurchase transaction from regulators. INSIDER LOANS The Deal: In the two months before American Continental filed for bankruptcy in April, 1989, the company transferred funds to Medema Homes, a Lincoln subsidiary. The Second Deal: Medema then approved $975,000 in personal loans to Keating, family members and associates. Keating, in turn, made a $200,000 payment on a personal loan. The Results: Keating and the others tried to conceal the loans, and American Continental lost the money. The indictment charges the defendants with bank fraud.