SEC Suit Targets Keating, 9 Others : Crime: They are accused of fraud in schemes to inflate the profits of Lincoln Savings. Charges include engaging in insider trading and a phony stock swap.
The Securities and Exchange Commission filed a lawsuit Thursday accusing Charles H. Keating Jr. and nine others of securities fraud in a series of schemes to inflate the profits of Lincoln Savings & Loan and its parent company.
Among the civil charges are allegations that Keating earned $7.5 million through insider trading in the shares of Lincoln’s parent company, American Continental Corp., and that he engaged in a phony stock swap with David Paul, the former chairman of another failed big thrift, CenTrust Savings Bank of Miami.
The SEC case came as an indictment issued by a federal grand jury in Los Angeles was unsealed. The indictment charged Keating and four associates with 77 counts of racketeering, bank fraud and other charges stemming from the failure of Lincoln.
The 86-page civil complaint filed by the SEC in U.S. District Court in Los Angeles outlined a complicated series of phony transactions and paper profits. SEC lawyers said that the schemes amounted to “cooking the books” to create $120 million in sham profits that helped keep Lincoln afloat until it was seized by regulators in April, 1989.
“The appearance of net worth was starkly different from reality,” Richard Breeden, the SEC chairman, said at a news conference here.
Among those named along with Keating were his son, Charles Keating III, former American Continental President Judy Wischer, former company officers Robert Kielty, Andrew Ligget and Jack Atchison, and CenTrust’s Paul. James Upchurch, an American Continental accountant, and Mark Sauter, a former in-house attorney, were also included.
As part of the action, the SEC seeks to bar the elder Keating and Wischer from serving as officers or directors of any other public company.
The securities violations focus on two areas--the creation of phony profits to disguise massive losses at Lincoln and the sale of $275 million in junk bonds to Lincoln customers. The junk bond allegations are similar to the state criminal securities charges on which the elder Keating was convicted in Los Angeles Dec. 4.
But other details in the lawsuit are new and describe a financial world in which the rules were so haphazard that one multimillion-dollar sham deal was consummated by a coin flip.
In June, 1988, as regulators were raising questions about the solvency of Lincoln, Keating entered into a securities transaction with Paul’s CenTrust, which was facing similar questions. According to the suit, Keating agreed to buy stock in Playtex Holdings from Paul at an inflated price and, in exchange, Paul agreed to pay American Continental an inflated price for stock in another holding company. Each company booked profits of about $25 million on its transaction.
The key to concealing the arrangement from auditors was to avoid recording the deals on the same day, which would have aroused suspicions. So, according to SEC attorney Bruce A. Hiler, a coin was flipped to see which deal closed first.
The insider-trading allegation is unusual too. It accuses Keating of collecting $7.5 million by selling American Continental stock at a time when he knew the company’s books did not reflect its true financial picture. The reasoning, according to SEC enforcement chief William R. McLucas, was that Keating was able to sell the stock at a time when its price was inflated through various fraud schemes.
In an attempt to stop the drop in his firm’s stock and forestall seizure by regulators, the suit also claims, Keating issued a false press release on Feb. 9, 1989, claiming that the sale of Lincoln was imminent. In fact, said the SEC, regulators had told American Continental that approval of the sale was highly unlikely.
