Getting Their Day in Court : Bonds: Lincoln investors will have a chance to recoup their losses in civil trial.

By JAMES S. GRANELLI

March 1, 1992 12 AM PT

TIMES STAFF WRITER

TUCSON —

The 73-year-old Huntington Beach man was desperate. He had lost his life’s savings--$167,000--in the collapse of Lincoln Savings & Loan three years ago. He received six cents on the dollar as partial settlement from the lawsuits filed in the wake of the Irvine thrift’s failure. But that money went quickly.

“Now I have nothing to eat and I finished all the dollars sent to me,” he wrote to a lawyer six weeks ago. “Please let me know if I am due more money or I have to finish my life.”

The lawyer, Ronald Rus of Orange, quickly became a crisis counselor. At least two others had already killed themselves over losses in the Lincoln debacle. Rus called the elderly investor.

“He was very depressed, but he seemed to get some hope out of our talk,” the lawyer said. “I tried to reassure him that justice was near.”

Indeed, some 23,000 investors in Lincoln’s parent company, American Continental Corp., have been waiting a long time for their day in court and a chance to recover the more than $250 million they lost by buying stocks and bonds in Charles H. Keating Jr.’s firm.

On Tuesday, the jury selection process begins in a complex civil securities fraud and racketeering case against Keating, his top aides and lawyers, accountants and investment bankers. It will mark one of the biggest securities fraud cases to ever go to trial. The first witness is scheduled to testify March 17.

For many, particularly the investors involved, the case and the man at its center symbolize the greed that gripped the financial markets and financial institutions throughout the reckless, high-flying 1980s.

“Putting all of the parts of this case together, it represents the worst of our society,” said Joseph W. Cotchett Jr. of Burlingame, Calif., the chief trial lawyer for the investors. “Certainly this case is the largest big-picture view of what happened in the country in the last 10 years.”

It has been those once held in high esteem--lawyers, accountants, investment bankers--who will become “unclothed” at trial as high-priced mercenaries concerned only with “bottom-line economics,” Cotchett said.

But for Keating and his supporters, the case is the result of government regulators overreaching themselves. They blame the failure of Lincoln--the nation’s largest S&L; collapse--and American Continental on government interference.

The government, however, is not on trial here. And that means the defendants may end up blaming each other for the losses. Keating will not even put on a defense since his insurance company has refused to pay his attorney fees.

While Keating was the alleged mastermind of the fraud, it is the professionals who are the main targets of the investors’ case. That in part may stem from the fact that Keating claims to be broke, while the other defendants have deep pockets.

And it was their legal opinions, audits, loan reviews and other work that enabled Lincoln and American Continental to present a healthy financial picture to the world. Their work allowed Keating’s empire to continue its risky business ventures in developing Arizona desert land, joining in corporate raids, trading in junk bonds and dabbling in a series of money-losing overseas projects, including foreign currency trading.

Their work also allowed sales of seven separate issues of stocks and bonds to continue--including nearly $200 million worth of American Continental bonds sold mainly to elderly Lincoln customers at the S&L;’s 29 Southern California branches.

In a pretrial ruling recently, U.S. District Judge Richard M. Bilby, who will be presiding over the trial, summed up the thrust of the case: “The central issue is whether defendants orchestrated and/or aided and abetted a far-reaching scheme to inflate the apparent worth and prospects of ACC/Lincoln while simultaneously concealing its latent but material weaknesses.”

Defendants still in the case deny that they participated in any conspiracy or scheme to rip off elderly investors or anyone else.

They assert that the information they obtained in working for the company didn’t raise questions of fraud to them, that their work was sound and that, if anything, they were duped by Keating as well.

For instance, Cleveland-based Jones, Day, Reavis & Pogue, the nation’s second-largest law firm, contends that its advice to Lincoln about how to sell bonds in the lobbies of Lincoln branches was good.

“If American Continental and Lincoln had followed the advice, there wouldn’t have been a problem,” said Robert A. Long, a Los Angeles lawyer representing the law firm.

And lawyers for two major accounting firms--Arthur Young & Co., now known as Ernst & Young, and Arthur Andersen & Co.--say that the audits their clients performed followed all generally accepted accounting standards and principles. Securities regulators relied on their audits in approving the sale of the company’s bonds at Lincoln branches.

Besides, they contend, their audits were only as good as the information given to them by Keating and his executives.

Such finger-pointing by the more than a dozen defendants left in the case prompted Bilby to quip during hearings three weeks ago: “Everybody’s pointing at everybody else. Everybody relies on everybody else, and nobody’s responsible.”

The trial is actually a consolidated proceeding involving 15 separate class actions filed by 14 law firms on behalf of minority shareholders, two levels of preferred stockholders, three levels of senior bondholders and the subordinated debenture holders--essentially bondholders who bought at Lincoln branches and stood last in line for refunds in the event of bankruptcy.

Several of the more than 90 original defendants asked a federal judicial panel to consolidate all the cases before one judge, and the panel picked Bilby, the chief federal judge for Arizona.

The investors have settled with 40 defendants for a total of about $38 million in cash and $32.5 million more in guaranteed payments if plaintiffs don’t recover that amount from other defendants still in the case.

Investors also will receive an unknown amount from the pending $1.3 billion “global settlement” of scores of lawsuits against jailed junk bond financier Michael R. Milken and others. Milken and his now bankrupt investment banking firm, Drexel Burnham Lambert Inc., were Keating’s primary conduit for junk bond trading and American Continental financing needs.

A few other defendants won’t go to trial because they are in bankruptcy court, or they were dismissed by the investors or Bilby.

“People will be settling the week before trial, during jury selection, after opening statements,” said Leonard B. Simon of San Diego, a plaintiffs’ lawyer who has handled much of the pretrial and settlement work for the investors.

“It would surprise me if we still had 20 defendants in the case once testimony begins, but it would surprise me more if we had zero defendants left,” he said.

Securities fraud cases typically draw little attention. Plaintiffs usually are sophisticated investors who bought their securities with extra funds through brokers experienced at reading convoluted prospectuses and determining the quality of companies.

But the unique feature about the American Continental case is that the largest group of investors consisted mainly of elderly Lincoln customers who were generally unsophisticated at investing. Many of them lived on fixed incomes and were easily attracted to accounts that paid slightly higher interest.

American Continental targeted the group, the lawsuits claim, in a variety of ways, including the classic “bait and switch” routine. Often, elderly customers simply looking to renew their insured certificates of deposit were persuaded to buy uninsured American Continental bonds without understanding how risky the investments were.

The very structure of the bond sales program, though it appeared to be legal, was designed to prey especially on older savers, the suits allege.

Rather than using brokers or underwriters, for instance, the company sold the bonds through Lincoln employees who were transferred to the American Continental payroll and who knew their longtime, big-account customers by name.

Interest rates were only slightly higher than certificate of deposit rates, a pricing decision that hid the true risks about the company’s shaky financial condition and regulatory problems, the suits contend.

And rather than issuing quarterly or semi-annual interest payments, which investors usually get, the company provided monthly payments that met the needs of senior citizens who needed supplements to their monthly Social Security or pension checks.

The effect, the suits charge, was to make the securities seem very much like ordinary certificate of deposit accounts. Many investors took the bait, invested their life savings and were eventually left destitute.

“This case has more blood-and-guts, real-people kind of stories than a lot of cases do,” Simon said. “The bondholders are very sympathetic characters. Keating is a very colorful defendant.”

Their stories have become as familiar as Keating’s travails.

Like many bondholders, Charles and Bertha Lee Roble of Orange trusted the tellers at the Santa Ana branch where they had been banking. “The second time we went in, every clerk knew us by name, whether they had met us or not,” said Charles Roble, 70, who has been on a disability retirement from his civilian job as a Navy electronic engineer since 1967.

The Robles said they invested a total of $28,000 largely because they trusted their bank. They didn’t get a prospectus before buying their first bond because the bank had run out of them, but one was mailed about three weeks later.

“I was looking for an insured account, but I realized when we bought it that we didn’t have one,” said Bertha Roble, 69. Now she’s working part-time as a sales clerk at Sears, Roebuck & Co. to replace the monthly bond income.

Trust even took in more savvy investors like Muriel Armond of North Hollywood. The 73-year-old woman used to work at a securities firm and knew how to read a prospectus.

When she went into the local Lincoln branch to renew her certificate of deposit, a longtime teller she knew persuaded her to buy a bond instead. Even when Armond got the prospectus later, she said, she questioned the stability of American Continental, but not enough to refute the saleswoman’s word. Then the company went bankrupt, and Armond realized she had lost her $10,000.

“I felt like a complete idiot,” she said. “When you’ve done business with people for many years, and there they are, the same people in the same office, you develop a trust.

“I should have known better. I was relying a lot on friendship and rapport that had developed between the institution, the employees and myself. You can bet your bottom dollar I won’t do that again.”

Her loss hit her hard, both emotionally and financially, she said. One way she managed to cope, she said, was by remarrying two years ago. “Two savings are better than one,” she said.

Some Lincoln customers faced the hard-sell approach.

Michael Wolpert, 79, of Costa Mesa said he used to go into his local Lincoln branch several times a week and was constantly badgered by a salesman who kept luring him with promises of earning higher interest rates.

Finally, he invested $45,000--”every single dime I had”--with the understanding that it was like his savings account: He could withdraw money any time he needed it. When he later wanted to pull out $5,000, Lincoln branch employees wouldn’t permit it. He threatened to remove all his money, he said, but those at Lincoln quickly agreed to give him the smaller amount he sought.

Why Charles H. Keating Jr. Is Going to Court Again

I n all, 15 class-action lawsuits--seven filed in state courts and eight in federal courts--have been consolidated for trial before U.S. District Judge Richard M. Bilby in Tucson.

The lawsuits allege that Charles H. Keating Jr. defrauded small investors in his company, American Continental Corp., and that a host of professionals--mainly lawyers, accountants, appraisers and investment bankers--either were negligent at uncovering the alleged fraud or actually helped him and his executives perpetrate the fraud.

The plaintiffs are broken into seven classes. Following is a list of the classes, the total amount invested in securities and the economic loss to bondholders or the market loss to stockholders at the time American Continental filed for bankruptcy in April, 1989.

Total * Economic/ Purchased Market Loss Holders (Amounts in millions) Subordinated debentures, various expiration dates (bonds bought mainly at Lincoln Savings & Loan) $250.144 $210.0 Senior debentures due 2001 50.000 46.7 Senior debentures due 1995 2.478 2.3 Senior notes due 1990 3.264 3.3 Cumulative convertible preferred stock 13.018 12.9 Exchangeable preferred stock 33.579 19.4 Common stock (minority shareholders only) 107.274 56.2 Total $460.0 $351.8

*Economic loss takes into account discount values, interest earned and other factors. It is close to the face amount of the bonds outstanding at the time of American Continental’s collapse, which for subordinated debenture holders was about $196 million.

Source: court documents

Defendants Headed for Trial

Officers and Directors:

Charles H. Keating Jr.*, former American Continental chairman. Accounting Firms and Accountants:

Arthur Young & Co. (now Ernst & Young) and Jack Atchison, partner in charge of American Continental/Lincoln audits. They conducted the last two annual audits in 1986 and 1987.

Arthur Andersen & Co. Its accountants conducted 1984 and 1985 audits.

Touche Ross & Co. (now Deloitte & Touche). It became American Continental’s auditor in October, 1988.

Law Firms and Attorneys:

Jones, Day, Reavis & Pogue, Cleveland, and Ronald Fein and William J. Schilling, then partners in Los Angeles office. They solicited American Continental’s and Lincoln’s regulatory and securities work.

Economic Consulting Firm:

Lexecon Inc., Chicago. It provided economic analysis of several major Lincoln assets.

Financiers:

Saudi European Investment Corp, N.V., and its Paris subsidiary, Saudi European Bank, S.A., and senior executive, Richard Fenn of New York. They facilitated numerous national and international deals for Lincoln, which owned 10% of SEIC.

Investment Bankers:

Offerman & Co. and executive Joseph Offerman, Minneapolis. They were underwriters for several American Continental securities offerings.

Borrowers, Joint Venture Companies and Others*:

Continental Southern Inc., Mountain West-Southwest Inc. and Conley Wolfswinkel and three of his Phoenix area companies.

*These defendants have decided not to defend themselves at trial or to participate in the trial on a limited basis.

Source: court documents

Where the Money Is

Investors haven’t received any money yet from about $38 million in partial settlements. Lawyers have put the funds into interest-bearing accounts for the time being.

One reason the money isn’t being disbursed is because it could trigger pay-backs to the Resolution Trust Corp., the federal agency that operated Lincoln and is selling the failed thrift’s assets.

To take over certain related legal rights and actions, the RTC reached agreement 18 months ago with lawyers for the investors and lawyers for American Continental’s other creditors to pay the investors $21 million. About $12.8 million of that amount, or about six cents on the dollar, went to those who bought bonds at Lincoln branches.

Under the agreement, a complicated formula was created to funnel money from settlements investors reached with certain defendants--lawyers, accountants and appraisers--back to the RTC until the agency’s “loan” is recouped.

The RTC can’t get any of the money, though, until it is disbursed to investors. Hence the delay.

The formula doesn’t guarantee that the agency will be fully refunded.

Where the Money Came From

Defendant & Settlement Amounts

Directors and Officers

Robin S. Symes, former Lincoln chairman, 10 other executives, five executives’ wives and an appraiser: $3.75 million *

Law Firms, Lawyers

Parker, Milliken, Clark, O’Hara & Samuelian, Los Angeles, and partner Franklin Tom : $5.8 million

Kaye, Scholer, Fierman, Hays & Handler, New York, and partner Peter M. Fishbein: $20 million

Sidley & Austin, Chicago, and partner Margery Waxman: $4 million and $30 million guarantee

Mariscal, Weeks, McIntyre & Friedlander, Phoenix, partner Gary Birnbaum: $2 million and $2.5 million guarantee

Barbara Thomas, New York: $90,000

Appraisers, Borrowers, Joint Venture companies, Others

R. A. Homes, Phoenix, and executives Ron Ober, Harold Ober and Harold Cole: $200,000

E. C. Garcia & Co. Inc., Tucson, and owner Ernest C. Garcia II: $90,000

Isaac Heimbinder and Robert Jenkins of U. S. Homes: $1 million

Jeffrey C. Patch Inc. and owner Jeffrey C. Patch: 1 million *

Defendants with guarantees are promising to pay up to this amount if plaintiffs fail to recover at least that much money from specified other defendants.

* Settlements are to be shared with the Resolution Trust Corp., the federal agency that took over Lincoln and sued many of the same defendants in a $2.7-billion fraud and racketeering lawsuit tentatively scheduled to go to trial next fall.

Ralph Brekan of Mountain West Research-Southwest Inc. in Phoenix also settled, but for a nominal amount.

SETTLEMENTS PENDING

Other top American Continental executives:

Judy J. Wischer, former president

Robert J. Kielty, former executive vice president, general counsel

Andrew F. Ligget, former chief financial officer

Robert M. Wurzelbacher Jr., former senior vice president

Charles H. Keating III, Keating’s son and senior vice president

George J. Wischer, Wischer’s husband and executive of subsidiary

James Grogan, former staff counsel who coordinated political activities

and five executives’ wives

Lawyers: