Lincoln Savings Investors to Have Their Day in Court : Thrifts: Jury selection is set to begin in the civil securities fraud and racketeering case against Charles Keating and various advisers.
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 6 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 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, about 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 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--one of the biggest securities fraud cases to ever go to trial--against Keating, his top aides and lawyers, accountants and investment bankers. 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, highflying 1980s.
“Putting all of the parts of this case together, it represents the worst of our society,” said Joseph W. Cotchett Jr. of Burlingame, 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.”
Those who were once held in high esteem--lawyers, accountants, investment bankers--will become “unclothed” at trial as hired 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 the government interference.
The government, however, is not on trial here. And that means the defendants may end up blaming one another for the losses. Keating may 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 Arizona desert developments, 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 to continue of seven separate issues of stocks and bonds--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 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.--state 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 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 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 will also 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 the 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.
