Lincoln Savings Law Firm Faces $275-Million Penalty
Federal thrift regulators on Monday proposed a record $275-million fine against one of the nation’s largest law firms for alleged actions that increased the cost of Lincoln Savings & Loan’s failure.
The Office of Thrift Supervision also froze the assets of the New York-based firm--Kaye, Scholer, Fierman, Hayes & Handler--and three of its partners. The regulators also want to permanently bar the firm and the three partners from the banking industry.
The Administration action marked the biggest judgment ever sought by the OTS against a law firm. The penalty reflects the government’s estimate of the losses to taxpayers because of Kaye, Scholer’s involvement with Lincoln.
The OTS charged that the firm “knowingly aided and abetted regulatory violations” by Lincoln. The 1989 failure of the Irvine-based Lincoln, controlled by Charles H. Keating Jr., will cost taxpayers $2.6 billion, the most costly S&L; collapse ever.
The firm, which has more than 350 attorneys and 1990 revenues of $185 million, vigorously disputed the OTS charges. Kaye, Scholer insisted that it played only a “traditional role” of defending Lincoln against charges by government regulators.
“The OTS seems intent on finding scapegoats outside the government for the Lincoln debacle,” the firm said in a statement.
Federal regulators last year sued Jones, Day, Reavis & Pogue, the nation’s second-largest law firm, for $50 million, alleging the firm helped Lincoln hide information about its financial troubles. The government also reached settlements with two other firms hired by Lincoln: Sidley & Austin, a Chicago firm, and Mariscal, Weeks, McIntyre & Friedlander of Phoenix. It has also brought suits against accounting firms that advised Lincoln.
The action against Kaye, Scholer stands out not only for the size of the claim, but also because the government obtained a temporary order freezing the personal assets of former managing partner Peter M. Fishbein and partners Lynn Toby Fisher and Karen E. Katzman. Previously, such action has only been taken against top owners and executives accused of looting failed S&Ls.;
If the charges against Kaye, Scholer are upheld, more than 100 partners in the firm could be financially liable for the judgment, Harris Weinstein, the OTS general counsel, said at a news conference.
The OTS charges that the firm:
* Advised Lincoln that it was legal to have direct real estate investments arranged before Dec. 10, 1984, when the government limited such activities. But the Kaye, Scholer lawyers knew that the documents approving the investments were signed after the deadline and backdated;
* Told federal regulators that Lincoln was enjoying financial “success.” But the law firm knew of “contrived “ deals in which Lincoln subsidiaries were moving real estate parcels back and forth in phony sales to claim false profits;
* Acted as Lincoln’s agent in dealings with federal financial regulators, refusing to give them access to Lincoln’s books and records without approval by Kaye, Scholer lawyers, and making false statements to the regulators;
* Engaged in a conflict of interest when Fisher obtained a $675,000 mortgage from Lincoln on favorable terms.
The fine now will be considered by an OTS administrative law judge; the agency’s top officials then rule on the judge’s decision. The law firm also can demand that the case be heard in court.
Gary Lynch, a lawyer for the firm, said the federal government is mounting the legal offensive against Kaye, Scholer to “try to make a lawyer’s role akin to that of a public accountant.”
“They want to change the lawyer’s responsibility to represent the client,” said Lynch, a former enforcement director for the Securities and Exchange Commission, who led the securities fraud case against convicted junk bond king Michael Milken.
The $275 million sought by the government “is just a number picked out of the air,” Lynch said. “There’s no way they can justify that.” Kaye, Scholer earned $13 million in fees from Lincoln and its parent, American Continental Corp., from 1985 to 1989.
Weinstein said efforts to settle the case had failed and Kaye, Scholer may not have enough liability insurance to cover the damages sought. However, Weinstein said the fine would not threaten the firm’s existence.
Kaye, Scholer was one of the major defendants in the series of complex fraud and racketeering lawsuits that arose from the collapse of Lincoln.
Small investors who lost more than $250 million in the purchase of ACC securities marketed at Lincoln branches reached a $20-million settlement with the law firm. The firm had reviewed Lincoln’s loan files and the ACC securities offerings.
The trial against the other defendants, including lawyers and accountants, begins today in federal court in Tucson.
Kaye, Scholer also agreed to pay $22 million last year to the federal government for damages it allegedly caused to Lincoln. The firm settled a lawsuit by the Resolution Trust Corp., the federal agency that operated Lincoln after the seizure of the S&L.;
Times staff writer James Granelli in Orange County contributed to this story.
