Law Firm’s Memos Raise Issues in Keating Scandal : Ethics: Notes revealed in a Tuscon trial cause attorneys to question the limits of their duty to clients. Citizens groups have long suspected the use of PACs to funnel money secretly to candidates.

Startling internal documents at a major national law firm about political contributions sought by former Lincoln Savings & Loan owner Charles H. Keating Jr. are raising questions about the use of professionals to help finance campaigns and the limits of a lawyer’s duty to clients.

A memo and notes by partners at Jones, Day, Reavis & Pogue show that the law firm was allowed to bill Lincoln’s parent company extra for legal work in return for contributing to the campaign of an Arizona gubernatorial candidate backed by Keating.

The documents show that the firm used one of its political action committees in 1986 to contribute $10,000 to a candidate and that Keating’s company “agreed that we could bill liberally in future with recognition of this.”

The previously confidential notes were revealed recently in federal court proceedings in Tucson, where jury selection is underway in a trial on fraud and racketeering lawsuits stemming from the 1989 collapse of the Irvine thrift and its parent company, American Continental Corp. in Phoenix.

The documents are providing fodder to citizens groups that have long suspected lawyers, accountants and other professionals of using their political action committees to funnel hundreds of thousands of dollars secretly to candidates at the behest of their clients--and possibly with client money.

Jones Day denies that it did anything improper.

While the firm did make contributions sought by Keating, a known fund-raiser at the time, and was allowed to “bill liberally” in the future, Jones Day used its own money and never padded its American Continental billings to recoup the donations, said Robert A. Long, whose Los Angeles law firm represents Jones Day.

“There was never any liberal billing or bonus billing designed to recoup the cost of that contribution, so it was not a contribution on behalf of American Continental,” he said.

But attorneys for thousands of American Continental bondholders who lost more than $250 million after Keating’s financial empire fell apart contend that the law firm overbilled the company to cover donations. They allege that bondholder money was used in part to fund Keating’s political favorites and that some of the money was funneled to candidates illegally through law and accounting firms.

Arizona authorities would not comment on whether they are investigating any possible violation of campaign laws. They did say, though, that state election law at the time prohibited anyone from making a contribution on behalf of another person or entity without disclosing it. State law also has long prohibited corporations from donating to political campaigns at all.

Federal regulators have been investigating Jones Day as part of an overall examination of lawyers, accountants and other professionals whose work helped keep failing thrifts alive in the 1980s.

On Monday, the Office of Thrift Supervision, the top thrift regulator, filed its biggest enforcement proceeding ever--a $275-million claim for damages at Lincoln--against another major law firm, Kaye, Scholer, Fierman, Hays & Handler in New York. And on Tuesday, the OTS won a court order forcing the giant Ernst & Young accounting firm to turn over a million pages of documents relating to its work on Lincoln and 22 other failed thrifts.

Jones Day, which is defending itself in the trial of the bondholders’ lawsuits, also is defendant in the pending $2.7-billion fraud and racketeering lawsuit brought by the Resolution Trust Corp., the federal thrift cleanup agency, against Keating and others.

Both private and government lawyers say they expect the various lawsuits to turn up more damaging information about the way professionals operate and the way Jones Day, in particular, aided Keating.

The economic impact of private-interest financing on campaigns and on public policy is thought to be staggering, and the Jones Day documents provide the clearest inside glimpse of attorney-client political dealings.

“It sounds to me like a smoking gun,” said Ellen Miller, executive director of the Center for Responsive Politics in Washington. “You just don’t see notes like that. This is as direct a quid pro quo as I have ever seen.”

“Shame on them,” said Michael S. Josephson, a former ethics law professor who heads a Marina del Rey think tank on ethics issues. “It’s a patent subterfuge. It’s not the kind of thing people of honor do. . . . It’s inappropriate.”

There is nothing illegal or unethical about lawyers acting as lobbyists, but the legal profession’s rules of conduct governing that lucrative field are not always so obvious, and ethical issues can become muddled.

Many lawyers, like Long, believe that law firms have a vested interest in the laws that affect a client’s business and the politicians who enact those laws.

Cleveland-based Jones Day--the nation’s second-largest law firm, with more than 1,200 lawyers around the nation and in nine other countries--had not been a major campaign contributor until mid-1980s, when it hired two top federal regulators and began promoting its S&L; practice.

Its thrift work was centered in its Dallas office, while its Los Angeles and Irvine offices helped in handling one of its biggest S&L; clients: Keating’s American Continental-Lincoln Savings operation.

Texas eventually became the cesspool of the thrift industry, and California was nearly as bad.

The thrift industry was one of the most influential lobbies in Washington, spreading campaign funds around as if it had a bottomless war chest. And Keating was among the industry’s heavy hitters, raising hundreds of thousands of dollars for dozens of state and federal politicians.

Keating raised more than $1.3 million for five U.S. senators, including Alan Cranston (D-Calif.), while asking them to intervene on his behalf with federal regulators over a lengthy federal audit of Lincoln. The lawmakers’ meetings with regulators in 1987 led to their reprimands last year by the Senate Ethics Committee, which reserved its harshest words for Cranston.

Keating’s apparent arrangement with Jones Day presents a new twist to his fund raising, said Miller of the Center for Responsive Politics.

“Charlie Keating knew how to tuck money into coats better than anybody I have ever seen, and I’m not saying that with admiration but with horror,” she said.

Jones Day’s campaign contributions were made by partners individually and through one of the law firm’s two political action committees--its federally licensed Good Government Fund PAC and its state-chartered Texas Elections Committee PAC.

Since the late 1970s, the Good Government Fund had never given more than $4,200 to federal congressional candidates in any two-year election cycle, according to Federal Elections Commission records.

But in the 1985-86 cycle, as its S&L; practice boomed, the fund gave $88,925 to Senate and House candidates. The amount grew to $97,294 in the next cycle. For the 1989-90 cycle, the fund gave Senate and House candidates $104,212, part of a total of $539,878 that it spent on politicians nationally.

The political donation issue arose in the American Continental litigation after Jones Day tried last month to get the case against it dismissed.

Attorneys for bondholders used the previously confidential internal documents to persuade the judge to force the law firm to go to trial.

The first document contains handwritten notes of two June 23, 1986, telephone conversations taken by Richard K. Kneipper, a partner in Jones Day’s Dallas office. He was checking into Keating’s request to give $10,000 to the Burton Barr Campaign for Governor of Arizona.

In his first conversation, Kneipper talked with fellow Jones Day partner Ronald W. Kessler of the firm’s Austin office. Kneipper recorded that the law firm had previously given money to its own political action committee, which in turn contributes to the candidates.

There was concern, he noted, that Jones Day is an out-of-state law firm and that a contribution of more than $5,000 “would look like an unusual move.” He also noted that there was a question about “whether or how we can get some busi(ness) from Gov. for this.”

Nearly two hours later, he talked with James Grogan, an in-house attorney at American Continental who handled Keating’s political contributions and fund-raising efforts. Kneipper noted that the company was asking the law firm to buy 10 tickets to a Barr event at $1,000 a ticket, and pointed out that “Barr wants limit of $5,000.”

Then Kneipper wrote a startling note: “agreed that we could bill liberally in future with recognition of this.”

The second document, an Oct. 22, 1986, memo to managing partner Richard W. Pogue from Kessler, detailed how the law firm used its Texas Elections Committee PAC to make the donations.

By the time the PAC could make the donations, Barr had lost the primary. But the client, “American Continental/Lincoln Savings,” asked that the money go to the Bill Schulz for Governor Committee. Schulz eventually lost, as well.

Lawyers for bondholders asserted in court that Jones Day indeed billed liberally. In one case, trial attorney Joseph W. Cotchett Jr. argued that Jones Day billed for 26 hours of work to attend a one-hour meeting.

Defense attorney Long called the allegation “preposterous” and said the firm billed only for the meeting, preparation for the meeting and round-trip flight time between Los Angeles and New York to attend the meeting.

Long said large law firms such as Jones Day are frequently asked by clients to contribute to various political campaigns. Any donations, though, are the firm’s, not the client’s, he said.

“There is a sense that law firms ought to be involved in the political process, to be responsive to clients and give support to clients who have supported you,” he said.

He pointed out that one of the major law firms representing bondholders--Milberg, Weiss, Bershad, Specthrie & Lerach--contributed heavily to politicians who supported legislation the firm wanted passed.

“This is a lot to do about nothing,” Long said. “This is no different than what happens to lawyers all the time.”

Law firms often act as lobbyists, and lobbyists can be counted on to buy a table’s worth of tickets at fund-raisers, said David B. Isbell, a Washington lawyer who is chairman of the American Bar Assn.’s Standing Committee on Ethics and Professional Responsibility.

“My sense of it is that it is not at all unusual, immoral or fattening for law firms to make contributions to candidates for the purpose of advancing their clients’ business,” Isbell said.

“It’s possible there is a segment of the bar that views lobbying as below the dignity of the bar, but I don’t think that’s a widely held view,” he said.

Yet the role of lawyers as lobbyists has become an ethically gray area, mainly because the potential for impropriety is so great. The Jones Day documents, many ethics experts believe, show that the very existence of an agreement to recoup donations--even if not acted on--puts lawyers in an ethical black hole.

“You can argue anything, but a good-faith, honest reading of those documents means there’s a quid pro quo,” said Josephson, head of the Joseph and Edna Josephson Institute of Ethics in Marina del Rey. “What else could it mean? I really would think we have a right to expect lawyers to be more scrupulous.”

Josephson maintained that “as long as clients make the call, it’s improper.”

Even if Jones Day did not violate any law or rule of professional conduct, its agreement with American Continental is suspect, said lawyers who have helped to write the profession’s code of conduct.

“In day-to-day practice, we often look to the smell test, and I don’t think this passes the smell test very well,” said Kurt W. Melchior, a San Francisco lawyer who worked on a committee to write California’s professional conduct rules for lawyers.

In fact, it stinks, said Paul W. Vapnek, another San Francisco lawyer who also was on the committee.

“What troubles me is that the lawyer is screwing his own client, the corporation, to help the guy running the corporation,” he said. “Also, the shareholders are getting screwed because the company’s expenses are higher than they should be.”

Citizens groups would like to get to the bottom of the campaign financing issue.

“It’s very difficult to track direct pass-throughs,” donations actually made by clients through law firms or accounting firms, said Miller of the Center for Responsive Politics. Federal law and laws in most states require disclosure of any donations being made on behalf of another person or group.

She said her group and other organizations are seeking more controls on donors and more information about them to uncover the true economic impact of their contributions.

To do just that, Arizona Common Cause, an affiliate of the Washington-based Common Cause citizens lobby, pushed state legislation to get more data from contributors--including their occupations and names of their employers.

Using the new laws, the state organization intends this year to learn the impact of political contributions, said Dana Larson, the group’s executive director. The effort has been growing since the 1986 elections, when many out-of-state PACs failed to report contributions, he said.

Alleged Conduit for a Contribution

In a handwritten note by a partner at Jones, Day, Reavis & Pogue, the law firm reaches an understanding with Charles H. Keating Jr.’s political point man to provide a $10,000 contribution to an Arizona gubernatorial candidate.

The Questioned Contribution: “10 tickets at $1,000 a ticket equals $10,000.”

The Incentive: “agreed that we could bill liberally in future with recognition of this”

Source: Federal court documents