Keating's Advisers Under Fire : Attorneys, Accountants Helped Massive Fraud Work, Investors' Lawyers Say

TIMES STAFF WRITER

Charles H. Keating Jr. was in "total control" of Lincoln Savings & Loan and its parent company, but he couldn't have masterminded a $250-million fraud without the help of professionals, a lawyer for small investors in Keating's company argued in federal court Friday.

It was the professionals--lawyers, accountants, appraisers and investment bankers--who helped Keating portray his empire as financially sound while trying to block regulators from taking it over, Joseph W. Cotchett Jr. of Burlingame, chief trial lawyer for the investors, said at the start of opening statements in the civil fraud and racketeering trial.

In his five-hour preview of the case, Cotchett charged that Keating and his family took $89.7 million out of Lincoln's parent company, American Continental Corp. in Phoenix, over the five years that it owned the Irvine thrift.

Some of that money was spent on elaborate trips to Europe with 21 family members and baby-sitters, and some of it allowed two of his daughters to take the corporate jet to Los Angeles to see a movie in Beverly Hills, he said.

That money came from more than $250 million that small investors, mainly elderly Lincoln customers in Southern California, put into American Continental, he asserted. They lost it all after Keating's financial empire collapsed in April, 1989.

The investors contend that they were swindled out of their money--in many cases their life savings--in a sales program that targeted older, unsophisticated customers and misled them about the true risks of the securities.

"While selling $250 million in bonds, American Continental Corporation was in fact bankrupt" and no money was coming in except the proceeds from the sales of bonds at Lincoln, Cotchett said.

Actually, the total amount of money owed to bondholders and to minority shareholders outside the Keating power group came to $285 million, he said later in his remarks to the jury of six women and six men.

The trial, a consolidated proceeding involving 15 class-action lawsuits, is important not only because investors have a chance to recover some of their money but also because still-secret information is expected to come out about how far professionals would go to help Keating.

The defendants--mainly Keating, three major accounting firms and a national law firm--deny any wrongdoing. They contend that any documents to be revealed will not show them culpable. Keating himself contends that over-reaching regulators were to blame for Lincoln's collapse, the nation's biggest thrift failure to date.

The defendants will be making their opening statements Monday and Tuesday. Keating will appear Tuesday or Wednesday, though he is expected to invoke his Fifth Amendment privilege to avoid self-incrimination.

Setting the stage for what he hoped the evidence would show, Cotchett asserted that the professionals were swayed by one thing--money.

He charged that, for large enough fees, the professionals provided Keating just about anything he wanted.

Jones, Day, Reavis & Pogue, the nation's second-largest law firm, worked hard to catch Keating's empire as a client, Cotchett said.

"Why? Because Charlie Keating was a big payer of attorney fees," the lawyer told the jury.

An internal law firm memo Cotchett showed the jury stated that Keating "does not care" how much legal costs are as long as he gets the best. The memo goes on to state: "It appears to us that (American Continental Corp.) is made for us and we for them."

In other ways, the law firm showed its concern for making money. In agreeing to give a Keating-backed political candidate a $10,000 contribution, a partner in the firm wrote that Keating "agreed we could bill liberally in the future with recognition of this."

That handwritten memo, revealed last month as well as in Cotchett's opening remarks, already has sparked concern in Washington about campaign financing and in legal circles about the ethics of lawyers acting as lobbyists.

Altogether, Cleveland-based Jones Day was paid about $1.6 million for its legal help. One of its partners at the time, Ronald Fein, also received an unsolicited check for $250,000.

Accounting firms also were paid high sums:

* Arthur Andersen received $3.7 million for auditing American Continental and Lincoln and providing services in 1984 and 1985.

* Arthur Young & Co., now Ernst & Young, billed $7 million for its 1986 and 1987 audits and other work.

* Touche, Ross & Co., now Deloitte & Touche, picked up a $2-million retainer in the fall of 1988 as Keating's company was falling apart and received an additional, unsolicited $2-million check.

The accountants approved transactions as profitable when they really were money-losers, the lawyer asserted. In 1987 alone, Arthur Young gave the company a clean bill of health, saying that it posted $27 million in profits. But Cotchett contended that $20 million of that money came from bogus transactions with straw buyers and never should have been recorded as profits.

The accountants have said that they relied on Keating and corporate executives to give them the proper information. They worked with what they had and their accounting procedures were sound, they said.

Meantime, Cotchett said, the lawyers ran interference for Keating in his ever-increasing battles with regulators.

"It was the lawyers who allowed Keating to head off regulators at the pass," Cotchett said.

The lawyers knew that loan-file documents were being backdated and allowed to contain forged signatures, but failed to halt the practice. They helped in adding new information to files that were woefully inadequate to support the huge loans that Lincoln was making, Cotchett said.

The entire effort, he said, was to fool regulators who were beginning to examine Lincoln to see whether it was truly in the good financial shape that it claimed to be.

But Jones Day has asserted that it was doing nothing more than what lawyers are supposed to do--help a client in trouble. Lincoln had serious problems in complying with regulations, and the law firm was simply trying to help its client comply, it said.

Jones Day also has contended that it had no reason to believe that American Continental executives were not following the law firm's advice.

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