Keating Receives 10-Year Sentence in S&L; Fraud Case : Trial: The former head of Lincoln Savings’ parent firm also is fined $250,000 for swindling investors. The judge declares him a flight risk and denies bail.
Charles H. Keating Jr. was sentenced Friday to the maximum 10 years in prison for directing an elaborate fraud in which thousands of small investors--mostly elderly Southern Californians--were bilked out of nearly $200 million.
Keating, who sat stoically as the sentence was delivered, also was fined the maximum of $250,000 by Los Angeles Superior Court Judge Lance A. Ito. The judge denied bail for Keating, saying he posed a “significant flight risk.”
Ito said the maximum term was justified by Keating’s callousness and the sophisticated nature of his scheme to defraud customers of now-defunct Lincoln Savings & Loan. Keating was chairman of American Continental Corp., which owned the Irvine-based thrift.
“This whole situation has been a tragedy for everyone involved,” Ito said.
Keating, 68, is the latest thrift baron to be convicted of crimes stemming from wild and far-flung investments that helped fuel the booming 1980s but led to a rash of S&L; failures. Lincoln’s collapse is the biggest thrift failure ever, costing taxpayers $2.6 billion. All told, the nation’s S&L; debacle will end up costing taxpayers hundreds of billions of dollars.
Keating, who was convicted Dec. 4 on 17 counts of state securities fraud, said in a brief statement to the court that he never bilked bondholders. Instead, he said, the money was put in “quality” real estate investments.
“Someday I hope I will be able to tell that story in full,” said Keating, who so far has invoked his 5th Amendment privilege not to testify.
Keating’s hands shook as he handed over his cuff links and other valuables to family members before being taken away by bailiffs. He hugged his wife and most of the two dozen family members who had come to support him.
“Don’t worry about me,” he told his grandchildren, several of whom were sobbing uncontrollably.
Ito’s sentence brought sighs of relief from several dozen American Continental bondholders in the courtroom.
“I’m very, very happy. Justice has been done,” exulted Sam Epstein of North Hollywood.
Dist. Atty. Ira Reiner called the sentence “a grand slam” and the chief prosecutor in the case, Deputy Dist. Atty. William Hodgman, said the stiff sentence should send a message to other would-be white-collar criminals. However, Hodgman noted that, with time off for good behavior, Keating could serve as little as five years in prison.
Keating, who has become a national symbol of the excess and arrogance of the thrift industry, still faces two federal court indictments charging him with fraud, conspiracy and racketeering, which carry a maximum prison term of more than 500 years. He also is a defendant in civil case now being tried in a federal court in Tucson.
Defense attorney Stephen C. Neal said that he will attempt to have Ito’s refusal to set bail overturned and that he plans to appeal the verdict.
More than 17,000 American Continental bondholders lost a total of about $180 million after Keating’s empire fell apart. The bondholders represent the bulk of the company’s investors, who lost a total of $285 million.
What made the American Continental fraud scheme unusual was both the sales program itself and the type of customers it targeted.
American Continental did not use underwriters or brokers, instead relying on its own employees--as well as Lincoln workers--to sell the high-risk bonds at Lincoln branches.
The customers were not sophisticated investors who talked regularly with brokers. The majority were elderly Lincoln depositors with no investing experience. Many simply wanted to put their money into insured Lincoln savings accounts but were persuaded instead to buy the bonds. Some invested their life savings and, since the collapse, have been forced out of retirement. Several bondholders committed suicide over their financial losses.
At Keating’s trial, prosecutors focused on his failure to disclose to bondholders that Lincoln and American Continental were in increasingly dire financial straits.
Testimony showed that federal regulators told Keating and his top executives as early as December, 1986--when bonds were first sold at Lincoln branches--that the thrift did not have adequate capital for the risky ventures in which it was engaging.
After the company bought Lincoln for $51 million in 1984, Keating turned it into a business dynamo by taking advantage of liberal investing laws to put federally insured deposits in high-risk ventures, such as development of raw land, junk-bond purchases, hotel construction, corporate takeovers and foreign currency trading.
After Lincoln was seized, regulators discovered that many of the transactions were nothing more than fraudulent schemes designed to pump up the value of Lincoln and increase the flow of money into Keating’s pockets for his lavish spending habits.
Keating and his aides fought regulators vigorously, testimony showed.
Regulators, meanwhile, continued to find more questionable activities at Lincoln and notified Keating about the problems they were uncovering. Still, Keating pushed the sale of bonds at Lincoln branches, promoting his company as safe and solid.
Even in January, 1989, when Keating was trying to sell a clearly troubled Lincoln, he brought bond salespeople to American Continental’s Phoenix headquarters and exhorted them to sell more bonds, saying the parent company and the S&L; were still strong.
But a month later, Lincoln’s president, Ray C. Fidel, who was in charge of bond sales, closed the operation.
Many customers were never given prospectuses on their investments, while others received them in the mail after they had purchased bonds, according to court testimony. They were won over with glossy pictures of Lincoln projects, like the luxurious Phoenician Resort hotel complex in Arizona.
And they saw Keating’s promotional gimmicks, like T-shirts worn by sales people with the words “Bonds for Glory” emblazoned on them. Ito referred to the T-shirts at Friday’s sentencing, saying they reminded him that money often is stolen more by the stroke of a pen than by the point a sword.
Before delivering the sentence, Ito cited the “tremendous moral, government and regulatory failure” that contributed to the collapse of Lincoln, saying that “nobody can be proud” of what happened.
The judge was most struck, he said, with the fact that Keating continued to push bond sales in the fall of 1988 after regulators ordered a halt to a tax-sharing agreement that was pumping Lincoln money up to American Continental to pay consolidated taxes when the S&L; did not owe any.
The judge found that Keating was unsuitable for probation and community service that he had sought.
Ito said he was impressed by letters supporting Keating and showing he has a “proud and caring family.” But the judge said he also had to weigh the devastation the fraud wreaked on innocent bondholders, and that is what helped persuade him to impose the maximum prison term.
What’s Next
Judge Lance A. Ito on Friday sentenced former Lincoln Savings & Loan chief Charles H. Keating Jr. to 10 years in prison and a $250,000 fine. And more trouble lies ahead for Keating. A list of what else Keating must face:
A 77-count federal indictment involving criminal bank fraud, conspiracy and racketeering, in court in Phoenix and Los Angeles. The charges have been consolidated. The trial will begin in Los Angeles federal court Aug. 4. Keating and associates face up to 510 years in prison if convicted.
A $130.5-million enforcement action by the Office of Thrift Supervision in Washington against Keating and six others for four transactions that caused losses at Irvine-based Lincoln. The OTS, the primary federal thrift regulator, also seeks to bar Keating and his companions from the banking industry for life.
Racketeering charges filed by the Resolution Trust Corp., which manages failed savings and loans. The suit seeks $2.7 billion in damages.
Civil litigation from 23,000 small investors who bought more than $250 million in risky bonds from Keating’s American Continental Corp. The trial began March 17 and is under way in federal court in Tucson; Keating is not offering a defense because his insurance company is refusing to pay his legal fees.
A $250-million state securities fraud suit filed by the California Department of Corporations, which approved the Lincoln bond sales.
The threat of a suit from the Securities and Exchange Commission, seeking to bar Keating and others from engaging in further securities transactions and to collect restitution for unspecified damages.
SOURCE: Los Angeles Times library
Researched by DALLAS M. JACKSON
