Lincoln Investors Hope to Recoup Losses : Trial: A key phase of the civil fraud and racketeering trial against Charles H. Keating Jr. and his advisers opens Tuesday in Tucson, where plaintiffs want $285 million back.
For much of the nation, the saga of former Lincoln Savings & Loan operator Charles H. Keating Jr. ended three weeks ago when he was sentenced to 10 years in a California prison on his state securities fraud conviction.
But for those who lost money in his real estate and thrift empire, as well as for the federal government, the legal proceedings continue.
An important phase of the civil fraud and racketeering trial against Keating and his advisers will open Tuesday in federal court in Tucson, where small investors hope to recoup $285 million lost after the Irvine thrift and its parent company, American Continental Corp., collapsed three years ago.
Lawyers for the investors will start to bring to the stand witnesses they hope will show that the giant accounting firm of Deloitte & Touche played a major part in keeping the company--and, thus, sales of American Continental bonds--alive.
The investors--mainly Lincoln customers--contend they were tricked into purchasing the risky, unsecured bonds instead of the insured certificates of deposit they had gone to the S&L;’s Southern California branches to obtain.
Deloitte & Touche was known as Touche, Ross & Co. at the time it took over the American Continental/Lincoln account in November, 1988. Investors contend that Touche knew that Keating and his managers lacked integrity and should never have accepted the job as certified public accountants for Keating’s operation.
Had it not taken the job, investors contend, the company would have likely collapsed then, saving customers millions of dollars that were poured into the bond sales during the following three months.
Touche is the only major defendant left in the trial. Two smaller defendants--an economic consulting firm and a French bank--also are defending themselves. Keating and a number of former associates--all who say they are without money--have chosen not to put on a defense.
More than a dozen groups of defendants already have settled or tentatively settled for a total of $242 million.
Through most of April, lawyers for the investors had federal thrift regulators and others on the witness stand to make the case against Keating and his former business associates. That testimony tried to established that Keating used Lincoln as a cash cow to funnel money up through American Continental and into his pockets.
“The case is going exceptionally well on behalf of the bondholders, and it’s clear the remaining defendants are simply stonewalling a jury’s decision,” said Joseph W. Cotchett Jr., the chief trial lawyer for the investors.
But the road got bumpy last week as plaintiffs’ lawyers brought three witnesses to the stand to testify about the role of Lexecon Inc., a Chicago economic consulting firm that filed four reports with federal regulators in 1987 and 1988.
The reports generally provided Keating with support for his contention that his operations were healthy and that several investments, including the lavish Phoenician Resort in Scottsdale, were sound.
A lawyer for Lexecon, one of the minor defendants on trial, believes that his client was not hurt by last week’s testimony.
“I feel extremely good about the case,” said Dan K. Webb, Lexecon’s chief lawyer. “I wouldn’t say I’m confident, but the evidence has established that Lexecon has done nothing wrong.”
The testimony from a former Lexecon officer clashed with that of two expert witnesses on economic issues whom investors hired.
John Buehler of the University of Arizona and financial economist Blaine Nye charged that Lexecon used incorrect formulas and made outright mistakes in assessing the value of the Phoenician, which was the biggest argument between Keating and regulators at the time.
Regulators had valued the property at $135 million, and Keating had obtained a private appraisal setting the figure at $184 million. But even that was too low. Keating needed a $200-million appraisal to avoid a huge write-off that could have sent Lincoln into regulators’ hands as early as 1987.
Lexecon’s assessment was that the project, which opened in October, 1988, was worth $208 million.
Videotaped evidence also showed that Keating begged construction workers to complete the job by Oct. 1, 1988, so he could avoid a financial catastrophe.
“I have to have big occupancy the first year, the carrying costs and the money add up and it will never be profitable,” Keating said in a taped speech. “This is the kind of a mausoleum idiots build, and then they can’t make it work and--I’m dead serious now--and they . . . go bankrupt.”
Keating concluded, “I gotta have it finished Oct. 1 because if I don’t hit that fall season, I’m dead.”
Keating subsequently sold a 45% interest in the subsidiary that owned the Phoenician and a sister hotel in Phoenix to Kuwaiti investors. The amount paid for that stake, regulators reluctantly decided then, seemed to justify the higher value that Keating put on the hotel.
Robert Sherwin, a former vice president of Lexecon, disputed an assertion that he valued the Phoenician at a figure Keating determined. That contention is “absolutely false,” he said.
“That’s not how I’ve ever engaged in any project,” he testified. “I don’t do that. I did the best work I could and came out with my value as an independent judgment on my part and on the part of Lexecon.”
What’s more, defense lawyer Webb said, a key regulator overseeing an examination of Lincoln testified earlier that Lexecon’s reports had no affect on any decision he made on the resort property.
The other defendant is a French bank, Societe d’Analyses et d’Etudes Bretonneau, that was once called the Saudi European Bank, whose parent company was once 10% owned by Lincoln. Investors expect to present testimony in mid-May on the bank’s role.
In addition to the civil trial, federal authorities are prosecuting Keating and four others on criminal fraud, conspiracy and racketeering charges leveled in two federal indictments. Trial on those indictments is scheduled to start Aug. 4.
And the Office of Thrift Supervision, insisting on its moment of public glory, has resumed its civil enforcement action in Phoenix against Keating and six of his former executives at the defunct Irvine thrift’s parent, American Continental Corp.
That hearing is a scaled-down version of the OTS fiasco that opened in a Los Angeles court last summer when decorum went out the window. Defense lawyers showed their displeasure with the administrative law judge by pacing or flipping pens in the air. Even the OTS lawyer was caught unprepared to question a witness he had been trying to get on the stand.
Other federal agencies as well as lawyers for investors had asked the OTS to halt its action until the civil and criminal cases were completed. The agency refused.
Keating and others already have said they would agree to an unconditional lifetime ban on working in the thrift industry--which is what the OTS has said it wanted most. They also claim they have no money to pay the $36.5 million sought by the agency on two accusations of fraudulent transactions. Earlier this year, the agency reduced its claim from a record $130.5 million by dropping two other accusations because they became part of the federal indictments.
Associated Press contributed to this report.
Lincoln Settlements
Defendants in a $1.2-billion civil fraud and racketeering lawsuit stemming from the failure of Lincoln Savings & Loan have agreed to out-of-court settlements totaling $157.7 million. In addition, tentative settlements totaling $84 million have been reached with bankrupt brokerage Drexel Burnham Lambert and with its one-time junk-bond promoter Michael R. Milken. Here is a breakdown of settlements reached thus far:
Settlement Defendant Category (in millions)* Ernst & Young Accountants $63 Drexel Burnham Lambert Brokerage 42 bankruptcy estate Michael R. Milken and Brokers 42 related parties Arthur Andersen & Co. Accountants 30 Jones, Day, Reavis & Law firm 24 Pogue, Cleveland Kaye, Scholer, Fierman, Law firm 20 Hays & Handler Parker, Milliken, Clark, Law firm 5.8 O’Hara & Samuelian Former Lincoln officials Bankers 5 Sidley & Austin Law firm 4 Mariscal, Weeks, McIntyre Law firm 2 & Friedlander Offerman & Co. Stock underwriters 1.5 Isaac Heimbinder, Robert Jenkins Home builders 1 Jeffrey C. Patch Inc. Appraiser 1 Others Various .4
* Settlements with accountants, lawyers and appraisers to be shared with the Resolution Trust Corp. up to about $12 million.
Source: Lawyers at trial Researched by JAMES S. GRANELLI / Los Angeles Times
