2 Defendants Agree to Settle in Lincoln Case
The last major defendant in the $1.2-billion securities fraud case brought by small investors in Charles H. Keating Jr.’s financial empire settled Monday for $8.5 million in cash and services, providing hope that investors can begin to get refunds by late this summer.
The accounting firm of Touche, Ross & Co., now known as Deloitte & Touche, has agreed to pay $7.5 million in cash and provide $1 million worth of services to the investors.
A small economic consulting firm, Lexecon Inc. in Chicago, also settled Monday by agreeing to provide $1 million worth of services, which will be funneled through Deloitte & Touche and will be in addition to the services Touche will provide.
The agreements raise the total amount of settlements in the case to $251 million, and leave only Keating and a few mostly bankrupt defendants in the civil fraud and racketeering trial in federal court in Tucson. Only one company, Saudi European Investment Corp., could afford to pay a judgment if found liable.
Final arguments are scheduled to begin Thursday, and the case could go to the jury by Friday.
“This is terrific,” said Joseph W. Cotchett Jr., chief trial lawyer for the investors. The agreements avoid appeals, he said, and should help to start the distribution of settlement funds to mostly elderly investors within the next three months.
Initial payouts from settlements could be as much as 35 cents on the dollar, with an additional amount of more than 20 cents on the dollar paid at some later date. The refunds do not include any possible jury award.
“We were thinking in terms of getting 80% to 100% back, based on what our lawyers said before,” said Jack C. Lower of San Jacinto, who bought bonds in Keating’s American Continental Corp. “It’s a big disappointment, but it’s better than nothing. I could sure use the money.”
Lower, though, praised Cotchett and the investors’ legal team and held out hope for a full recovery at trial.
“They did a good job,” he said. “I don’t think we would have got anything without them.”
Deloitte & Touche said in a statement that it settled mainly to avoid the possibility of being held liable for the entire $1.2 billion, including treble damages, that small investors in American Continental were seeking.
“It is a sad commentary on the present state of the American legal system when professional firms believe they have to make these kinds of payments to avoid the risk of catastrophic loss, even when they bear no professional or other responsibility for the matters at issue,” the accounting firm stated.
The arrangement for services from Touche and Lexecon is designed to help lawyers for investors start distributing the settlement funds to some 23,000 people who bought American Continental stock and bonds. Most of the investors were customers of the Phoenix company’s main subsidiary, Lincoln Savings & Loan, based in Irvine.
Both the company and the S&L; collapsed in April, 1989. Lincoln is the nation’s worst thrift failure, costing taxpayers an estimated $2.6 billion. The small investors lost more than $285 million in American Continental’s bankruptcy.
The complex civil case involving the consolidation of 15 state and federal class actions has been a major effort to hold professionals to a high standard in their dealings with clients. The message Cotchett said he wants to send to lawyers, accountants, investment bankers, consultants and appraisers is that they owe a duty to the investing public as well as to their clients.
The professional defendants were accused of helping Keating peddle his American Continental and Lincoln as financially sound operations when they were really on the brink of disaster.
The only solvent defendants remaining in the case are Saudi European Investment Corp. N.V., an offshore company that once owned Saudi European Bank in Paris, and Richard Fenn, a senior SEIC executive. Lincoln once owned a 10% stake in the offshore company and arranged a number of questionable deals with the company and its Paris bank. Saudi European Investment Corp. is owned by a number of wealthy Arabs.
Keating decided not to defend himself at the civil trial. He is serving a 10-year prison term in the California Men’s Colony in San Luis Obispo for his conviction last fall on state securities fraud charges. He also is awaiting trial Oct. 20 in U.S. District Court in Los Angeles on criminal fraud, conspiracy and racketeering charges.
Several other minor defendants--all bankrupt--also did not defend themselves at trial. They are Atlanta developer Continental Southern Inc., Tempe developer Conley Wolfswinkel and his three companies.
U.S. District Judge Richard M. Bilby must approve the settlements. He has said previously that he wants to start the distribution of funds to investors by late summer.
He is expected to have $167 million on hand, and an additional $84 million is expected to be placed into the settlement pool over the next year or two, depending on the amount recovered from assets sales and other sources in the bankruptcy of the Drexel Burnham Lambert brokerage and global settlement involving Michael R. Milken, its former junk-bond broker.
From the amount on hand, $42.4 million is allotted for attorney fees, about $12 million for court costs and $11.6 million for a federal agency that advanced money to investors who bought bonds at Lincoln branches. Those bondholders received about 6 cents on the dollar then.
Cotchett said lawyers for investors may take part of their fees out of the future settlement money, thus increasing the initial payment to their clients, and will negotiate with the Resolution Trust Corp. to forgive most or all of the $11.6-million debt, which also would increase the payment to clients.
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 $167.2 million. Also, tentative settlements totaling $84 million have been reached with bankrupt brokerage Drexel Burnham Lambert Inc. and with its onetime junk-bond promoter, Michael R. Milken. Settlements reached so far (in millions of dollars):
Defendant Category Settlement* Ernst & Young Accountant $63.0 Drexel Burnham Lambert bankruptcy Brokerage 42.0 estate Michael R. Milken and related parties Brokers 42.0 Arthur Andersen & Co. Accountant 30.0 Jones, Day, Reavis & Pogue, Cleveland Law firm 24.0 Kaye, Scholer, Fierman, Hays & Handler Law firm 20.0 Deloitte & Touche Accountant ** 8.5 Parker, Milliken, Clark, Law firm 5.8 O’Hara & Samuelian Former Lincoln officials Bankers 5.0 Sidley & Austin Law firm 4.0 Mariscal, Weeks, McIntyre & Friedlander Law firm 2.0 Offerman & Co. Stock underwriter 1.5 Lexecon Consultant ** 1.0 Isaac Heimbinder, Robert Jenkins Home builders 1.0 Jeffrey C. Patch Inc. Appraiser 1.0 Others Various 0.4
*Settlements with accountants, lawyers and appraisers are to be shared with the Resolution Trust Corp., up to about $12 million.
**Touche settlement includes $1 million worth of services in distributing funds to investors. Lexecon’s settlement is to provide a similar amount of services, funneled through Touche.
Sources: Lawyers and litigants
