Jury Orders Keating to Pay Bilked Investors $2.1 Billion
In the largest civil judgment against an individual in U.S. history, a federal jury in Arizona on Friday ordered Charles H. Keating Jr., the former owner of Lincoln Savings & Loan, to pay $2.1 billion in damages to thousands of investors he defrauded.
The jury also ruled that three other defendants aided Keating in the fraud and assessed them damages that could total $2.3 billion.
U.S. District Judge Richard Bilby must approve the final damage awards. Attorneys in the case said Friday that it was unclear exactly how much the defendants will be ordered ultimately to pay the victims.
And, it is uncertain how much money the 23,000 investors will eventually recover. Keating, now serving a 10-year prison term for state securities fraud, claims he is broke and two of the other defendants are in bankruptcy proceedings.
Nonetheless, the investors and their attorneys were pleased with the decision. “We’re delighted with the verdict,” said Leonard Simon, one of the lawyers for the plaintiffs. “This is another major step in the direction of bringing full recovery.”
“Boy, $2.1 billion is a lot of money,” said Jack Lower, 77, a San Jacinto resident who had invested $34,000. “Of course, the bondholders are not going to get it unless they can find where Keating hid it all.”
Friday’s verdict followed a 3 1/2-month trial on several class-action lawsuits in which thousands of small investors claimed losses of $288.7 million after buying American Continental Corp.’s bonds. Many of the junk bonds were sold in branches of Lincoln Savings, the Irvine-based thrift owned by American Continental.
The investors lost their money when American Continental declared bankruptcy and Lincoln was seized by the government in April, 1989. Lincoln’s collapse, linked largely to bad real estate investments, will cost taxpayers a record $2.6 billion.
Numerous lawsuits were filed against Keating and his associates in the wake of the failures. The lawsuits originally named more than 90 people and companies as defendants, including several major law and accounting firms. Most of the defendants agreed to settle out of court for a total that plaintiffs’ lawyers estimated could reach $250 million.
Continental Southern Inc., Conley Wolfswinkel and Saudi European Investment Corp. remained as co-defendants. Arizona developer Wolfswinkel and Continental Southern, an Atlanta real estate firm, were accused of engaging in sham transactions with Keating to inflate the value of his companies. Saudi European, a Paris-based bank owned by wealthy Arabs, was accused of taking part in a circular transaction with American Continental that netted the company $5 million in fees and let Keating book a $38-million profit plaintiffs contend did not exist.
The 11-member jury found that all three defendants conspired with or aided Keating in some way. The jury found that Keating conspired to mislead investors.
Saudi European, the only defendant to mount a defense in the case, said it will appeal the verdict and ask for a new trial. The company’s attorney argued that it, too, was a victim of Keating and that it could never afford to pay so large a judgment.
Testimony during the trial showed that customers received phony sales pitches, often being told the risky junk bonds were government-backed; some thought they were buying or renewing federally insured certificates of deposit.
Near the end of the trial, Bilby said he had found a pattern of “racketeering activity,” including mail, wire and securities fraud. He also found that the actions, including sham deals to record fake profits and inflate the apparent strength of American Continental and Lincoln, violated common law.
The decision by the jury in Tucson “sent a pretty good message,” Bilby said in a telephone interview after the verdict. “The message to banks, savings and loans, congressmen and politicians and everybody else is that the system failed.”
The six-man, five-woman panel, after eight days of deliberation, ordered Keating to pay compensatory damages of $600 million and punitive damages of $1.5 billion.
Continental Southern, which is operating under bankruptcy court protection, was ordered to pay $600 million in compensatory and $500 million in punitive damages. Wolfswinkel, a personal friend of Keating, was ordered to pay $518 million, plus $410 million in punitive damages, and Saudi European, $300 million in compensatory damages only.
The verdict against Keating was more than double the $1.2 billion sought by the plaintiffs’ attorneys in a class-action lawsuit. Bilby has yet to rule on a motion that would automatically triple the compensatory awards as allowed under the federal racketeering laws. If tripled, the award against Keating could exceed $3 billion and would be boosted to more than $5 billion for all the defendants.
Joseph W. Cotchett, chief attorney for the plaintiffs, said his clients believe that Keating has assets that he has hidden abroad. He said the jury ruling will allow questioning about wire transfers totaling as much as $100 million that he said Keating made to Europe.
Times staff writer Ted Johnson contributed to this story.
