Keating Judge Bars Use of State Verdict : Courts: Telling jurors in the federal case about the fraud conviction of the former S&L; operator is called ‘overwhelmingly’ prejudicial.

A federal judge on Monday decided that, for now, prosecutors cannot use Charles H. Keating Jr.’s state conviction against him in his upcoming criminal fraud, conspiracy and racketeering trial in federal court.

U.S. District Judge Mariana R. Pfaelzer said that telling jurors about last year’s state securities fraud conviction of the former Lincoln Savings & Loan operator would be “overwhelmingly” prejudicial.

But prosecutors might be able to get Keating’s previous conviction before the jury, she said, in response to what the defense might do in presenting its evidence or what Keating might say if he testifies.

Pfaelzer’s ruling was one of 10 she rendered at the start of one of the nation’s biggest S&L; criminal cases--the trial of a man who has come to symbolize the fraud and arrogance that devastated the thrift industry in the past decade.

Opening statements and testimony in the trial, which is expected to last as long as six months, will not begin until sometime next week.

Keating, 68, and his son, Charles H. Keating III, are accused of bank fraud, securities fraud, bankruptcy fraud, conspiracy and a racketeering scheme designed to enrich themselves by artificially inflating the profits of Lincoln through sham real estate transactions.

The Irvine thrift and its parent company, American Continental Corp. in Phoenix, collapsed in April, 1989. Small investors beguiled by the company’s apparent profits lost $288.7 million. Lincoln’s failure is the nation’s biggest, costing taxpayers $2.6 billion.

The elder Keating faces 75 counts in two indictments and a prison term of up to 525 years. His son, who is free on bail, is charged in one indictment with 64 counts and faces up to 475 years in prison.

Keating, 68, was convicted in December in Los Angeles County Superior Court of violating state securities law by selling risky American Continental bonds at Lincoln’s Southern California branches. He was sentenced in April to 10 years in state prison.

In federal court Monday, five U.S. marshals escorted a handcuffed Keating into the courtroom and whisked him away in the same manner after the 2 1/2-hour hearing. He spoke only to his lawyers and his son.

The once-dapper dresser was noticeably thinner in his blue prison garb.

His chief lawyer, Stephen C. Neal, told Pfaelzer that his client lost 55 pounds in the first six months behind bars and that current conditions at the Metropolitan Detention Center put him “in danger of serious, serious deterioration of his health.”

Neal again asked that his client be released on bail to participate more effectively in his defense, but Pfaelzer denied the request.

Pfaelzer also told Neal that he would not be able to make any broad allegations against federal regulators for Lincoln’s collapse, though he would likely be able to respond to specific issues raised by Assistant U.S. Attys. Alice C. Hill and David A. Sklansky, the lead prosecutors.

“A large part of what you want to do is blame the regulators,” she pointed out to Neal. Those efforts will be stymied if prosecutors never raise any regulatory issues.

Sklansky said he and Hill do not intend to bring any regulators to testify about their bitter relations with executives at Lincoln and American Continental.

Aware of a variety of disruptions during the state court trial of Keating, Pfaelzer promised that the federal trial would be “very, very fast-moving and quiet” and that any disruptions would be dealt with “very severely.”

Jurors will not be allowed to mix in the hallways with witnesses and bondholders, and anyone making any outburst will be removed from the courtroom and barred from coming back, she said.

“Anyone emotionally involved . . . should stay out,” she said.