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Law Firm to Pay $51 Million in Keating Case : Thrifts: Jones Day was accused of helping Keating keep control of Lincoln Savings even though it knew he was looting it.

TIMES STAFF WRITER

The nation’s second-largest law firm--Jones, Day, Reavis & Pogue--agreed Monday to pay a record $51 million to savings and loan regulators for its role in the 1989 collapse of Lincoln Savings & Loan.

In a lawsuit, the Resolution Trust Corp. had accused Jones Day of helping Charles H. Keating Jr. keep control of the Irvine-based financial institution, even though the law firm knew that Keating was looting it. The case was settled shortly before it was to go to trial in Tucson.

The settlement is the most ever paid by a law firm to settle a malpractice suit, according to Stephen Gillers, a legal ethics professor at New York University Law School.

“This is a fitting epitaph for the end of the go-go years for thrifts,” Gillers said. “This is the last big-firm case the RTC has, though new ones could come along.”

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Though it settled the case, Cleveland-based Jones Day continued to deny it had done anything wrong. The settlement also relieves the law firm of any responsibility for possible malpractice at other failed thrifts for which it worked.

The settlement is separate from the $24 million that Jones Day paid last year to settle lawsuits filed by small investors in Keating’s financial empire.

The RTC, the federal agency formed to clean up S&L; industry failures, said Jones Day learned in early 1986 that Keating was looting Lincoln but failed to stop him.

Instead, the agency alleged, the firm helped to keep him in power by its work on a federal audit and with efforts to get a Keating friend, Atlanta lawyer Lee H. Henkel Jr., appointed as the nation’s top thrift regulator.

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“This is really an instance of lawyers, who knew better, making an affirmative decision to chase the riches by being a member of Charlie’s team,” said Michael C. Manning, a Phoenix lawyer representing the RTC.

Jones Day, however, said its advice to Keating was appropriate and correct--though mostly ignored.

In prepared remarks Monday, the firm said that its lawyers had not uncovered enough information to determine whether Keating was engaged in fraud or other misconduct.

“Neither Jones Day nor the other respected professional service firms that have been caught up in the aftermath of the Lincoln failure caused the institution’s problems,” Patrick F. McCartan, the firm’s managing partner, said in a press release.

“Lincoln’s failure resulted from business transactions entered into by Lincoln independently of any advice rendered by Jones Day.”

McCartan said the firm settled the case because the risk of losing a $200-million lawsuit was too great. The firm thus “reluctantly follows” a pattern of settling high-profile cases for business reasons, he said, not because the allegations have any merit.

Jones Day also settled charges brought by the Office of Thrift Supervision, which is the industry’s main regulator.

The OTS accused the firm of unethical and improper conduct in representing Lincoln, and Jones Day agreed in settling the charges to abide by a set of OTS conditions for representing S&L; clients.

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The agreement bars Jones Day partner William Schilling, who was in charge of the firm’s work at Lincoln, from representing financial institutions before regulatory agencies.

The collapse of Lincoln and its parent, American Continental Corp., became a national standard by which greed, arrogance and fraud in the savings and loan industry were measured. Lincoln Savings’ failure cost taxpayers $2.6 billion.

Keating is serving a 10-year prison term for his December, 1991, state securities fraud conviction and is awaiting sentencing in May for his federal racketeering, conspiracy and fraud conviction three months ago.

Monday’s settlement with Jones Day gives the RTC a recovery so far of more than $216 million in its negligence, fraud and racketeering suit against Keating and others.

As much as $60 million more is expected from numerous related settlements with former junk bond king Michael Milken and his brokerage, Drexel Burnham Lambert, which had close ties to Lincoln Savings.

Accountants, who have also been caught in the dragnet of S&L; litigation against professionals, have paid even more.

Ernst & Young, the nation’s largest accounting firm, paid $63 million a year ago to the small investors and a staggering $400 million more in November to regulators who had alleged that the firm failed to warn about disastrous problems at major thrifts nationwide.


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