Bondholders, Regulators Unhappy That Keating Penalty Isn’t Harsher : Justice: Prosecutors had sought a sentence of 25 to 30 years, but acting U.S. attorney calls term ‘relatively stern’ since parole is not possible.

The nation’s top thrift regulator was taken by surprise at the length of the federal prison term given to Charles H. Keating Jr.

A spokesman for the U.S. Office of Thrift Supervision said that the agency presumed Keating would receive a longer sentence than the 12 years, seven months handed him by a federal judge Thursday.

“Charles Keating is deservedly characterized as the epitome of a savings and loan crook,” John Downey, deputy director of regional operations for the OTS, said in a prepared statement. “He earned every year of prison the judge meted out.”

Prosecutors had asked U.S. District Judge Mariana R. Pfaelzer to sentence Keating to 25 or 30 years in prison, and many lawyers involved in the multitude of Keating civil cases had expected a sentence of at least 15 to 20 years.

Bondholders, regulators and lawyers reacted to the shorter sentence with disappointment.

“Based on the magnitude of the crime that Mr. Keating was convicted of, he seems to have gotten off lightly,” said Edwin J. Gray, former chairman of the Federal Home Loan Bank Board, which was replaced by the OTS in 1989. “I’m not sure this sends a very good message to future bank robbers and criminals.”

Leah Kane, 68, a Keating victim who helped organize a class-action suit against the financier on behalf of fellow Leisure World residents in Laguna Hills, said she is “not exactly pleased” with the sentence.

“This man has created so much heartache for the elderly citizens of Leisure World,” Kane said. “I don’t think justice has been served. However, I’m happy he at least got 12 years.”

Another bondholder, Jack C. Lower, 78, a retired shipyard planner in San Jacinto, also expressed dismay. “I’m very disappointed, and I’m sure other bondholders are too,” he said. “We thought he should get the rest of his life without parole. He’s gotten away with robbing several thousand people, most of them elderly like myself.”

But acting U.S. Atty. Terree A. Bowers pronounced the sentence “relatively stern,” pointing out that under federal law, Keating will not be eligible for parole.

“We’re pleased that Mr. Keating will probably be in jail until he’s approximately 79 years old,” Bowers said. “He has to serve at least 85% of the sentence, hard time. The federal system is very different from the state system. A 12-year sentence is the equivalent of a 30- or 40-year sentence (with chance of parole) on the state side.

“Of course, no sentence could really account for the trauma Mr. Keating caused to individual investors in his company and to the American taxpayers still having to shoulder the burden of the failure of Lincoln,” Bowers added.

Susan Illston of Burlingame, one of the attorneys who represented bondholders, said, “I’m disappointed the sentence isn’t longer, but I think the effect will be that Keating will serve 10 or 11 years of real prison time, which for a man of his years is significant.”

Ronald Rus, a co-lead counsel for the bondholders, said he had a “mixed reaction” to the sentence.

“If a 22-year-old kid had robbed a little old lady, he would have gotten 20 years to life,” Rus said. “But I think more important than the time Keating will serve is how he will go down in history. The judge noted that he adversely affected thousands of lives, and that he is solely responsible for this fraud. This is the final capper that ensures Charlie will go down as a scoundrel despite his efforts to rewrite history.”

One bondholder, Charles Roble of Orange, said he was more frustrated by “the slow, grinding wheels of justice” than by the sentence.

“I’m angrier at the justice system than I am at Keating,” said the 72-year-old man who invested $28,000. “My wife died in March; I wish she didn’t have to spend the final years of her life dealing with this.”

Keating’s Legal Morass

Thursday’s sentencing of Charles H. Keating Jr. to 12 years and seven months in prison ends all criminal proceedings against him. But the former financier remains mired in numerous legal entanglements. A status report:

* State securities fraud charges: Convicted in 1991 and sentenced to 10 years in prison. Outcome: Keating has served 15 months in the California Men’s Colony in San Luis Obispo, where he will remain for only 45 months more, with time off for good behavior. By serving the federal and state sentences consecutively, he will be eligible for parole in 10 years.

* Bondholder suits: Thousands of bilked investors filed individual and class-action suits in California and elsewhere. Last summer, a federal jury in Arizona ordered Keating and others to pay $4.4 billion in damages to 17,000 investors. Keating was found liable for $2.1 billion, the largest civil judgment in U.S. history. Outcome: A U.S. district judge later reduced the total judgment from $4.4 billion to $1.5 billion. Investors have recovered more than $250 million from other defendants such as Keating’s lawyers and accountants, but so far less than 50 cents on the dollar has been paid to bondholders. It is unknown how much investors will recover from Keating, who claims he is broke. Additional suits are pending.

* Resolution Trust Corp. racketeering suit: The RTC, which manages failed savings and loans, filed suit in 1989 seeking $2.6 billion in damages. Outcome: Pending.

* Office of Thrift Supervision action: Wants to bar Keating and six associates from the industry and seeks $130.5 million in restitution. Outcome: Administrative hearings began in July, 1991, but adjourned until after criminal proceedings.

* Securities and Exchange Commission suit: The SEC filed a civil suit against Keating and nine others in 1991, alleging securities fraud and insider trading. Outcome: Pending.

* State Department of Corporations suit: The state’s $200-million suit seeks restitution for bondholders. Outcome: Pending.

* California attorney general’s suit: Keating and his accounting firm were sued over alleged violations of business laws. Suit sought $250 million restitution to bondholders. Outcome: Charges against the accounting firm were later dismissed, but the dismissal was appealed and the case was reinstated and is now pending. Source: Times files; Researched by JAMES S. GRANELLI and JANICE L. JONES / Los Angeles Times