Ruling May Give Keating Loophole in S & L Conviction

Financier Charles Keating’s chances of overturning his California securities convictions appeared to improve Monday when the state Supreme Court ruled that prosecutors must prove a knowing falsehood in the sale of securities.

The 6-1 ruling overturned the convictions and three-year prison sentence of John Martin Simon, a Southern California minister and securities promoter who had no connection to Keating but raised a similar legal issue in his appeal.

Keating, now serving a 10-year state prison sentence, was convicted in 1991 of aiding in the sale of securities through false statements. The securities were junk bonds issued by the parent company of Lincoln Savings & Loan and sold to investors without disclosure of the company’s losses and lack of security. Lincoln’s collapse in 1989 is estimated to cost taxpayers $3.4 billion.

Keating’s appeal, accepted for review by the state’s high court in September, 1993, challenged the trial judge’s refusal to require proof that he knowingly withheld information that the bonds were a risky investment. That element was a key part of Keating’s defense.

Even if his state convictions are overturned, however, Keating still must serve the remainder of his 12-year, seven-month federal prison term for his 1993 racketeering, conspiracy and fraud convictions in U.S. District Court. He also has been hit with more than $1 billion in damages from investors’ lawsuits but says he is broke.

In Monday’s ruling, the court said the prosecution must prove that a seller of securities either knew a statement was false or was grossly negligent in failing to learn that it was false.

A Los Angeles County Superior Court judge, bound by a 1989 appeals court ruling, had instructed the jury in Simon’s case that a false statement in the sale of securities was enough for a conviction, regardless of the seller’s knowledge.

State securities law does not expressly require proof of knowledge for a criminal conviction. But the Supreme Court noted that state law requires proof of a knowingly false statement when an investor sues a seller of securities for damages. Such knowledge must also be required in a criminal case, said the opinion by Justice Marvin Baxter.

Dissenting Justice Stanley Mosk noted that the 1989 appellate ruling was left undisturbed by the Legislature when it increased criminal penalties in such cases in 1993. The purpose of the law is “to protect the public against fraudulent--even unknowingly fraudulent--stock and investment schemes,” Mosk said.

Simon was convicted of five counts of false statements or omissions in the sale of promissory notes and limited partnerships to clients of his Clergy Tax and Financial Services. He and his employees did not tell investors of the risks, the court said.

On separate grounds, the court also overturned his seven convictions for selling unqualified securities. The ruling allows prosecutors to retry him.

The ruling “shows what good things can happen when concerns for due process and concerns for business both converge,” said Simon’s lawyer, Thomas Coleman. He said the decision reflected the court’s concern that a law imposing a long prison sentence without proof of criminal intent might be unconstitutional.

Though the issues in Keating’s case are not identical, the ruling will probably also entitle Keating to a new trial, Coleman said.