Judge Voids State’s Keating Conviction

Citing flawed jury instructions from Superior Court Judge Lance A. Ito, a federal judge in Los Angeles on Wednesday overturned the state securities fraud conviction of former Lincoln Savings & Loan operator Charles H. Keating Jr., handing state prosecutors a devastating defeat.

U.S. District Judge John G. Davies ruled that Keating was denied his constitutional due process rights because his conviction was based on “nonexistent and erroneous legal theory” and “erroneous” jury instructions.

The key jury instruction, on aiding and abetting the fraudulent sale of securities, was specially crafted by Ito, who also presided over the failed double-murder prosecution of O.J. Simpson.

The decision will not get Keating, 72, out of the federal prison in Tucson, where he is serving concurrent sentences of 10 years on the state case, and 12 years, 7 months on federal convictions for racketeering, conspiracy and fraud.

Under federal sentencing guidelines, he is not eligible for parole until 2001.

“We’re tremendously disappointed with the decision,” said Deputy California Atty. Gen. Sanjay T. Kumar. The state will appeal, he said. The agency previously had won state appeals court rulings upholding Keating’s 17 convictions on state securities law violations.

Keating’s attorney, Stephen C. Neal, hailed Davies’ decision as “very strong” and “well reasoned,” and said that his client is “very, very pleased.”

He also said he doubted that the state could retry Keating if it loses its appeal. “I think the double jeopardy clause would prevent it,” Neal said.

The state’s appeal would go to the U.S. 9th Circuit Court of Appeals, which is also considering Keating’s appeal of his federal conviction.

Keating, who railed against federal regulators for the restrictions they placed on his high-flying thrift, came to symbolize the industry’s greed and arrogance as well as its ability to influence legislators.

His contributions to five U.S. senators, whom he enlisted in his fight against regulators, tarred their reputations and led, in part, to the decision of California Sen. Alan Cranston not to seek reelection four years ago.

Using his Phoenix company, American Continental Corp., to buy Lincoln for $51 million in 1984, Keating turned the sleepy Irvine thrift into a business dynamo by taking advantage of liberal investing laws. He put federally insured deposits in high-risk ventures, such as development of raw land, junk bond purchases, hotel construction, corporate takeovers and foreign currency trading.

Regulators began clamping down, and Keating’s empire collapsed in April 1989.

Federal authorities and regulators soon discovered that many of the thrift’s transactions were fraudulent schemes designed to pump up the value of Lincoln and increase the flow of money to American Continental and into Keating’s pockets for his lavish spending habits.

Lincoln’s failure was the nation’s second most expensive, costing taxpayers $3.4 billion. In addition, investors lost more than $285 million, mostly in junk bonds issued by American Continental.

Wednesday’s court ruling did not sit well with those small investors, especially more than 11,000 mostly elderly Southern California residents who bought risky American Continental bonds in Lincoln’s branches.

“This is very much a travesty of justice,” said bondholder Sam Epstein, 83, of North Hollywood. “The man went to court and was found guilty by the jury and now suddenly they’ve found a loophole for him? This doesn’t say much for the justice system.”

Davies’ 29-page ruling, coming only two days after he heard oral arguments, also delivers a blow to the Los Angeles County district attorney’s office and adds to its record of losing high-profile criminal cases, including last summer’s acquittal of football great Simpson on charges of killing his former wife and her friend.

The Keating case was brought under the tenure of former Dist. Atty. Ira Reiner, not current officeholder Gil Garcetti.

Even so, Deputy Dist. Atty. William Hodgman, the lead prosecutor on the Keating case and a member of the Simpson prosecution team, vehemently denied that the office is losing big cases.

“That allegation is ridiculous,” he said. “We win dozens of big cases all the time, cases that are important to the community and that involve dangerous and serious offenders.”

He noted that the prosecutor’s office won the Keating case at trial against great odds and the skepticism of many court observers.

“I disagree most profoundly with Judge Davies’ decision,” Hodgman said.

The state’s case against Keating for selling risky American Continental bonds out of Lincoln’s Southern California branches was difficult to bring together.

After the grand jury indicted Keating and others, Ito threw out half the case and the prosecution filed an amended indictment. On the eve of the trial, the judge also threw out the prosecution’s attempt to convict Keating on an untried theory of corporate responsibility.

The prosecution switched gears quickly to allege that Keating set up the machinery for the fraudulent sales of securities and thus aided and abetted the fraud.

The prosecution never had any evidence that Keating was a “direct perpetrator” because he never personally sold the bonds.

But Ito instructed the jury on the meaning of “direct perpetrator.” Hodgman said the instruction was needed to give jurors definitions they could use to find Keating guilty of aiding and abetting. In addition, Ito fashioned a special instruction on aiding and abetting to force the prosecution to show some intent on Keating’s part to commit a crime.

But Davies rejected the elaborate efforts. He ruled that Ito had botched the instruction on aiding and abetting and that the instruction on a direct perpetrator wrongly allowed the jury to convict Keating of being a direct participant in the crime.

Davies also said the instructions did not provide the required intent that defendants must show to commit a crime. Keating contended that Ito refused to require proof that he had knowingly withheld information that American Continental bonds were highly risky.

Times staff writers John O’Dell and Erin Texeira contributed to this story.