Court Ruling Gives Keating Hope for New Federal Trial

Citing possible jury misconduct, a federal appeals court in Los Angeles on Friday ordered a hearing into whether a new fraud and racketeering trial should be held for convicted financier Charles H. Keating Jr.

The ruling by the U.S. 9th Circuit Court of Appeals comes just two months after Keating’s 1991 state securities fraud conviction was thrown out because it was based on “nonexistent and erroneous legal theory” and “erroneous” jury instructions.

The ruling raised defense hopes that Keating, 72, could be freed as early as this year from the 12 1/2-year sentence he is serving in a federal prison in Tucson. The term is scheduled to end in 2001.

“Keating is very pleased with the court’s order,” said his lawyer, Stephen C. Neal. “Coming on the heels of [the April] ruling, he’s obviously encouraged.”

Both cases stem from the 1989 collapse of Lincoln Savings & Loan in Irvine, which is the nation’s second-costliest thrift failure with $3.4 billion in losses.

An outspoken critic of regulators, Keating became the archetypal villain in the S&L; debacle of the 1980s, the symbol of the industry’s greed and arrogance as he stood accused of looting Lincoln and swindling elderly investors.

Friday’s unanimous ruling by a three-judge panel requires a hearing on what jurors knew or discussed about Keating’s state court conviction. Evidence of that conviction was excluded from the federal case, and a finding that it prejudiced jurors would result in a new trial.

In its brief order, the appellate court noted pointedly that post-trial affidavits by jurors warranted a hearing “unless the defendants’ guilt was overwhelming, which it was not.”

That language contradicts U.S. District Judge Mariana R. Pfaelzer, who presided over the federal trial and determined that the evidence against the onetime real estate baron and his son was overwhelming.

In a telephone interview Thursday on an unrelated matter, Keating was upbeat about his chance of vindication, even though he criticized his continued incarceration after his state conviction had been dismissed.

“I’m in prison,” he said, “and 99% of the time you are out on bail until [the appeal] is decided.”

His son, Charles H. Keating III, who was convicted with him in January 1993, is free on bail pending his appeal. Friday’s order applies to the son as well.

Neal said he would seek his client’s release from prison, but prosecutors vowed to block it.

“The U.S. attorney’s office has been strongly committed to this case for many years and we remain unwavering and steadfast in our commitment to see that justice is done in this case,” said Steven E. Zipperstein, the chief assistant U.S. attorney.

Zipperstein wouldn’t comment on the court’s order except to say that his office will do “whatever is necessary to uphold the convictions of both Keatings.”

Federal Judge Pfaelzer had refused to allow evidence of the state conviction in the federal case because she believed the prejudice against Keating would be “altogether too great.”

With the state conviction now thrown out, court observers said juror knowledge of it would indeed be too prejudicial.

Neal argued in the appellate court that sworn affidavits from five jurors and statements from two others prove that some knew about the state court conviction before trial and others learned about it from fellow jurors after the federal trial began.

As a matter of law, he argued, “there must be a new trial.”

Prosecutors put the blame on Neal. They argued that he never asked jurors before trial if they knew about prior criminal proceedings against Keating. In addition, Keating wasn’t entitled to jurors who were ignorant about such general news as his conviction. And, they argued, the jurors’ awareness of the state case was “entirely harmless” and couldn’t affect the verdict.

Neal said Friday that the appellate court’s order indicates that “there are major, major doubts about this conviction,” giving him further reason to seek Keating’s release pending a retrial.

Two of the jurors who provided affidavits to the defense after the trial told The Times on Friday that they were aware of the state conviction but doubted that the outcome would have been different had they not known about the previous verdict.

“It had no bearing on whether I found him guilty,” said juror David A. Webb, who said he knew about the state conviction before he was selected for the federal case.

The Tujunga resident said he based his decision solely on “the facts presented before the jury and not on the stuff floating around in the ether.”

“That’s the way you’re supposed to do it,” he said. “The preponderance of evidence was there. He was guilty.”

Webb said it would be a “waste of taxpayers’ money” to retry the case. He called it unreasonable to expect to find jurors who are completely unaware of the news surrounding such a high-profile defendant.

Juror Thomas E. Sabetta of Glendale said that as far as he knew, no one discussed Keating’s state court case in the jury room, but he figured that “there was nothing that wasn’t known prior to us going in.”

He said that before being called to jury duty, he had read news stories about Keating and was “familiar” with events involving the businessman.

He said he was never asked about his knowledge of Keating’s state conviction, and therefore never said anything about it until after the federal trial. That information, he said, didn’t affect his deliberations “whatsoever.”

Keating, meanwhile, passes the time as the prison recreation supervisor.

“I exercise about 3 1/2 hours a day,” he told a Times reporter in an interview about the Olympic hopes of his grandson, swimmer Gary Hall Jr. “My blood pressure is down to where it was the day I left the Army.”

He said he also reads a variety of books, rotating among five or six at a time. One of his current tomes is “How the Irish Saved Civilization.”

He also has had time to reflect on his role in the thrift industry, though he declined to talk about it.

Keating used his Phoenix company, American Continental Corp., to buy Lincoln Savings in 1984 and transform it into a dynamo that took advantage of liberal investing laws. He put federally insured deposits in high-risk ventures, such as development of raw land, junk bond purchases and corporate takeover efforts.

When his empire collapsed in 1989, taxpayers were left to pay for the cleanup of the thrift. American Continental’s investors, thousands of them elderly Southern Californians, lost more than $285 million.

His state court conviction was narrowly focused on accusations that he set in motion the machinery to defraud his investors.

The federal prosecution was a broad-range indictment of his operation of Lincoln, accusing him of fraudulent schemes that pumped up the thrift’s value and increased the flow of money to the parent company and, eventually, to his own pockets.

Some of the thousands who lost their investments in Lincoln’s parent company were outraged at the court’s decision.

“Oh, no. Bad news, bad news,” sighed Leah Kane of Leisure World in Laguna Hills. “I don’t like that one bit. It’s very unfair. Where is the justice? This is like a nightmare.”

Jean Bowman of Sherman Oaks said she was “disgusted” by the decision. “I think it’s a misjustice to all of us and to humanity,” she said. “He’s never said he’s sorry. He still thinks he’s right.”

Also contributing to this report were Times staff writers Greg Miller and Lisa Dillman.

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The Keating and Lincoln Savings Saga

1984

* Feb. 22--Charles H. Keating Jr. uses his American Continental Corp. real estate development company in Phoenix to acquire the 58-year-old Lincoln Savings & Loan for $51 million.

1986

* March 12--Examiners at the Federal Home Loan Bank in San Francisco begin routine audit of Lincoln that turns into a long, bitterly fought process.

* Nov. 3--American Continental wins state approval to sell $200 million in corporate bonds. Sales begin early December out of Lincoln’s Southern California branches.

1987

* April 2--Four U.S. senators, including Alan Cranston (D-Calif.), all of whom received healthy political contributions from Keating, meet in private with top federal regulator Edwin J. Gray on Keating’s behalf. A week later, a fifth senator joins the lawmakers’ group in meeting with other top federal regulators.

1989

* April 13--American Continental and 11 Lincoln subsidiaries file for bankruptcy protection, rendering $250 million in bonds worthless.

* April 14--Regulators seize Lincoln. It becomes nation’s biggest thrift failure, costing taxpayers an estimated $3.4 billion.

* Sept. 15--Resolution Trust Corp., the federal agency managing Lincoln, files fraud and racketeering charges against Keating and others.

1990

* Sept. 18--A 42-count indictment handed down by the California Grand Jury charges Keating and three others with violating state securities laws by defrauding bondholders.

1991

* Feb. 27--Senate Ethics committee chastises four U.S. senators for aiding Keating in battles with regulators while soliciting political contributions from him. Cranston is reprimanded later.

* Aug. 2--Trial on state fraud charges begins. Elderly bondholder accosts Keating in courtroom.

* Dec. 4--Keating is convicted on 17 of the 18 state charges.

* Dec. 12--Keating and four associates are indicted by a federal grand jury in Los Angeles on 77 criminal counts of racketeering, securities fraud, bank fraud, conspiracy, misapplication of funds and interstate transportation of stolen money.

1992

* March 17--Testimony begins in Tucson in the suit brought by the 23,000 small investors who bought more than $250 million in risky bonds.

* April 10--Judge Lance A. Ito sentences Keating to 10 years in prison and fines him $250,000 in the state case.

* July 10--In the largest civil judgment against an individual in U.S. history, the jury in Tucson orders Keating to pay $2.1 billion in damages, and assessed his three associates damages that could total $2.3 billion. It is later reduced to $1.5 million.

* Nov. 3--Keating’s federal trial begins in U.S. District Court in Los Angeles.

1993

* Jan. 6--After five days of deliberation, jurors convict Keating on 73 counts of racketeering, conspiracy and fraud, and his son, Charles H. Keating III, on 64 counts.

* July 8--Keating is sentenced to 12 years and seven months in prison. The sentence is to be served concurrently with the federal 10-year term.

1994

* April 27--Federal judge in Tucson grants the Resolution Trust request for a summary judgment and orders Keating to pay an additional $4.3 billion.

1996

* April 3--A federal judge in Los Angeles overturns Keating’s state securities fraud convictions because of flawed legal theories and jury instructions.

* June 21--A U.S. 9th Circuit Court of Appeals panel orders a hearing into possible juror misconduct in Keating’s federal trial.

Source: Times reports