Reinstatement of Keating Sentence Urged

Arguing that jurors who convicted Charles H. Keating Jr. received proper instructions, prosecutors urged appeals judges Tuesday to reinstate Keating’s state court conviction for swindling Lincoln Savings & Loan investors.

Keating, the most notorious figure of the 1980s savings and loan scandals, sat impassively in a Pasadena courtroom as three judges from the U.S. 9th Circuit Court of Appeals heard the arguments that could send him back to state prison.

The panel is not expected to rule for months. But the judges’ intense questioning of Keating’s lawyer was “heartening,” said William Hodgman, the Los Angeles County prosecutor who won the conviction of Keating that was overturned last year.

“Charlie’s not completely free yet,” Hodgman said. “He’s got a sword of Damocles hanging over his head. And it’s hanging a little lower today.”

In a case before Superior Court Judge Lance A. Ito, jurors convicted Keating in 1991 on 17 counts of defrauding investors who cashed in federally insured certificates of deposit to buy junk bonds issued by his American Continental Corp. The investors said the risks of the bonds weren’t fully disclosed to them.

American Continental, based in Phoenix, was the parent of Irvine-based Lincoln. When Lincoln was seized in 1989, the bonds were rendered worthless. Regulators later estimated that Lincoln’s bailout cost taxpayers $3.4 billion.

Keating’s lawyer, Stephen C. Neal, last year persuaded U.S. District Judge John G. Davies to throw out Keating’s state conviction.

Davies ruled that Ito, best known for presiding over the O.J. Simpson murder trial, had unconstitutionally expanded state law by allowing Keating to be convicted of aiding and abetting fraud even though the actual bond sellers had no intent to defraud investors.

The key jury instruction, on aiding and abetting the fraudulent sale of securities, was crafted by Ito. He also instructed the jurors on the meaning of “direct perpetrator,” even though there was no evidence Keating personally sold a bond.

Neal said Tuesday that jurors were “never told that you have to have face-to-face conduct” in order to cause fraud. He told the judges Keating never intended for his employees to cheat anyone, and called the state’s appeal an “eleventh-hour” effort to try “to save this conviction.”

But California Deputy Atty. Gen. Sanjay T. Kumar argued that Ito had properly told the jury that Keating could be convicted for aiding and abetting deceptions by the bond sellers.

Even if the sellers were unaware they were misrepresenting the safety of the bonds, Keating, as the orchestrator of the fraud, could be convicted, Kumar said.

He also contended that the case never should have gotten to federal court because Keating had failed to exhaust his appeals in the California courts.

No matter which side prevails in the latest battle, additional appeals are expected.

Keating was sentenced to 10 years in prison on the state securities fraud charges and to 12 years and 7 months on a separate federal conviction for looting Lincoln and defrauding investors.

The federal conviction also has been overturned on grounds the federal jurors improperly learned of and discussed the earlier conviction in Ito’s court.

Keating served 4 years and 9 months behind bars before being released last December.

He declined to answer reporters’ questions at the hearing. Neal said his client, who appeared trim and leathery as usual, is keeping busy exercising and spending time with his extensive family.

Times wire services contributed to this report.