Recovering From Keating : How His Defrauded Investors Are Faring

Small investors bought up bonds at a record pace from Lincoln Savings & Loan offices in Woodland Hills and Sherman Oaks in the late ‘80s. Along with others, they lost $285 million when Charles H. Keating, Jr.’s financial empire collapsed in 1989. After years of civil litigation, 17,000 people who held bonds issued by Lincoln’s parent company, American Continental Corp., have recouped nearly 50% of their losses. To plead their cases, lawyers have been paid over $91 million.

The $1-billion collapse of the Keating enterprises amounted to one of the nation’s costliest thrift failures and epitomized the arrogance of the S&L; industry in the 1980s: Lincoln bond sellers targeted elderly people seeking high returns on retirement funds. As one judge said, “This whole situation has been a tragedy for everyone involved.”

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Total estimated losses from Lincoln failure: $2.6 billion

Those losses attributed to fraud of Charles Keating and others: $962 million

Collapse of an Industry

Charles Keating’s Lincoln Savings & Loan was joined in its failure by hundreds of other thrifts, leaving taxpayers to foot the bill for the costliest financial scandal in U.S. history. Some key facts from the Bailout:

Number of failed thrifts resolved by U.S. government in:

1934-79: 143

1980-87: 284

1988-93: 882

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Cost of RTC bailout: $115 billion (est.)

Value of thrift assets sold by RTC: $342 billion

Value of outstanding assets to be sold by RTC: $76.3 billion

Legal fees paid by RTC (1991-93): $857.4 million

Number of pending RTC lawsuits involving thrifts: 256

Lincoln Settlements

Defendants in a civil fraud and racketeering lawsuit brought by small investors in American Continental Corp. have agreed to out-of-court settlements totaling $256 million, including tentative settlements with bankrupt brokerage Drexel Burnham Lambert and its onetime junk-bond promoter, Michael E. Milken. Here is a breakdown of settlements reached:

Amounts in millions

Defendant Ernst & Young (Arthur Young & Co.) Accountants Michael R. Milken and related parties Brokers Drexel Burnham Lambert bankruptcy estate Brokerage Jones, Day Reavis & Pogue (Cleveland) Law firm Arthur Anderson & Co. Accountants Kaye, Scholer, Fierman, Hays & Handler Law firm Deloitte & Touche (Touche, Ross & Co.) Accountants Parker, Milliken, Clark, O’Hara & Samuelian Law firm Former Lincoln officials Bankers Sidley & Austin Law firm Saudi European Investment Corp. Banking firm Mariscal, Weeks, McIntyre & Friedlander Law firm Offerman & Co. Stock underwriters Isaac Helmbinder, Robert Jenkins Homebuilders All others Total Amount so far distributed to plaintiffs

Defendant Settlement Ernst & Young (Arthur Young & Co.) $63.00 Michael R. Milken and related parties 50.00* Drexel Burnham Lambert bankruptcy estate 44.90 Jones, Day Reavis & Pogue (Cleveland) 24.00 Arthur Anderson & Co. 22.85 Kaye, Scholer, Fierman, Hays & Handler 20.00 Deloitte & Touche (Touche, Ross & Co.) 7.50 Parker, Milliken, Clark, O’Hara & Samuelian 5.65 Former Lincoln officials 4.50 Sidley & Austin 4.00 Saudi European Investment Corp. 2.30 Mariscal, Weeks, McIntyre & Friedlander 2.00 Offerman & Co. 1.50 Isaac Helmbinder, Robert Jenkins 1.00 All others 2.90 Total $256.10 Amount so far distributed to plaintiffs $118.20

*Figure is expected to rise pending the allocation of funds from a settlement of numerous lawsuits against Milken and others.

Lincoln Assets

Here is a breakdown of the proceeds from the government’s sale of Lincoln assets to date, comparing the value the thrift claimed for them on its books with the actual value the Federal Resolution Trust Corp. realized:

Value of Type of Book Sale Remaining asset value proceeds Losses Assets Mortgages $1,015 $925 $90 $440 Securities 1,206 1,121 85 20 Junk bonds 265 128 137 5 Loans 73 45 28 68 Real estate 73 31 42 68 Other 422 409 13 578 Total $3,054 $2,659 $395 $1,179

Legal Fees

The legal pursuit of Charles H. Keating Jr. and his associates produced huge legal fees, as well as some of the largest recoveries ever made. Small investors who lost $285 million filed 15 class-action lawsuits that were consolidated and went to trial last year. A group of 99 bondholders led by Sherman Oaks lawyer Alan H. Yahr filed a separate suit as individuals who lost a total of $3.6 million. The Resolution Trust Corp., the federal agency liquidating Lincoln, sued for an estimated $2.6 billion lost in Lincoln’s 1989 collapse. With nearly everything over, here are the results:

Amounts in millions

Amount Legal Settlement recovered** fees Expenses Class actions $256.1* $190.5 $72.9 $17.8 Yahr 4.4 4.4 1.2 .2 RTC lawsuit 280.0* 229.3 17.0 11.5

*Amounts depend on funds allocated to Lincoln cases from recently approved global settlements of numerous lawsuits against bankrupt brokerage Drexel Burnham Lambert Inc. and Michael R. Milken.

**Represents what has been recovered by plaintiffs’ attorneys, not what has been distributed to plaintiffs.

The Keating Cases

The failure of Lincoln savings prompted a rash of lawsuits, criminal and civil, against its founder and chief executive, Charles H. Keating Jr. Here is a summary of the status of the most important cases:

1991

People vs. Keating (L.A. County Superior Court) Dec. ’91 - Convicted in state case on 17 of 18 counts of securities fraud.

1992

April ’92 - Sentenced to 10 years in prison and fined $250,000. Now serving sentence at California Men’s Colony, San Luis Obispo.

Class-action lawsuit (U.S. District Court, Tucson, Ariz.) July ’92 - Jury awarded $2.1 billion in damages to small investors defrauded by Keating, the largest civil judgment against an individual in U.S. history. The judge later reduced the sum to $1.04 billion. Jury also awarded $2.3 billion in damages against three other sets of defendants, but the judge later reduced two awards to a total of $516,000, and the third defendant settled for $2.3 million.

1993

U.S. vs. Keating (U.S. District Court, Los Angeles) Jan. ’93 - Convicted in federal case on 73 counts of racketeering, conspiracy and fraud.

July ’93 - Sentenced to 12 years and 7 months in prison (to be served concurrently with state sentence). He also was ordered to pay $122.4 million in restitution and to forfeit $265 million in assets.

Pending

RTC and Securities Exchange Commission lawsuits seeking damages from Keating.

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Sources: Resolution Trust Corp., Office of Thrift Supervision, Cotchett Illston & Pitre; Researched by MATTHEW HELLER and JAMES GRANELLI.