Broke and Beleaguered : American Continental Bondholders Battle to Get Their Money Back

By MARIA L. La GANGA

April 25, 1989 12 AM PT

Times Staff Writer

It was late in the day, and Don Mikami could barely talk. His throat was raw, his voice was hoarse, and his spirits were low. Mikami had spent the past eight hours on the telephone, he said, listening to “calls of misery” that had left him heartbroken.

The hundreds of callers who got through the jammed switchboard of Mikami’s Fountain Valley dental office weren’t seeking medical attention. Like Mikami, they had purchased bonds issued by American Continental Corp., the troubled parent company of Lincoln Savings & Loan Assn., and they had heard that the dentist was trying to do battle on their behalf.

Their bonds plummeted in value after American Continental filed for bankruptcy court protection and Lincoln was seized by regulators earlier this month. And the calls Mikami received barely scratched the surface of the some 14,000 bondholders who overall may have lost as much as $192 million.

The bonds “make great wallpaper, like stocks after the Depression,” said William J. Crawford, California’s savings and loan commissioner.

The aggressive marketing of American Continental bonds to Lincoln depositors has created a new class of victims in the nation’s continuing thrift debacle and raised a ticklish problem for savings and loan regulators. Unlike ordinary S&L; depositors, whose accounts are protected up to $100,000 each, the bondholders must stand in line with other American Continental creditors as the company attempts to reorganize its financial affairs.

The past two weeks have rendered many of American Continental’s bondholders broke and beleaguered. But while they are tied together by tales of loss and bad luck, some are also beginning to unite to fight the company that they contend has taken their money and run.

Some bondholders contend that they bought the securities without fully comprehending that they were, in effect, high-risk “junk bonds” that were not backed by the federal government’s deposit insurance program.

Since holders of the company’s secured debt are legally entitled to recover their funds first, the possibility exists that the army of small investors who hold American Continental’s unsecured, high-risk bonds will get back little, if any, of their money. American Continental already has stopped making monthly interest payments on the bonds.

Jean and Donald Bowman invested $120,000 in these American Continental bonds, which technically are known as subordinated debentures. Jean Bowman said sales representatives at a Lincoln branch office in the San Fernando Valley told her that American Continental Chairman Charles H. Keating Jr. had “one of the most successful private enterprises in the U.S.”

“They implied that everything he touched was very safe, and that’s what I fell for,” she said. “They said what good condition Lincoln was in. They weren’t high pressure, but they made you feel like you were very safe. They were very sweet.”

Mikami said that callers such as the Bowmans “have been unanimous in their opinion that they were defrauded and misled . . . at the teller’s windows of Lincoln offices.”

Mikami himself purchased $25,000 of American Continental bonds last summer at a Lincoln branch in Huntington Beach. The fact that the bonds were sold through Lincoln offices, peddled by overwhelmingly upbeat salesmen, led him to invest.

“It was the personality of the sales person that sold it,” Mikami said. “He said that American Continental is the parent of Lincoln, which is a safe, insured institution, that American Continental is backed by umpteen million dollars in assets and that he’d recommended (the bonds) to his family and friends.”

According to Mikami and others, the same scene was repeated over and over at Lincoln Savings offices throughout the Southland.

Thousands of Lincoln depositors who went to Lincoln offices with the intention of investing their personal savings or retirement funds in federally insured certificates of deposit were steered instead into American Continental debentures, bondholders said.

“This is a type of borrowing that American Continental was doing using depositors’ money, money that would otherwise have been going into deposit accounts,” said James M. Marks, an analyst with SNL Securities in Hoboken, N.J. Customers “were brought into branches and tempted by yield to buy products that were not suited for them.”

Sounded Attractive

Many American Continental bondholders said they were assured that the subordinated debentures were as safe as certificates of deposit. And they generally paid about 1 1/2 percentage points more than the CDs available at Lincoln.

Harriet Mulac, 67, of Los Angeles, was one of those investors. In 1985, she bought a $20,000 Lincoln certificate of deposit, which was fully insured by the government. When it matured in 1986, she renewed it.

But when it matured again in 1987, the bank teller introduced Mulac to the office’s American Continental salesman, who told her about the subordinated debentures.

“It sounded attractive to me,” Mulac said. “I went for the attractive increase in rate. They told me the things they (American Continental) owned and stuff. I felt it was OK. They talked about the reputation of Lincoln Savings, that they have 29 branches and so forth. I thought it was completely safe.”

But when American Continental filed for bankruptcy court protection on April 13 and federal regulators seized Lincoln the following day, the bonds that Mulac and others bought lost their allure.

‘Normal Reaction’

American Continental spokesman Mark Connally said his company is guilty of no wrongdoing and that the bondholders’ concerns “would be a normal reaction of any investor whose investment value has come into question.”

He said the company “is very, very comfortable “ that it provided adequate disclosure to bond buyers. “There is no way, when you look at the disclosure statement, that we did not make full and adequate disclosure,” he said.

The Federal Home Loan Bank Board is investigating Lincoln, and it has asked the Department of Justice to look into possible criminal violations. Bank board officials have declined to disclose the nature of the criminal referral. But Bank board spokeswoman Martha Gravlee said her agency is continuing to investigate “all aspects of Lincoln” including the bond sales.

“We are naturally concerned about how any kind of debt offering was represented,” Gravlee said. “The key is if it was properly disclosed. If we find anything we believe to be improper, we will make the appropriate referral.”

Gravlee said that while American is not the first S&L; parent company to sell its debt through savings and loan branches, “as far as we know, it’s not a common occurrence.”

According to state regulators, Lincoln is the first S&L; in California to sell subordinated debentures on a retail basis directly to consumers. While the practice apparently was not illegal, it raises ethical issues.

Normally, when S&Ls; sell such bonds, they offer the securities through stockbrokers, said William Davis, chief deputy commissioner for the state Department of Savings and Loan.

“A person who is used to going through a broker knows that those are speculative investments,” Davis said. “ . . . Our fear all along was that people would confuse the investment with an insured savings account.”

The recourse for bondholders is unclear. Mikami is trying to organize the group. Attorney Ronald Rus of the Orange firm of Alvarado, Rus & McClellan has consulted with more than 100 bondholders and agreed to work with them.

“I have talked with a number of these people,” Rus said. “We are still in the exploration stage. One potential vehicle for the bondholders is to file a class-action suit.”

The Philadelphia law firm of Greenfield & Chimicles, through its Los Angeles office, already filed a class-action suit for shareholders in state and federal courts in Los Angeles nine days before American filed for bankruptcy. One of the firm’s attorneys, Kevin P. Roddy, said he plans to amend the suits to include bondholders, too.

Mikami insists that something must be done. He keeps pictures of American Continental’s officers pinned to his office bulletin board because “it revives me to continue in my efforts on behalf of all of the bondholders, to ensure some kind of return of their lifetime savings and earnings.”

“Thousands of investers in the Southwest have been scammed out of their life savings and hard-earned after-tax dollars,” he said. “The magnitude of this crime far outweighs a lot of the other scams that have victimized Southern California residents.”

Times Staff Writers James S. Granelli and John O’Dell contributed to this article.