Making a Federal Case of Keating : Courts: This next trial in the Lincoln Savings legal saga will ‘go to the very heart of the thrift crisis,’ one lawyer says.

LOS ANGELES —  Like a recurring public nightmare, Charles H. Keating Jr. goes to court again.

This time, the former Lincoln Savings & Loan operator, who became the symbol of arrogance and greed in the scandal-scarred thrift industry, faces two federal indictments charging him with 73 counts of fraud, conspiracy and racketeering.

Testimony in the trial of Keating and his son, Charles H. Keating III, is expected to get under way this week.

But to a public that has had a tough time understanding the savings and loan debacle, another court proceeding against the former Arizona thrift and real estate baron may seem like just a bad dream better forgotten.

Even “The Tonight Show” host Jay Leno, one of the first comedians to take shots at Keating, rarely cracks a joke any more about the industry’s leading villain, especially since the presidential election provides much better topical fodder.

Public apathy about Keating, though, shouldn’t obscure the fact that this federal prosecution is very important, say lawyers and criminal justice experts.

“The federal case implicates actions that go to the very heart of the thrift crisis, and it needs the type of public airing that results from a trial,” said Michael C. Manning, a Phoenix lawyer who represents the federal Resolution Trust Corp. in its civil action against Keating and others.

Moreover, the federal case provides perhaps the final chance to learn what went on behind the doors of the Irvine thrift and its Phoenix parent company, American Continental Corp. Some former top executives, including American Continental’s president, Judy J. Wischer, are expected to testify against Keating.

Except for trying to win back his thrift in a court proceeding three years ago, Keating has refused to testify in other cases, and his attorney, Stephen C. Neal, has pointed to the federal case as the proper place to take the stand. Neal, however, would not say last week if his client would now testify.

“The full story has yet to be told,” said criminal law expert Gerald F. Uelmen, dean of the Santa Clara University School of Law, who has followed closely the fallout from Lincoln’s demise.

For those who fear that Keating’s state court conviction last year on state securities fraud and his 10-year prison term might be overturned on appeal, a conviction in the federal case could insure that he stays behind bars, said Peter Arenella, a criminal law professor at UCLA School of Law. Keating faces up to 525 years in prison in his current case.

The federal charges stem from the much-publicized April, 1989, collapse of Lincoln and American Continental. Lincoln’s failure is the nation’s biggest, costing taxpayers an estimated $2.6 billion. The corporation’s bankruptcy cost small investors, most of them elderly Southern California customers of Lincoln, more than $288 million.

Also well publicized were last fall’s state court criminal trial of Keating and this year’s civil securities fraud trial, which led to a $1.6-billion judgment against him. Keating also has lost courtroom battles in a number of other civil and administrative actions.

And he has been vilified in televised congressional hearings and Senate Ethics Committee hearings. The Senate hearings ended in public rebukes of five U.S. senators, including Alan Cranston (D-Calif.), for accepting campaign donations from Keating while at the same time intervening with thrift regulators on his behalf.

Keating, who raised more than $1.3 million for the five senators, has so saturated the public consciousness that members of Congress have used his name to create a new term: de-Keatingize.

De-Keatingizing a politician is a public relations cleansing process that allows a lawmaker to support special interest legislation without the public, especially the press, believing that the support was prompted by political contributions.

By now, the public probably could be forgiven for yawning at the prospect of another Keating trial.

“There will be a lot of (American Continental) bondholders who, once they get their money coming in from the civil case, will say, ‘The hell with it,’ ” said Jeri Mellon of Sherman Oaks, a leader of a group of bondholders.

“It’s almost like a non-event,” said Ronald Rus of Orange, one of the lead lawyers for the small investors. “It’s overshadowed by the politics of the day. But from my view, this is one of the great scenes of the 20th Century--the embodiment of the excesses of the 1980s and all that is wrong with paid influence in political decision-making.”

Susan Illston of Burlingame, another lawyer for bondholders, said that the public may have an “it’s been done” feeling about the federal trial, but she pointed out that this isn’t just another S&L; fraud case.

“What Keating did was so bold and so large-scale that this trial will probably be as big a one as the government is ever going to bring in the S&L; industry,” she said.

What Keating did was buy an ailing but recovering thrift in 1984 and build it into a deregulation dynamo by investing more than $5 billion of federally insured deposits in a wide array of projects that had been closed to thrifts before 1982 when investment restrictions on thrifts were greatly reduced.

Shunning traditional home mortgages, he channeled the S&L;’s funds into investments in huge tracts of raw desert land in Arizona, luxurious hotel projects, a portfolio of junk bonds, corporate takeover attempts, foreign currency trading and other speculative ventures.

According to the federal indictments, as well as evidence in other cases, Keating and his cohorts then tried to evade regulatory restrictions on such investments by making bogus loans to “straw” buyers. They also devised a tax plan that let them divert $95 million in Lincoln money to American Continental by creating phantom profits through the sham loans and land swaps.

And they used accounting gimmicks, legal maneuvering and political string-pulling to further their operations and slow down investigators. In April, 1987, for instance, Keating persuaded the five U.S. senators to meet privately with regulators to bring a yearlong federal audit of Lincoln to an end.

Keating also used top-quality accountants, lawyers and other professionals to put a face on Lincoln as a financially sound institution. Most of them have also been sued by regulators and investors and have settled by paying tens of millions of dollars.

Compounding the ultimate cost to taxpayers, American Continental sold about $220 million worth of its own bonds through Lincoln branches, in addition to six other securities offerings it had made previously. Most of the bond buyers were elderly S&L; customers, and many thought their investments were insured. Only $30 million to $60 million in principal was repaid before the empire crumbled more than three years ago.

Hordes of investigators from a multitude of state and federal agencies, as well as private investigators for small investors, descended on Lincoln after its failure to piece together what happened.

State authorities, under the direction of Los Angeles Dist. Atty. Ira Reiner, moved quickly. They narrowed their investigation to the bond sales at Lincoln and indicted Keating and three others in 1990 for selling securities in what the executives billed as a safe and sound company when they knew it was falling apart. The other three pleaded guilty, and Keating was convicted on his 68th birthday last Dec. 4.

A task force of state and federal agencies--including the FBI and the Orange County district attorney’s office--took 2 1/2 years to investigate and indict Keating, his son, a son-in-law, company President Wischer and another former executive. The younger Keating, 37, is the only other defendant in the federal trial.

Like Wischer, Keating son-in-law Robert M. Wurzelbacher Jr. and Andrew F. Ligget, former corporate chief financial officer, pleaded guilty. Wurzelbacher will not be required to testify in the main case against Keating. In addition, five others have pleaded guilty before indictment and will testify.

While the state case focused on one aspect--securities fraud--the federal trial involves, in essence, “a fraud on regulators, a fraud on the very system of doing business,” said William Hodgman, the deputy Los Angeles district attorney who prosecuted Keating last year.

“The story we told was a very important chapter, but it wasn’t a complete story,” he said. “Federal prosecutors will be able to tell a much more complete story than we could, and it’s important for people to know what went on.”

The main indictment, from a federal grand jury in Los Angeles, accuses Keating and others of using five criminal schemes to siphon money out of Lincoln for their own benefit. The schemes purportedly provide a pattern of criminal conduct needed to show a violation of the U.S. Racketeer Influenced and Corrupt Organizations Act.

Defense attorney Stephen Neal said last year that the charges were nothing new. “They’re trying retroactively to criminalize a whole host of business activities that complied with the applicable laws, regulations and accounting standards when they were made,” he said then.

The indictment alleges that American Continental was a criminal enterprise through which Keating and the others stole from Lincoln. The document alleges the following criminal activities:

* Tax-sharing: Lincoln sent income taxes to American Continental based on sham profits from the fraudulent sale of land and other assets, and it also transferred some tax payments before they were due.

* Sham profits: The defendants used American Continental, Lincoln and a thrift subsidiary in six transactions that resulted in the S&L; wrongly posting gains and sending tax payments to its parent company. The thrift was actually funding 100% of the purchase price by verbally promising the buyer that down payments would be reimbursed.

* Bond sales: The defendants sold risky American Continental bonds to unsuspecting customers through Lincoln’s 29 Southern California branches without disclosing the high risk of the securities, the company’s poor financial condition and management’s “untrustworthy and deceitful” nature.

* Rancho Acacias scheme: The defendants used Lincoln funds to bail American Continental out of a money-losing project in Riverside County. The company had participated in a loan on the 51-acre parcel and sold its interest under an agreement to repurchase it at the buyer’s option. The defendants used Lincoln money to repurchase it.

* Insider loan scheme: Facing the prospect of bankruptcy in early 1989, the defendants caused American Continental to transfer funds to a Lincoln subsidiary called Medema Homes of Utah, which was a shell company. Over a few months, Medema loaned a total of $975,000 to Keating, his son, Wurzelbacher and Wischer’s husband. The same day that the younger Keating and Wurzelbacher received a total of $250,000, they gave Keating a total of $228,700. Keating used most of that money to make a $200,000 payment on a personal loan.

A second indictment from a federal grand jury in Phoenix charges Keating, Wischer and Ligget with conspiracy, wire fraud and bankruptcy fraud in connection with a scheme to funnel nearly $1 million from American Continental through a subsidiary to them within two months of the company’s bankruptcy.

For those not accustomed to business deals, transactions such as those in the two indictments are typically difficult to explain and more difficult to understand, say lawyers and investigators in the case.

Coupled with the pervasive publicity about Keating over the years and the highly combative presidential campaign dominating the media now, the federal trial of Keating is not attracting the attention it may deserve.

“A sense of ‘who cares’ may be the feeling you get today, but I doubt that those who judge what we do six months, six years or 50 years from now would be less forgiving if the public walked away from these allegations,” said Michael Manning, the RTC lawyer. “This is one case that should not be ignored.”