Judge Throws Out Keating Conviction in S&L; Fraud Case

Charles H. Keating Jr., a central figure in the thrift debacle of the 1980s, won a new trial Monday on charges that he systematically looted Lincoln Savings & Loan and defrauded investors.

U.S. District Judge Mariana R. Pfaelzer, ordered by an appellate court to look into claims of jury misconduct, threw out his 1993 federal racketeering, conspiracy and fraud convictions after finding that jurors improperly learned about his prior state court conviction.

Evidence of the state case was barred from the federal trial, and in April that conviction was thrown out on appeal.

“He’s an innocent man now. He hasn’t been convicted of anything,� defense lawyer Stephen C. Neal said after the two-hour hearing in federal court in Los Angeles.

The judge’s decision means that Keating is no longer a felon. The state is appealing the dismissal of its case.

Assistant U.S. Atty. Sharon McCaslin said the federal government “‘absolutely� will retry Keating, who already has served four years and nine months of his original 12-year, seven-month sentence.

But the U.S. attorney’s office officially said only that it would review its options, including a possible appeal of Pfaelzer’s ruling. A decision not to pursue the case could prove politically embarrassing because the man whom many saw as the national symbol of greed and arrogance in the highflying thrift industry of the 1980s would end up without a conviction on his record.

Though Pfaelzer’s action didn’t touch on the merits of the case, another conviction could be more difficult to obtain. The prosecution’s case is known, and it has little new evidence.

Meantime, Neal has promised to bring more defense witnesses to bolster his client’s case. Keating has long asserted his innocence and has maintained that overreaching regulators and a free-falling real estate market caused his downfall.

Some of the mostly elderly Southern California investors who lost more than $285 million believe a retrial would be a waste of money and don’t want to relive the headlines.

“It’s a quandary. I have very mixed emotions,� said Thomas Shelley of West Hills. “My gut reaction is that taxpayers should not spend the money on another trial. But if it means that he walks, we have to retry him because we have to get him conclusively convicted again. This was the clearest-cut case of fraud in the annals of S&L; history.�

Investors, though, may want to put the affair behind them. They don’t hold meetings anymore, Shelley said, and their network has eroded. Moreover, although they once attended court hearings regularly, none appeared Monday.

Ronald Rus of Irvine, one of their lawyers, said Keating ought to be retried.

“The reason to prosecute him was for deterrence,� Rus said. “Mr. Keating is a symbol, and if the symbol you want is that you can cause financial havoc for the elderly and get away with it, what message does that send?�

Keating, who remained grim-faced during the hearing, smiled broadly afterward but kept his comments to a minimum.

“You’ll have to talk to my attorney, man. He’s doing pretty good for me so far,� said Keating, who will turn 73 on Friday. The once-outspoken Arizona developer, who has been held under tight wraps by Neal, simply agreed with his lawyer that he was delighted with the ruling.

Keating’s son, Charles H. Keating III, who was convicted with his father nearly four years ago, must wait until today for a ruling by Pfaelzer on whether he, too, will get a new trial. The judge said there wasn’t much legal precedent to guide her decision.

Though he didn’t speak about his son’s situation, Keating consoled his daughter-in-law after the hearing, saying: “Don’t worry. She’s going to grant that motion.�

*

Keating was accused of looting Lincoln’s federally insured deposits by booking phony profits on sham land and securities transactions and then fooling auditors and investors about the failing health of the S&L; and its parent company, American Continental Corp. of Phoenix.

Monday’s decision came eight months after his conviction in state court was thrown out because it was based on “nonexistent and erroneous legal theory� and “erroneous� jury instructions.

He sought a new federal trial on the grounds that some jurors improperly learned about his earlier state conviction, on securities fraud charges, and discussed it during the federal proceedings. Pfaelzer had barred all references to the state case in the federal proceeding on grounds that they would have been too prejudicial, jeopardizing Keating’s right to a fair trial.

In June, the U.S. 9th Circuit Court of Appeals ordered Pfaelzer to question jurors about their conduct during the state trial. After a closed hearing in October, she released Keating on bail pending Monday’s hearing.

Federal prosecutors had argued that the jurors’ knowledge of Keating’s state court conviction had no effect on their verdict.

But Pfaelzer sided with Neal, who said that similar cases had been reversed when jury misconduct was nowhere near “as pervasive or as detailed as it was in this case.�

While only a handful of jurors acknowledged through public documents that they knew about the prior conviction or learned about it during the federal trial, the previously secret testimony showed that 14 of the 18 jurors and alternate jurors knew or learned about the state case.

“Both of these trials were permeated with fundamental problems that no trial should be burdened with,� Neal said.

The defense lawyer said he’s ready for a retrial and expects a different result. First, he noted, there is no prior conviction to worry about. Second, defense witnesses who wouldn’t testify at the first trial should be available now. Neal had asked the judge to grant immunity to several defense witnesses, but she refused.

Now, he said, those witnesses and others who were “terrorized into silence� by the grand jury investigation that produced the indictments have no need for immunity.

*

Neal’s biggest liability, besides the evidence from the first trial, may well be Keating himself. As a witness, Keating came across as arrogant and unbelievable, jurors have said. Putting him on the witness stand again could prove his undoing.

Keating never held an official position at Lincoln. He used American Continental to buy Lincoln Savings in 1984 and transform it into a dynamic entity that took advantage of California’s 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.

His brash conduct and Washington connections helped to turn him into a symbol, in the minds of many, of the greed, arrogance and political clout common to the thrift industry in the 1980s.

Keating’s influence was such that five senators, whose campaigns and causes he helped to fund, met with federal regulators at his behest to discuss rules that were hampering Lincoln’s operations and to talk about an unusually lengthy federal audit of the thrift. The Senate later chastised the five, who included former Sen. Alan Cranston (D-Calif.).

When Keating’s empire collapsed in 1989, taxpayers were left to pay for cleaning up the nation’s second most costly thrift failure, an amount revised earlier this year to $3 billion.

The uproar over Lincoln’s collapse prompted numerous investigations by various federal agencies as well as criminal investigations by both state and federal authorities.

In 1990, a state grand jury indicted Keating and three others on charges of defrauding investors in American Continental. The other three pleaded guilty. Keating was convicted on his birthday, Dec. 6, 1991.

Less than a week later, he and his son were indicted on federal charges.

Keating has adamantly denied any criminal guilt, blaming regulators for hamstringing his operation.

Industry critics, without necessarily agreeing with him, have questioned the regulators’ role in the S&L; industry debacle, which led to a congressional bailout that will eventually cost taxpayers about $500 billion with interest.