Only the Lawyers Are Sure to Win in Lincoln Wars : Thrifts: Twenty-four lawsuits and nearly as many investigations are expected to keep prosecutors and lawyers busy for years.

A courtroom full of lawyers had gathered for their weekly meeting in Phoenix a few months ago to go over some legal matters in the bankruptcy of American Continental Corp., parent of the failed Lincoln Savings & Loan in Irvine.

Ronald E. Warnicke, a Phoenix lawyer who was appointed an examiner in bankruptcy, contended that the way the company’s chairman, Charles H. Keating Jr., was spending money to fight federal thrift regulators, there soon would be no money left for creditors.

The accusation prompted U.S. District Judge Richard M. Bilby to warn the lawyers about the vast amount of litigation and investigations involving Lincoln, which could become the biggest thrift bailout in history with a $2-billion bill to taxpayers.

“I would hate for this case’s epitaph five years from now to be that the public lost, the regulators lost, American Continental lost, the creditors lost, Mr. Keating lost--but the lawyers got rich,” Judge Bilby said.

Indeed, the lawyers are doing well. Lincoln is arguably the most investigated financial institution in the nation’s history. To date, at least seven state and federal agencies are investigating possible criminal wrongdoing. In addition, small investors and government authorities have filed at least 24 major civil lawsuits seeking millions of dollars in damages from Keating and his top executives.

“I can’t imagine anyone being more investigated,” said Donald Gaffney, a Phoenix lawyer for a bankruptcy committee of unsecured American Continental creditors. “Other than the CIA, everyone’s investigating Lincoln.”

The web of investigations and lawsuits will take years to untangle. Much of the effort may be for naught. Keating and his corporate executives have claimed in court documents that they’re out of money, making any recovery of claims against them questionable.

American Continental, which has worked with more than 75 law firms in the last few years, is paying its army of lawyers more than $1 million a month to battle regulators and other litigants and to bring the company out of bankruptcy. And the government is estimated to be spending twice that on its hired hands in an all-out war to put Keating and his cohorts totally out of business and behind bars.

Much of the spending appears to be unnecessary because of duplicative efforts. Federal authorities, for instance, are not sharing information with state investigators or other parties who are on the same side. And state authorities, Gaffney said, appear to be going over the same ground that federal investigators and others already have covered.

Keating and American Continental have helped run up the bills by filing several lawsuits against regulators as well. The company has challenged the federal seizure of Lincoln last year. U.S. District Judge Stanley Sporkin has been hearing testimony over the last several months.

While the Lincoln collapse is a boon to lawyers, Gaffney quips that the big winners are paper manufacturers.

A document depository was created in Phoenix to maintain the originals of all documents filed by American Continental, Lincoln, federal regulators, several accounting firms and others. The depository has more than 20 million pages of documents in some 10,000 boxes, which, if set end to end, would create a Great Wall of Lincoln--a foot-wide, foot-high mound of paper stretching for nearly four miles.

“You can read from now until your demise and still not read everything,” said John Quinn of Los Angeles, a lawyer for Keating and his family. “I’ve never seen anything like this.”

But there’s a reason for all the paper, beyond the fact that fraud cases typically include a large amount of documents.

“This is the financial scandal of our age,” said William S. Lerach of San Diego, one of the lawyers in 17 lawsuits brought by small investors who bought American Continental debt securities.

David B. Gold of San Francisco, another plaintiffs lawyer, points out that the litigation involves more than just the loss of $250 million to more than 23,000 debt holders. The civil suits include charges of improper political pressure by Keating and his company.

“This case goes to the very essence of the way our government works,” Gold said. “If political pressure is going to be put on our regulators, it undermines the function of government.”

Before American Continental filed for bankruptcy last April 13 and regulators seized Lincoln the next day, Keating wielded great influence among politicians. He and his family and business executives, as well as his company, contributed more than $1.7 million to about three dozen state and federal politicians or their causes. And he frequently called officeholders to express his views on thrift law regulation.

His group spent most of its money--more than $1.3 million--on five influential U.S. senators, including Alan Cranston (D-Calif.), who raised more than $900,000 from the Keating group, mostly for voter registration groups the senator supported.

When Keating had trouble with regulators over an unusually long federal audit of Lincoln in early 1987, he called on the five senators to help end the audit. The Keating Five, as they now are known, held two meetings with regulators, who have since claimed the senators pressured them and sought to make a deal for Keating.

The senators have vehemently denied applying pressure or seeking any deal and have called for some of the investigations that now are part of the litigation landscape.

Cranston, for instance, had asked the General Accounting Office to look into ways to get money back to the American Continental debt holders but the GAO declined to act, citing ongoing litigation elsewhere. Some Keating Five senators, such as John McCain (R-Ariz.), were among those who asked the Federal Elections Commission to look into possible campaign law violations on the part of himself and the other senators.

Meantime, the Senate Ethics Committee is probing their contacts with federal thrift regulators on behalf of Lincoln. The senators have vigorously defended their actions in that forum.

The pending litigation and investigations come from three groups: federal authorities, state agencies and creditors, primarily debt holders. Most of the small investors were part of a group that bought the biggest chunk of debt securities, or bonds--nearly $200 million worth--at Lincoln’s 29 Southern California branches.

James J. Feder of Los Angeles, a lawyer for American Continental, admits that his client has its share of legal problems, particularly the $250 million in class-action claims from bondholders. But he said the case does not rival the problems caused by some previous bank failures.

“While that’s a lot of money, it’s not in the range or involves the complexity of cases like Penn Square or Continental Illinois,” he said.

Penn Square National Bank in Oklahoma City, Okla., failed in 1982 because of bad energy loans, causing millions of dollars of losses at other banks and resulting in criminal convictions for fraud. Continental Illinois National Bank in Chicago was the first major federal bailout of a bank as regulators put $4.5 billion into it in 1984 and took an ownership position, which they subsequently sold. Neither bank action, however, carried the political overtones involved in the Lincoln case.

The list of pending lawsuits against Keating and others includes a recent civil action filed by the California Department of Corporations, a suit many lawyers involved in the massive amount of litigation say is inadequate and hypocritical. Bondholders have sued the agency in some of their class-action suits, accusing it of wrongly approving the bond sales when there was clear evidence that American Continental couldn’t repay the debt.

“The Corporations Department sued three people who claim not to have any money at all and almost negligently failed to go after those who are just as culpable and have money,” said Joseph W. Cotchett of Burlingame, another bondholder lawyer. “They manifest a complete lack of understanding of what happened.”

The bondholders are looking to recover from the professionals--accountants and lawyers--who advised Keating, as well as from insurance carriers for Keating, his lawyers and his accountants.

The list of pending investigations against Keating and his executives includes Los Angeles County Dist. Atty. Ira Reiner’s call for a special state grand jury to investigate the possibility of criminal wrongdoing, an action some lawyers think might help but others call superfluous and politically motivated.

Reiner, acting as a special state attorney general, may be able to move faster than federal authorities and secure a conviction that could help the bondholder cases move more quickly, Cotchett said. But plaintiffs lawyer David B. Gold said the investigation covers the same area that federal officials are probing and charged that Reiner’s only motivation is political. A Democrat, Reiner is running for state attorney general and wants to reach as high as possible into Deukmejian’s Republican Administration for wrongdoers, Gold claims. Reiner denies the charge.

Orange County Dist. Atty. Michael R. Capizzi, invited to join the state investigation, said he declined because his office has “too many cases to spend our resources on without duplicating what another agency has done.” He gave the federal task force two county investigators and will supply staff lawyers if needed.

Capizzi, a Republican, said his decision was nonpartisan and based on the best interests of the investigation, the victims and the taxpayers.

Atty. Gen. John K. Van de Kamp, a Democrat who is running for governor, has been criticized for playing politics with the Lincoln case. Caught between his dual role of defending state officials and prosecuting state fraud cases, he did nothing through last summer, then appeared to flip-flop between investigating Lincoln and defending the state.

In December, he decided to pass the criminal investigation off to Reiner and Sacramento County Dist. Atty. Steve White, a former Van de Kamp aide. The attorney general also decided to launch a separate civil investigation while defending the state against bondholder litigation. This litigation alleged negligence on the part of the Corporations Department for approving the debt sales when the agency knew American Continental could not repay the debt.

A month later, Van de Kamp decided that state officials had to get their own lawyers, at state expense, because his office would have a conflict of interest in investigating securities improprieties while representing the state agency that may have wrongly approved the securities sales.

Corporations Commissioner Christine Bender was fuming. She charged that Van de Kamp was abandoning his clients and that he already had an attorney-client relationship with them. Worse, she said, he was withdrawing when the state had a vital interest in any statements she made in upcoming depositions in the bondholder litigation because her comments could bind the state and make it liable. She termed his conflicts argument a “thin excuse.”

Bondholder lawyers said she “stonewalled” the questioning at her deposition on Thursday, giving them little information. Bender could not be reached for comment.

Meantime, bondholder lawyers have been jockeying among themselves for positions of leadership, positions that will pay them huge sums should the lawsuits recover the money they expect.

“In my opinion, it’s going to result in one of the largest class-action recoveries in history,” bondholder lawyer Lerach said.

Defense lawyers such as American Continental’s James Feder said they’ve never seen such infighting among plaintiffs lawyers for the job of lead counsel. Cotchett’s attempt in December to freeze Keating’s assets and revelations that Lerach hosted a fund-raiser for Cranston in December were really efforts to take control of the cases, defense lawyers said.

Cotchett, Lerach and other plaintiffs lawyers, though, say they’ve been working together amazingly well--so well, Lerach said, that he and Cotchett were recently named co-lead counsel in the federal litigation in Los Angeles.

But now Gold, the San Francisco lawyer, has filed a bondholder suit in federal court in Phoenix and has asked for a consolidation of cases there in what most plaintiffs and defense lawyers see as a bold attempt to join as co-lead counsel. The Lerach-Cotchett group filed papers opposing any move out of Los Angeles.

“Gold is not going to be co-lead counsel,” Lerach said. “He filed his suit late and he went by himself to a jurisdiction where no one else filed. The odds of the cases being transferred out of Los Angeles are very remote.”

LINCOLN’S LEGACY OF LEGAL ACTION

MAJOR PENDING LITIGATION

Lincoln’s Parent Looks for Safe Harbor: American Continental Corp. in Phoenix, unable to sell Irvine-based Lincoln Savings & Loan, files a bankruptcy petition April 13, 1989, to protect itself from creditors while it tries to reorganize under Chapter 11 of federal bankruptcy laws. Federal regulators seize Lincoln the next day.

Regulators Seek Funds in Bankruptcy: Federal regulators file a claim against American Continental in Bankruptcy Court to recover losses at Lincoln that were allegedly caused by the parent firm. Regulators predict the bailout of Lincoln will amount to $2 billion, the costliest thrift rescue ever.

American Continental Fights Back: Lincoln’s parent files three lawsuits against regulators. One challenges the takeover of Lincoln. A second seeks $500 million for wrongful taking of property. And a third seeks $200 million for leaking confidential financial information--much of it allegedly erroneous--that harmed the S&L.; The company dropped the leaks suit last week under court pressure to curtail legal expenses.

Bondholders Seek $250 Million: About 23,000 holders of five different issues of American Continental’s unrated, uninsured debt securities file 17 lawsuits in state and federal courts in California and in federal court in Arizona. They allege fraud, misrepresentation and racketeering against American Continental executives and their lawyers and accountants. The biggest block of plaintiffs, nearly 22,000, bought almost $200 million of the lowest-grade securities mostly at Lincoln’s 29 Southern California branches.

RTC Files Racketeering Suit: The Resolution Trust Corp., which manages failed savings and loans, files suit accusing seven American Continental executives of racketeering and 20 directors, officers and spouses of fraud. The suit seeks $1.1 billion.

Insurers Sue to Abandon Keating: Three insurers covering American Continental Chairman Charles H. Keating Jr. and other officers and directors for their corporate actions refuse to defend the executives and sue for a court order saying they don’t have to pay defense costs or any judgments. Keating sues a fourth insurer for refusing to honor a similar policy.

State Dept. of Corporations Sues: Christine W. Bender, who as the agency’s commissioner initially approved the Lincoln bond sales, files a state securities fraud suit seeking restitution for the 22,000 debt holders and an injunction against three American Continental executives to prevent further violations of securities laws.

Pontchartrain Investor Sues Insiders: An investor in the Pontchartrain Hotel Limited Partnership, which owned the downtown hotel, contends in his suit filed in federal court in Detroit that American Continental insiders are liable for securities fraud in their marketing of partnership shares. Insiders held a majority interest in the hotel, which the partnership bought from Lincoln.

PENDING CRIMINAL INVESTIGATIONS

Joint Task Force Launches Probe: A joint task force including the FBI, the U.S. attorney’s office and the Orange County district attorney’s office is working with a federal grand jury in Los Angeles on three separate probes. They are investigating allegations of general bank fraud, securities violations and illegal political contributions.

D.A. Asks for Special Grand Jury: Los Angeles County Dist. Atty. Ira Reiner, acting for state Atty. Gen. John Van de Kamp, wins Superior Court authorization to empanel a special state grand jury to investigate primarily any wrongdoing in the sale of debt securities in Lincoln’s branches. He expects to have jurors in place by mid-April and to complete his investigation in six to nine months.

Corporations Dept. Seeks D.A. Probes: The state agency asks the district attorneys in Los Angeles and Orange counties to investigate possible criminal violations of state securities laws. The request is handled as part of on-going investigations.

SEC Continues to Investigate: The U.S. Securities and Exchange Commission has been investigating American Continental for more than three years on a variety of disclosure and other securities law matters. Long quiet, the investigation has heated up recently with new subpoenas issued to Keating and his family. The SEC is empowered to bring either criminal charges or civil lawsuits.

PENDING CIVIL INVESTIGATIONS

FEC Checks Possible Election Law Wrongs: After revelations about Keating’s support of three dozen politicians, particularly five U.S. senators, the Federal Elections Commission launches a probe into possible election law violations, including allegations that Keating contributed funds to campaigns in return for favors for Lincoln. The five senators, including Sen. Alan Cranston (D-Calif.), deny such claims.

U.S. House Committee Broadens Scope: The U.S. House Banking, Finance and Urban Affairs Committee, after making a series of disclosures about Lincoln over the last five months, turns its investigators loose on other ailing thrifts.

Thrift Regulators Follow Up Investigations: The Office of Thrift Supervision, which regulates savings and loans, and the RTC, which filed the federal racketeering suit, continue to investigate additional allegations of fraud, regulatory violations and other wrongdoing against the same defendants and new targets.

Van de Kamp Initiates State Action: Van de Kamp, after naming Reiner and the Sacramento County district attorney in December as special attorneys general to probe possible criminal violations, decides to look at possible civil wrongdoing, primarily in connection with the sale of debt securities at Lincoln branches.

Bankruptcy Examiner Looks for Fraud: A court-appointed examiner in the bankruptcy cases of American Continental and 11 Lincoln subsidiaries is looking for fraud and mismanagement of the companies.

Creditors Hire Special Investigator: The unsecured creditors committee, formed in American Continental’s bankruptcy, brings in a special investigator and audit team to uncover the causes of the bankruptcy. The committee is made up mostly of debt holders.

Assembly Committee to Wind Up Probe: Three days of hearings and a massive amount of documents are being boiled down into a report from a subcommittee of the Assembly Finance and Insurance Committee. The investigation was sparked by the committee’s chairman, Pat Johnston, (D-Stockton).

RELATED INVESTIGATIONS

Senate Ethics Probe Targets Five: The five U.S. senators who intervened with federal thrift regulators on behalf of Keating look to the Senate Select Committee on Ethics to clear them of any ethical blame for their questioning of regulatory treatment of Lincoln in April, 1987.

Accountants Face License Action: The state Board of Accountancy is looking into the work of individual accountants at the firms of Arthur Young & Co. (now Ernst & Young), Arthur Andersen & Co. and Touche, Ross & Co. (now Deloitte & Touche). Debt holders and others claim accountants misrepresented American Continental’s financial condition. The board can recommend sanctions including revocation of licenses.

State Bar Reviews Conduct of 3 Lawyers: The State Bar of California starts an investigation into the ethical conduct of Gov. Deukmejian’s chief fund-raiser, Karl M. Samuelian, and two others, Franklin Tom and Christine W. Bender. Samuelian and Tom represented American Continental in winning Corporations Department approval for the sale of debt securities. Bender, who came from the same law firm, was the agency’s commissioner when she approved the last debt offering in May, 1988.