2 Firms Expected to Be Added to Keating Suit

The federal government will name the Ernst & Young accounting firm and a major New York law firm as new defendants in its $1.1-billion, civil racketeering lawsuit against former savings and loan owner Charles H. Keating Jr., a government source said Wednesday.

The amended complaint, which will name at least six new defendants, is expected to be filed by the Resolution Trust Court in federal court in Phoenix within two weeks, according to the source, who asked not to be identified.

The RTC will allege that one of Ernst & Young’s predecessor firms, Arthur Young & Co., along with former Arthur Young partner Jack D. Atchison, aided in the filing of misleading financial information about Keating’s American Continental Corp. and its Irvine-based subsidiary, Lincoln Savings & Loan, the source said.

The RTC also will accuse the New York law firm of Kaye, Scholer, Fierman, Handler & Hays of helping Keating in his allegedly fraudulent schemes.

Regulators have said previously that a Kaye, Scholer lawyer reviewed Lincoln loan records and found them so inadequate that it should have put the firm on notice about possible wrongful activity.

Representatives of Ernst & Young could not be reached for comment, and a Kaye, Scholer spokesman declined to comment.

The amended lawsuit also is expected to name as defendants Lincoln borrower Conley Wolfswinkel and his Mesa, Ariz., development company, as well as C.V. Nalley, a Phoenix-area purchaser of Lincoln property.

Regulators have called transactions involving Wolfswinkel, his firm and Nalley nothing more than shams designed to falsely inflate Lincoln’s earnings.

Wolfswinkel and Nalley could not be reached for comment.

The source said the government has not yet decided whether to name another major law firm as a defendant. The suit already lists 20 individuals and 17 companies as defendants.

Regulators, U.S. senators and investors relied on financial statements and other information prepared by the company’s accountants and law firms in their dealings with American Continental and Lincoln.

In April, 1989, American Continental filed for bankruptcy protection, and the thrift was seized by regulators.

The lawsuit, which also alleges fraud, conspiracy and breaches of fiduciary duties, was originally filed in September, 1989.

Under federal law, damages for racketeering convictions would be automatically trebled, which could boost the suit’s total damages to $2 billion.