Ex-Regulator May Be a Defendant in Lincoln S&L; Case

Federal regulators probably will add Lee Henkel, a former top U.S. thrift regulator, as a defendant in the government’s $2.7-billion fraud and racketeering lawsuit against former owners and operators of Lincoln Savings & Loan, a government source said Monday.

Henkel and his former law firm, Troutman, Sanders, Lockerman & Ashmore in Atlanta, are two of at least nine major law firms, accounting firms and others that the Resolution Trust Corp. blames for losses at the defunct S&L;, according to the source.

Other potential defendants are the law firms Kaye, Scholar, Fierman, Hays & Handler in New York and Sidley & Austin in Chicago; the accounting firms Arthur Andersen & Co. and Ernst & Young; U.S. Home Corp. in Houston, one of the nation’s biggest home builders; MDC Holdings Inc. in Denver, a real estate development firm and junk bond investor, and Gene Phillips, former chairman of now-bankrupt Southmark Corp. in Dallas.

The agency is trying to negotiate settlements with several of the potential defendants. Sources earlier confirmed that Ernst & Young tentatively agreed to pay the government more than $40 million in order to avoid litigation over its audits of Lincoln.

“Sometimes those exchanges turn into settlement negotiations, sometimes they turn into fist fights,” the government source said.

The addition of the professional firms to the 18-month-old suit would follow the agency’s action Monday in naming the nation’s second-largest law firm--Cleveland-based Jones, Day, Reavis & Pogue--as a defendant.

The RTC, the federal agency that manages and liquidates failed thrifts, has until April 12 to include more defendants to the suit filed in federal court in Phoenix. The agency filed the suit after Lincoln’s failure in 1989. The collapse is expected to cost taxpayers $2.6 billion, the costliest S&L; failure to date.

Some defense attorneys said the RTC is going after the lawyers, accountants and others associated with Lincoln and its parent, American Continental Corp., because the agency is concerned that it will not recover any funds from the thrift’s former owner, Charles H. Keating Jr.

But Michael C. Manning, a Phoenix lawyer heading the RTC’s litigation effort, said the government case had always intended to pursue those responsible for Lincoln’s failure, including the thrift’s legal advisers and auditors.

If Henkel is added to the suit, he would become the first former government official to be sued by regulators for a role in the Lincoln debacle. The RTC is concerned about possible conflicts of interest when Henkel served on the three-member Federal Home Loan Bank Board, once the nation’s chief S&L; regulatory body.

After Henkel, a Keating friend, was nominated to the bank board in November, 1986, he sold his shares in an Atlanta company to Lincoln for $3.7 million. That sale came a few months after Henkel offered to sell the shares for $3 million to Lincoln. Keating, who declined the offer, said then the stock wasn’t worth half that amount, according to government documents.

Henkel and partnerships he was involved in also received a total of $110 million in loans from Lincoln before he took his seat on the bank board.

Henkel resigned from the bank board in early 1987 after the Justice Department began looking into the possible conflicts of interest. The probe came after he had proposed a rule that would have greatly benefited Lincoln and other thrifts engaged in risky investments in land, junk bonds and other ventures. The federal investigation was later dropped.

His law firm, Troutman Sanders, represented American Continental, Lincoln and Keating in several legal matters before the thrift’s failure.

Henkel could not be reached for comment, and his Washington lawyer, James Hamilton, refused to comment.

The law firm of Sidley & Austin was also involved with Henkel. A lawyer for the firm, acting on Lincoln’s behalf, lobbied for Henkel’s appointment to the bank board and later put pressure on the nation’s top regulatory agency to defer to Keating’s demands for a new examination of Lincoln.

A lawyer for Sidley & Austin said Wednesday that it is trying to persuade the RTC that the agency doesn’t have a case against it.