Two Firms Settle Lincoln S&L; Cases : Fraud suit: The nation’s largest accounting company and second-biggest law office agree to pay $87 million. Investors may eventually recover all their losses.

The nation’s largest accounting firm and second-biggest law firm Monday agreed to pay $87 million to settle fraud charges stemming from the collapse of Lincoln Savings & Loan, making it likely that small investors will eventually recover all their losses in the debacle.

The out-of-court agreements call for accounting firm Ernst & Young to pay $63 million and the Cleveland-based law firm Jones, Day, Reavis & Pogue to contribute $24 million to settle the fraud and negligence charges.

The settlements, which came as the federal civil trial entered its second week of testimony, increase the recoveries by investors to $158 million, more than half the $285 million that they lost in the 1989 collapse of the Irvine-based S&L; and its parent, American Continental Corp.

Other pending settlements could boost the amount to more than $240 million, and the trial is continuing against other defendants.

“We expect to get a full recovery,” said Leonard B. Simon, a lawyer for the investors.

The settlements will be shared by more than 23,000 investors who bought the bonds and stock of American Continental, a real estate development company controlled by Charles H. Keating Jr. Many of the investors bought American Continental junk bonds at Lincoln Savings branches, believing that they were insured by the federal government.

When American Continental filed for bankruptcy in April, 1989, and federal regulators seized Lincoln Savings, the investors--many of them elderly Southern California residents--lost all their funds. For some it was their life’s savings.

“We’re very, very happy with the settlements,” said Sam Epstein, an 80-year-old North Hollywood resident who lost $65,000. “Whatever we get back is certainly appreciated.”

U.S. District Judge Richard M. Bilby, who is presiding over the trial in Tucson and must approve the proposed settlements, has said he wants to start distributing the money to investors by late summer.

The failure of Lincoln Savings is expected to cost taxpayers $2.6 billion, the most expensive thrift collapse in U.S. history. It has prompted a flood of criminal and civil litigation, including the Keating’s conviction on state fraud charges in California and class-action suits against him and his professional advisers.

The settlements announced Monday are among the largest ever against professional firms, which have become targets of blame for thrift failures nationwide. The amount paid by Ernst & Young and Jack Atchison, a former partner with one of the firm’s predecessors, Arthur Young & Co., is a record.

“This is the largest accounting settlement ever,” said Joseph W. Cotchett Jr., the chief trial lawyer for the investors.

Insurance will pay for all but about $1 million of the Jones, Day settlement and a “substantial” amount of the Ernst & Young settlement, the firms said. Partners in the firms will pay the rest.

In the lawsuit, the investors charged that the accounting firm violated securities laws by producing audits that gave American Continental a clean bill of health and allowed it to sell bonds at Lincoln Savings branches. The investors alleged that Jones, Day aided and abetted the fraud by helping employees hide certain information from regulators.

Both defendants denied doing anything improper and did not admit any liability in settling the cases. Ernst & Young asserted that it followed standard accounting principles, and Jones, Day said it adhered to traditional attorney-client norms by reporting problems it uncovered to the corporate executives who hired the firm.

Lawyers for the two firms said their clients settled the suits for several reasons:

* The bulk of investors--elderly Lincoln Savings customers--are “very sympathetic” plaintiffs who have shown so far that they were duped into buying risky American Continental bonds at the S&L;’s branches when all they really wanted were insured certificates of deposit.

* The taint of being associated with Keating, who has become a national symbol of the S&L; industry’s extravagance and arrogance, would be too much for most defendants to overcome, even if they played no role in the sale of securities.

* As more defendants settle, any defendant remaining at the end of the trial faces the prospect of paying the entire amount sought by the investors, a judgment that could be $1.2 billion after punitive and other damages are added.

During opening arguments two weeks ago, the accounting firm of Arthur Andersen & Co. settled for $30 million. Last week, the small Minneapolis investment banking firm of Offerman & Co. settled for $1.5 million.

“It is evident that any professional who has any association with Keating enterprises will be irretrievably tarred in the eyes of lay folks on the jury,” said M. Laurence Popofsky, chief trial lawyer for Ernst & Young.

John L. Strauch, a Jones, Day senior partner, said the “trial dynamics” were such that the law firm would not be able to get its story out and understood by the jury.

“We continue to believe our advice and conduct were entirely correct,” he said. “But the dynamics at this point made it advisable to settle.”

Popofsky and other defense lawyers said their cause also was dealt a blow in a powerful opening statement by Cotchett. Punctuating his points, Cotchett used excerpts of videotaped depositions to show that some witnesses suspected foul play at Keating’s operation and questioned the role of lawyers and accountants.

The settlements announced Monday leave seven defendants on trial including Keating, who was convicted Dec. 4 in Los Angeles on state charges of racketeering, fraud and other offenses in connection with the bond sales. He is free pending sentencing. He also faces federal criminal charges in connection with the bond sales and other alleged offenses in managing American Continental and Lincoln Savings.

Three co-defendants are putting on active legal defenses: the accounting firm Touche Ross, now Deloitte & Touche; Lexecon Inc., an economic consulting firm in Chicago, and Societe Bretonneau, a French bank. Several lesser defendants also remain in the case, which began its second week Monday with testimony from Sen. John McCain (R-Ariz.).

Meantime, investors are tentatively earmarked to receive an additional $42 million from the global settlement of cases against the bankrupt brokerage firm of Drexel Burnham Lambert and up to a similar amount from the settlement of cases against Drexel’s former junk bond leader, Michael Milken. The amounts, which could change, are subject to a number of conditions, such as federal court approval of Drexel’s reorganization plan.