Last month, about 300 neighbors jammed into the Women's Club of Van Nuys hoping to learn how they could recover money they had invested in debt securities sold through a nearby branch of Irvine-based Lincoln Savings & Loan.
Instead, they heard how much it would cost them to hire a Beverly Hills law firm to file a lawsuit on their behalf. "It sounded to me like a boiler-room operation," said Norm Keller, a Northridge resident who attended the session but refused to participate in the suit.
The experience is part of the sometimes painful education that Keller and other investors are receiving as a result of the collapse of Lincoln's parent company, American Continental Corp. of Phoenix.
About 22,000 people stand to lose all or part of the $200 million they invested in debt securities issued by American Continental. Having been burned once already, they are afraid they could be preyed upon a second time as they attempt to recoup their money.
American Continental filed for bankruptcy court protection on April 13. Federal regulators seized Lincoln the next day. The parent company has stopped making interest payments on its debt securities, and it is uncertain if bondholders will recover any of their money.
Some bondholders are confused by the proliferation of lawsuits and legal theories advanced by competing groups of attorneys, all of whom claim to have bondholders' best interests at heart. More than a dozen lawsuits have been filed already, and others are likely to follow.
And they may soon be solicited by prospective financial advisers: one firm plans a pitch to bondholders on reverse mortgage arrangements that would provide a substitute source of monthly income but could leave them without their homes.
"It's just sad that people who already are victimized by fraud are going to be further victimized by others," said William S. Lerach, a San Diego lawyer handling a class-action lawsuit filed on behalf of bondholders.
"What I think bondholders should do at the moment is nothing," Lerach said. "The way they can get hurt is by doing something quickly or precipitously. They should let the situation sort itself out."
A number of bondholders agree.
"People are cautious--and bitter," said Norman Lapin, a Sherman Oaks accountant whose parents invested a large portion of their estate in American Continental debt securities. "Anybody coming to help them now, they look over twice."
The 22,000 bondholders, mostly Southern Californians, make up an unusual group. For the most part, they were not sophisticated investors with the ability to evaluate the risks of the subordinated debentures sold by American Continental. Debentures are a type of corporate IOU that tend to have shorter maturities than traditional bonds.
Many bondholders were elderly S&L customers who went to Lincoln Savings offices with the intention of placing their
savings in traditional certificates of deposit but were persuaded by company representatives to buy American Continental debentures instead.
Some say they did not realize that the debentures would not be protected by federal deposit insurance as CDs are. Nor did they know that the debt securities were considered to be among the riskiest on the market, so risky, several brokers said, that American Continental would have had difficulty selling them to sophisticated investors. Nor did they know that they would stand near the end of the creditors' line if American Continental were to file for bankruptcy.
Now they know. And they are hardening in their resolve to get back what in some cases would have been their children's inheritance, or what had been given to them as their own inheritance.
A major dilemma faced by bondholders is trying to decide what lawsuit to join and which lawyers to retain. Some don't even like the idea that attorneys stand to get rich off lawsuits that will recover only part of their losses.
One North Hollywood bondholder said he went to a meeting at a San Fernando Valley law firm and was "appointed" to head a five-member committee expected to raise $150,000 to cover initial costs of a lawsuit and responsible for raising more money if needed. The lawyers were to receive a third of any recovery, he said. The bondholder, who requested anonymity, said he walked out of the meeting.
And a Sherman Oaks woman blanched when she went to a private lawyer and figured out that he would end up collecting 60% of any recovery.
Many Were Disappointed
Many of the bondholders who attended the meeting in Van Nuys last month walked away disappointed and upset after hearing little about action and a lot about attorney fees, according to a number of bondholders in attendance.
"I felt as though it was a sales job," said accountant Lapin. "They stand to make a lot of money from it. And they didn't represent the downside. Even if we win something, they get a million dollars and we get a piddling amount."