The top executives of American Continental Corp. may be the main targets of the anger and frustration felt by the bankrupt company's bondholders, but they aren't alone.
Some of the people who bought American Continental debt securities through branch offices of the company's Lincoln Savings & Loan subsidiary are also looking at the culpability of federal and state regulators who supervised the troubled thrift. After all, regulators had been examining Lincoln's financial condition for three years and had allowed the sale of American Continental subordinated debentures--a form of corporate IOUs--through Lincoln branches. Some bondholders say that marketing scheme deluded them into thinking the risky investments were safe.
About 22,000 bondholders, mostly Californians, stand to lose the $200 million they invested in debt securities because American Continental filed for bankruptcy April 13. Lincoln Savings was seized by federal regulators the next day.
"The examiners are more at fault than (American Continental) because they should never have allowed the sale of these bonds in Lincoln branches," said Nunzio Tringali, a retired Los Angeles barber who may lose $10,000. "They are responsible for us being in such jeopardy."
Like Tringali, others believe that the Federal Savings and Loan Insurance Corp. should make sure bondholders recover their funds even though American Continental's debt securities are not covered by the government's insurance program, which protects thrift deposits up to $100,000.
FSLIC and Lincoln's former operators are "the two deepest pockets that debenture holders can go after," said Donald Mikami, a Fountain Valley dentist and bondholder. In fact, FSLIC and other regulatory agencies could be liable for the losses under several legal theories, some plaintiffs' lawyers said, although suing the government is a difficult proposition at best.
Lawyers for bondholders believe there may be good reason to take aim at federal and state regulators, but they think it may be, as one said, a "low-percentage, high- investment kind of thing."
They note that state and federal S&L regulators had been examining the financial condition of Lincoln Savings for three years and should never have allowed American Continental to sell its debentures through Lincoln's 29 Southern California branches.
Under one legal theory, lawyers would argue that regulators, including the state Corporations Department, which approved the offerings, knew Lincoln and American Continental were in questionable financial condition and should have prevented the sale of the debentures or seized Lincoln before they could be sold.
Under another theory, they would argue that the bonds were risky investments and that thrift regulators knew buyers could become confused into thinking the debentures were insured, as savings accounts are. Some bondholders, in fact, said Lincoln and American Continental employees led them to believe that the securities were insured, even though the prospectus clearly states that they were not insured.
The class-action lawyers have begun meeting to coordinate their cases in strategy sessions. They have discussed among themselves the possibility of suing FSLIC and other state and federal regulators, said Ronald Rus of Orange.
"At this point, any lawsuit against FSLIC would be premature," said Richard S. Greenfield, a Philadelphia lawyer handling a class-action lawsuit filed against American Continental on behalf of bondholders. He said he would want to investigate the matter more thoroughly before pursuing such an action.
Also, the effort involved in suing the governments, especially the federal government, may not be worth the potential rewards, said William S. Lerach, a San Diego class-action lawyer.
"Such a suit would be extraordinarily difficult to bring," he said. "There are all sorts of procedural and legal obstacles."
The debentures were approved for sale by the state Corporations Department in late 1986.
The state Department of Savings and Loan allowed American Continental to set up a desk in Lincoln's branches for one year, apparently thinking the sales outlets would be used to sell insurance or other products routinely offered by S&L holding companies, said William J. Crawford, the commissioner for the department.
Instead, the company used its in-house desks to boost bond sales. Despite its dislike of the arrangement, Crawford said, his office could not do anything until the one-year period ended. Then it refused to renew the company's request to continue its operations in the branches.