SACRAMENTO — Franklin Tom, who was state corporations commissioner when the department approved now-bankrupt American Continental Corp.'s ill-fated sale of $200 million in bonds, went to work for the company within weeks of leaving the state post, it was revealed Thursday.
Although it had been known that Tom represented the firm in 1988, it had not been revealed that he worked for the firm almost immediately upon leaving his state job at the end of February, 1987.
State law requires department heads to wait at least 12 months before they lobby their former departments.
Tom insisted in testimony before an Assembly subcommittee on savings andloans that he violated no law. He said he merely requested on behalf of American Continental that the department transfer its file on the company from its San Francisco to the Los Angeles office. The file was moved from the San Francisco office as a result.
In a memo written at that time, a Department of Corporations official, noting that Tom was American Continental's attorney, said he told Tom of his concern that the company had a debt of more than $1 billion and that he thought it could not meet its obligations.
In April, American Continental Corp. declared bankruptcy, and regulators seized its main subsidiary, Lincoln Savings & Loan of Irvine. As many as 23,000 investors, many of them elderly Southern Californians, invested in those bonds, only to find that they held little more than paper.
In frenzied final months before American Continental declared bankruptcy in April, the company sold "$100 million worth of worthless paper," peddling the bonds at Lincoln branches, said Joseph W. Cotchett, a Burlingame lawyer representing many of the investors.
In emotional testimony before the committee chaired by Assemblyman Patrick Johnston (D-Stockton), two elderly investors told how they thought the bonds were safe investments because their neighborhood thrift had offered them for sale.
Leah F. Kane told of investing $15,000 of her $25,000 nest egg in the bonds after the manager of Lincoln's branch near her home in Leisure World told her: "You have nothing to worry about; this is an excellent investment."
Tom sat stoically as Kane, who since has helped organize scores of Leisure World retirees who invested in the bonds, charged that Charles H. Keating Jr., owner of American Continental, is "some kind of sociopath, a man who delights in taking money from seniors."
Under questioning by Johnston, Tom acknowledged that he was commissioner of the state Department of Corporations--a gubernatorial appointment--in 1986, when the department first approved the bond sale.
But he testified that he knew nothing about the offering, even though his old law firm represented Lincoln before the department.
In March, 1987, Tom returned to his law firm, Parker, Milliken, Clark, O'Hara & Samuelian, in Los Angeles, which had among its clients Lincoln and American Continental.
American Continental Chairman Keating long had a reputation for winning government approval of his various projects by hiring his former regulators. He also has donated heavily to politicians.
While most of the attention has focused on Democratic recipients of Keating's largesse, Thursday's hearing spotlighted Tom's law firm, in which a partner, Karl Samuelian, is a chief fund-raiser for Gov. George Deukmejian, who appointed Tom. Deukmejian received more than $40,000 in campaign donations from Keating and his companies and associates.
Once 12 months had passed, Tom openly represented Keating before his former agency, appearing before Christine Bender, who replaced Tom as commissioner. Bender went to work for the Department of Corporations six years ago after working as an attorney at Parker, Milliken.
"The point is you complied with the letter of the law," Johnston told Tom, noting that he had waited only the minimum period before returning to lobby his former agency.
"That is my understanding of my obligation," Tom replied.
Under questioning from Johnston, Bender said she was not intimidated that her former boss, and the law firm for which she had worked, represented Keating.
"Mr. Tom, along with several other former commissioners appear regularly before the department," Bender said.
Documents released or referred to in the hearing detailed the depth of concern about Lincoln's bonds by lower-level state regulators in 1987 and 1988. One 1988 memo by a savings and loan regulator referred to the bond sales as a "Ponzi scheme."
But eight days later, the Department of Corporations approved the sale of millions more bonds. Bender testified that her staff was unable to prove such "rumors."
And like Savings and Loan Commissioner William Crawford, Bender testified that her department was powerless under state law to act until it was too late.
"Until the bankruptcy, nothing concrete was given to us," Bender said.
Bender told Johnston that a law empowering her department to undertake full reviews of all public offerings would place a "tremendous burden on businesses" that seek to raise capital in California.
She noted that the federal Securities and Exchange Commission already investigates offerings such as American Continental's. When it approves the offerings, state approval is virtually automatic, she said.