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Lincoln S&L Figure Pleads Guilty to Fraud : Crime: Ernest C. Garcia II admits acting to help the thrift hide its ownership of some risky desert land in Arizona.

October 31, 1990|JAMES S. GRANELLI | TIMES STAFF WRITER

LOS ANGELES — A key figure in the failure of Lincoln Savings & Loan pleaded guilty Tuesday to bank fraud and agreed to cooperate with the continuing federal investigation of the thrift's collapse 18 months ago.

Ernest C. Garcia II, a 33-year-old Tucson developer, admitted that he fraudulently obtained a $30-million line of credit in a series of transactions that also helped Lincoln hide its ownership in risky desert Arizona land from regulators.

Garcia is the first person charged with a crime in the federal probe of Lincoln's collapse. A federal grand jury in Los Angeles has been investigating Lincoln's failure for more than a year. Charles H. Keating Jr., a Phoenix developer whose company owned Lincoln, is the central target of the probe.

Garcia entered the plea Tuesday before U.S. District Judge James M. Ideman after federal prosecutors filed an information--essentially an indictment agreed to without going through a grand jury.

Garcia, free on a $5,000 personal bond, is scheduled to be sentenced April 19. The bank fraud charge carries a maximum of five years in prison, a $250,000 fine and restitution.

In a prepared statement, Garcia said he entered the plea "with tremendous feelings of remorse."

"After careful consideration of all the facts, numerous consultations with legal counsel, and, most importantly, consideration of my family, I felt it was best to try and put the circumstances and mistakes of the last three years behind us," he said. "Given the benefit of hindsight, I would have done some things differently."

Federal prosecutors said the plea agreement requires Garcia to cooperate in the continuing Lincoln probe, but they declined to detail what would be required of him. Lincoln's failure is expected to cost taxpayers $2 billion.

Garcia's testimony could be damaging to Keating, former American Continental chairman. Keating is awaiting trial in state court on 42 counts of securities fraud relating to the sale of American Continental bonds.

Neither Keating nor his lawyer could be reached for comment.

Early this month, lawyers for Keating identified the deal with Garcia as one of three activities they said the federal grand jury was concentrating on.

The bank-fraud charge alleges that Garcia was a "straw borrower" used by executives at Lincoln and its parent firm, American Continental Corp. in Phoenix, to hide the true ownership of 1,000 acres of desert land outside Phoenix, according to federal prosecutors.

"This type of white-collar scheme--using 'straw borrowers'--is of particular concern because it is designed to conceal the true nature of the financial transactions involved," said U.S. Atty. Gen. Dick Thornburgh in a prepared statement from Washington. "In the process, federal regulators are deceived, the institution is defrauded and the taxpayers are left to foot the bill."

The convoluted arrangement involving Garcia and a partnership called Westcontinental Mortgage & Investment Corp. was the first of 10 transactions regarding property in a planned development called Hidden Valley Ranch.

Garcia is accused of obtaining a $30-million line of credit from Lincoln by "creating the materially false and misleading impression" that the borrowing was not related to the simultaneous purchase of the desert acreage.

The Hidden Valley property was bought in 1987 by Westcon, a partnership with few assets created and run by a friend of Garcia to accommodate the transaction.

The information charges that, instead of being an arms-length transaction, the sale of the desert land for $14 million actually was an illegal "quid pro quo" for Garcia's line of credit. Westcon put $3.5 million down--money regulators claim came from Lincoln through Garcia--and borrowed the remaining amount from a Lincoln subsidiary.

Regulators, who had been pressing Lincoln to rid itself of risky holdings in undeveloped Arizona desert land, doubted both the values Keating put on the land and the arrangements he used to sell some of it.

Westcon never repaid the $10.5-million loan it received from Lincoln for the balance of the purchase price. In a letter, the company asked that the property be returned to its rightful owner, suggesting that the partnership was a straw borrower.

In civil lawsuits, regulators allege that Lincoln claimed "phantom profits" of $82 million from the 10 deals--including $11 million on the Westcon deal--and improperly paid American Continental $31 million for income tax on the deals. Lincoln, however, didn't owe any taxes, regulators said.

Junk Buyers

Columbia Savings has narrowed the list of buyers for its bond portfolio. D2

HOMEFED BORROWER WOES

The San Diego thrift's largest single borrower is behind on his payments. D2

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