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State Conviction of Keating Is Reinstated

January 16, 1998|JAMES S. GRANELLI | TIMES STAFF WRITER

A federal appeals court on Thursday reinstated the state's securities fraud conviction against Charles H. Keating Jr., and prosecutors vowed to put the former Irvine-based Lincoln Savings & Loan operator back in prison.

Keating, who became a symbol of the 1980s savings and loan scandal, was released from prison in October 1996 with about five months left on his 10-year state prison term.

Thursday's ruling by a three-judge panel of the U.S. 9th Circuit Court of Appeals was strictly procedural and left open the door to further appeals. But Deputy Los Angeles Dist. Atty. William Hodgman said he will seek Keating's return to a California prison as soon as possible.

"Practically and symbolically, Keating is once again a convicted felon," said Hodgman, the lead prosecutor in the state's case. "It is essential that he goes back [to prison]. He owes time to the people in California.

"I really consider this a triumph of justice," Hodgman said. "For so many who had their faith in the system shaken by [his release], this is a great, great day."

But Keating's lawyer, Stephen C. Neal, said the appellate court's decision wasn't a serious setback and that he would fight any effort to return Keating to prison.

"I'm not sure I can stop them from trying, except to appeal to their sense of fairness and order," Neal said. Keating is 74 and served 4 1/2 years in prison, Neal pointed out. He had been sentenced to 10 years, but would have been out in five years with time off for good behavior.

"They know there are still very serious problems with the convictions," Neal said. Keating is also free pending appeal of a separate federal racketeering, conspiracy and fraud conviction.

The appellate court's ruling in the state case won't be final for at least 14 days. Neal said he plans to take up another petition with U.S. District Judge John G. Davies, who issued the original ruling allowing Keating to go free.

The normally outspoken Keating, who has been living with his family in Phoenix since his release from prison, declined to comment. Neal said Keating, a former lawyer, understands the actions being taken on his behalf and is "comfortable and confident" about the outcome.

Keating was convicted in December 1991 on 17 counts of violating state securities laws. Prosecutors charged that he swindled nearly $200 million from 17,000 investors--mainly elderly Southern Californians.

Thomas Shelley of West Hills, who lost $17,000, said Thursday that bondholders simply want to write off their losses and put the case behind them. But he was elated about the decision and hoped that Keating would be returned to jail.

"Hopefully, this restores a little more faith in a justice system that has gone awry with technicalities," he said.

With influence that reached throughout Congress and into the White House, Keating became the lightning rod for criticism of the thrift industry during the free-wheeling 1980s.

He used his Phoenix company, American Continental Corp., to acquire Lincoln Savings and take advantage of the then-liberal investing laws in California. Lincoln poured billions of dollars into raw desert land, corporate take-over attempts, foreign currency trading, luxury hotel development and a host of other unconventional investments.

Among those investments were the Phoenician Resort in Scottsdale and the Pontchartrain Hotel in Detroit.

He raised money by selling American Continental securities through Lincoln's branches, confusing many elderly depositors about the safety of the investments. Prosecutors alleged that he defrauded investors not only by confusing them but also by failing to reveal Lincoln's shaky financial condition and its ongoing fights with regulators.

The outrage over the collapse of Lincoln and American Continental turned Keating into the national symbol of greed and arrogance that was rampant in the thrift industry at the time.

Prosecutors brought evidence showing the Keating was both a direct perpetrator in the fraud and that, through the bond sellers, he aided and abetted the fraud.

In the trial, prosecutors painted the bond sellers in the Lincoln branches as innocent dupes of Keating's swindle.

Keating lost his appeals in the state Court of Appeal and the state Supreme Court. He took the case to federal court.

Judge Davies decided in April 1994 that the conviction rested on erroneous legal theories and flawed jury instructions.

But part of his decision rested on a new legal argument Keating was raising: Since the bond sellers were innocent, Keating can't be convicted of aiding and abetting an innocent act.

The state appealed to the 9th Circuit, saying that Keating couldn't introduce new legal arguments that the state courts hadn't reviewed. Keating essentially failed to exhaust all his remedies in state court, said Deputy California Atty. Gen. Sanjay T. Kumar, who handled the state's case.

The federal appeals panel agreed, ruling that Davies never should have reached the merits of the appeal.

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