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California

Prosecutors Formally Drop Charges Against Keating

Courts: Fraud case closes as expected. Ex-thrift chief, unrepentant, says regulators foiled investors' prospects.

November 10, 2000|E. SCOTT RECKARD | TIMES STAFF WRITER

The state's tumultuous, decade-long criminal case against Charles H. Keating Jr., the former Lincoln Savings & Loan boss who became the poster boy of thrift industry greed during the 1980s, ended quietly Thursday as prosecutors formally withdrew securities fraud charges.

The decision is the final act among state and federal criminal cases and civil and government lawsuits against Keating, who gained notoriety for his defiance of federal regulators and his ability to wield political clout in Washington.

After a brief hearing Thursday before Superior Court Judge Lance A. Ito in Los Angeles, Keating said he learned his lesson.

"Stay . . . out of the government's way," said a trim and fit Keating, who turns 77 next month. "Don't mess with the regulators."

But he was unrepentant about the highflying course he set for his Irvine thrift and its Phoenix parent company, American Continental Corp. Thousands of mostly elderly Southern California investors lost $285 million in the 1989 collapse of his financial empire.

"If they'd have left me alone, they'd all have been rich," Keating said about his battles with regulators and the returns his investors could have realized.

Indeed, the hot real estate market and stock deals of the late 1980s are much like today's fast-paced economy, with its high real estate values and tight housing market. But the rules governing the similar landscapes have changed dramatically.

Most S&Ls have become part of larger commercial banks, whose fundamental business is sounder and easier to analyze because most are publicly held and must disclose more information to investors. Laws, regulations and enforcement also have been strengthened to avoid a similar calamity.

Future banking failures are expected, but only as isolated incidents, said banking consultant Bert Ely of Alexandria, Va.

Observers said they are still stunned by the magnitude of the investors' loss and Lincoln's failure, the second most costly nationwide at nearly $3 billion.

"Something like this could happen again, but just not on this scale--except in a John Grisham novel, and then you wouldn't believe it," said Michael Manning, a Phoenix lawyer who helped regulators unravel Keating's deals.

After a long period of inflation that hurt S&Ls, Congress and California's Legislature in the 1980s lifted nearly all limits on investments by the federally insured institutions. Billions of depositors' dollars were poured into risky deals from land development to corporate takeovers and foreign currency trading.

But no thrift operator rivaled Keating's combination of risky investments, political influence, multimillion-dollar payments to family and friends and sheer, bold arrogance, Manning said.

After the court hearing, a grinning and excited Keating boasted that he could have rescued Lincoln and saved American Continental investors. He figured that his $6 billion investments in desert land development deals, junk bonds, corporate takeovers and luxury hotels would now be worth more than $16 billion had the operation been left in his hands without government interference.

The decision not to try Keating again had been expected since last month when the U.S. Supreme Court refused to hear the state's appeal. Lower courts had ruled that Keating could have been convicted without a proper finding of criminal intent to defraud the Southern California investors.

A separate federal conviction was tossed out because the federal jury had heard about the state court conviction and discussed it during deliberations. Keating eventually pleaded guilty to bankruptcy fraud charges stemming from corporate loans made to his family just before the bankruptcy.

But he now stands free of any convictions or charges of swindling investors.

Experts say there is enough blame to go around for the S&L industry's failure: liberal laws, lax regulation, foolhardy investments, poor managers and outright fraud.

Taxpayers were called in to cover the cost, which reached more than $125 billion as hundreds of S&Ls failed. With borrowings through bond sales to pay off that amount, the total cost over 30 to 40 years is more than $500 billion.

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