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Prosecutor: Lincoln Bond Buyers Were Like Bamboozled Used-Car Purchasers

November 15, 1991

LOS ANGELES (AP) _ Buyers of junk bonds at Charles Keating Jr.’s Lincoln Savings were like purchasers of a good-looking used car with a transmission that was about to fall out, a prosecutor said in closing arguments Thursday.

Had the investors known the severity of the problems of Keating’s companies, they would never have purchased the bonds, Deputy District Attorney William Hodgman said.

″Let me introduce you ... to the lemon law of the California Corporations Code,″ he told the Superior Court jurors.

Keating’s attorney replied that the bond sales were approved by regulators, generally followed strict guidelines emphasizing the risks and were policed by lawyers.

Keating, 67, is on trial on securities fraud charges stemming from Lincoln’s failure, which was the biggest thrift collapse in history and cost U.S. taxpayers $2.6 billion.

Keating is accused of 18 counts of failing to pass along information to buyers of bonds issued by his American Continental Corp., Lincoln’s parent company. More than $250 million in American Continental bonds became worthless when his companies collapsed in April 1989.

If convicted of six or more counts, Keating could be sentenced to 10 years in prison.

Hodgman displayed victims’ pictures and excerpts from their testimony: elderly Moroccan immigrants who lost $101,000; a traveling puppeteer who said he couldn’t understand legal documents about the bonds but trusted the sellers; a man who said he was told they were ″like the Rock of Gibraltar.″

Hodgman, summing up more than 10 weeks of evidence, acknowledged that bond sellers testified they provided buyers with prospectuses describing the risks of the bonds. Several buyers testified they didn’t receive any brochures before buying the securities.

Hodgman said such conflicts in memory were common, and didn’t undermine his case. More important, he said, is that the securities ″lemon law″ under which Keating was charged also makes it a violation to orally lie or omit information about bonds.

Buyers of bonds never got full disclosure during sales pitches from the bond sellers, he said. Sellers, he said, failed to pass along such information as:

-Regulators’ concerns that Lincoln was failing its net worth requirement, which could lead to its seizure by the government.

-Restrictions placed on Lincoln’s ability to pay dividends to American Continental, cutting off a significant cash flow to the parent company.

-The fact that other American Continental bonds, theoretically safer than those bought by the investors charged in the complaint, were rated lower than investment grade by ratings services.

-A regulator’s order in December 1988 that Lincoln stop operating in an unsafe and unsound manner.

The facts weren’t relayed to bond buyers unless they found them buried in the fine print of legal documents, Hodgman said.

″Is anybody telling those bond buyers that this company was in deep financial condition? You can scan your memories and you can scan your notes (from witnesses) and you won’t find it,″ he said.

Hodgman argued his case for more than five hours. Defense attorney Stephen C. Neal spoke for about 10 minutes, and was to continue his final argument Friday.

Neal said star prosecution witness Raymond C. Fidel, a former Lincoln president who turned state’s evidence, testified that only ″in a few rare circumstances bond reps got overzealous.″

The bond sellers themselves said Keating never told them what to say or not to say about the bonds, and Fidel and other Lincoln officials never told Keating of problems, Neal said.

Far from evidence of ″deliberate, conscious, knowing conduct″ by Keating, the prosecution can only ″pile inference upon inference upon inference,″ Neal said.

″There is a line at which inferences become speculation,″ Neal said. ″That is not the way the people are supposed to build a criminal case against someone in our society.″

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