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Federal Regulators File $1.1 Billion Fraud Suit

September 15, 1989

PHOENIX (AP) _ Federal regulators acting on behalf of a seized California thrift filed a $1.1 billion fraud and racketeering lawsuit Friday against the founder of the thrift’s parent company and other individuals.

The civil lawsuit, filed by Resolution Trust Corp. under the Racketeer Influenced and Corrupt Organizations Act, also alleges negligence, breach of fiduciary duty and breach of contract.

The alleged wrongdoing involves Lincoln Savings and Loan, a wholly owned subsidiary of American Continental Corp. of Phoenix. Defendants named by the suit included company founder Charles H. Keating Jr., his wife, and various Keating relatives and company executives.

The lawsuit charges fraud in the takeover of Lincoln and subsequent mismanagement that squandered the thrift’s assets, diverted ″enormous″ sums of money to the parent company and benefited American Continental and its executives at Lincoln’s expense.

American Continental was not named in the complaint because it filed for reorganization under Chapter 11 of federal bankruptcy laws in April and received an automatic stay.

The lawsuit is the government’s largest filing against a thrift. The $1.1 billion sought in damages surpasses a $500 million claim against Sunbelt Savings and Loan. Federal racketeering laws allow the government to seek triple damages from defendants.

Federal regulators seized Lincoln on April 14, the day after American Continental filed for bankruptcy protection from creditors.

American Continental attorney A. Melvin McDonald said: ″We will vigorously defend the case and we fully believe that once all the information comes out we believe that all of the individuals named will be vindicated.″

The suit contends that beginning in 1983, Keating and four other American Continental officers schemed to divert funds from the thrift for their own use. The five are accused of racketeering. The suit names a total of 20 individuals and 17 business enterprises.

″The implementation of this scheme involved concealing from the regulatory authorities, first, the true intentions for acquiring (Lincoln Savings) and, next, the actual operation of the thrift,″ the suit states.

The lawsuit states that prior to 1984 the defendants operated an American Continental enterprise comprised of about 17 corporations primarily focused on speculative real estate transactions.

It alleges that around 1983, American Continental’s enterprises needed additional funds to expand its real estate transactions.

The lawsuit claims that American Continental acquired Lincoln Savings by making ″material misprepresentations″ to the Federal Home Loan Bank Board, the former agency regulating the nation’s savings and loans.

It also alleges that once Lincoln Savings became a subsidiary, money was diverted to the parent; insider loans, bad loans and bad investmests were made; and transactions were manipulated to enhance the American Continental and its insiders.

A recurring element in the transactions, the lawsuit claims, was that Lincoln Savings turned over cash for American Continental allegedly to pay the thrift’s income taxes, even though no taxes were currently due.

Keating and his advisors also face a dozen class-action suits filed by about 23,000 bondholders. American Continental has responded by suing the FHLBB and Federal Deposit Insurance Corp. to remove Lincoln from federal conservatorship.

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