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Ms. HILL. I simply would point out to the subcommittee that, in fact, right on the prospectus it said on the last page and we have attached a copy of that prospectus—it said that no oral representations were to made, or if they were made, they should not be relied upon by the purchaser.

It is in bold type right on the back page. But it was, in fact, true, we found, as Mr. Simon and Mr. Hodgman have stated, that most people relied on that relationship, the trust that they had and the oral statement, “This is as safe and secure as Lincoln. It is backed by Lincoln's assets."

Mr. DINGELL. Mr. Simon?

Mr. SIMON. Mr. Chairman, I think you probably have to deal with structures and atmospheres more than try to regulate what is said. I think it is almost impossible to regulate what thousands of people say to tens of thousands to others.

You can demand training. You can demand licensing. You can demand supervision. That is one level of regulation that we did not have here given the people who were selling the bonds. You can physically separate the two sales areas. You can make the names different. You can make the logos different. That is what I mean by structure and atmosphere.

It seems to me that sitting in Washington trying to write legislation or pass regulations to govern the entire problem coast-to-coast, the best thing you can focus on is structure and atmosphere. What basic minimum protections can we put in so that the bulk of the people who buy a Dreyfus mutual fund or something else like that understand that it is a Dreyfus mutual fund and do not believe that it is a deposit in the Mellon Bank. That is where I would focus my attention is on structure and atmosphere which was at its worst in Lincoln.

Mr. HODGMAN. Mr. Chairman, if I might add, the reason we need to have strict regulations on that structure and atmosphere is because it is too late for the victims, for the human victims for someone like myself to bring a criminal prosecution after the fact, or for the Federal Government to bring a criminal prosecution after the fact, or for Len Simon and his associates to bring a class action law suit.

This scenario was indeed a tragedy. If the subcommittee could hear the testimony of even one representative bond purchaser, it would be a plaintiff cry for “Protect the consumer.” The reason is it takes time for agencies and institutions to rectify the situation like ACC/Lincoln.

Just to take one example, there was a victim who testified at our trial, at the State trial, named John Bruner. John Bruner flew fighter planes in World War II. After World War II he and his wife became puppeteers.

They toured California and the American Southwest giving puppet shows to children. This is where they made their money. They saved what money they could for their nest egg when they retired. They did not have 401(K)s. They were independent contractors. They needed that nest egg.

Mr. and Mrs. Bruner relied upon what they were told in the lobby of Lincoln Savings and Loan about the ACC bonds, that they were safe and secure. In reliance upon those representations, they took their nest egg, put it in the ACC bonds, and then in April of 1989 found out that they were wiped out, that they had no money there.

Now, it is almost 5 years later, and through the efforts of Mr. Simon, the Bruners have achieved partial recovery. But for Mr. Bruner, someone who suffered a long and lingering illness, and who died just about a year ago, he had to live out the remaining years of his life without financial security, operating on a tight rope where every day it was a choice between spending too much and really going into the hole, or getting by. He died after this illness not knowing that his wife would ever get all the money back, that his wife would be secure.

This is what this type of tragedy in ACC/Lincoln meant to individual people. That type of scenario was replicated thousands of times in this case. That is what we need to be mindful of as we proceed.

Mr. DINGELL. And it could happen again unless we extended the securities protections to deal with the behavior of bank employees and officers who are, at this minute, exempt from the regulation of the SEC; isn't that right?

Mr. HODGMAN. That's my fear; yes, sir.

Mr. DINGELL. And, of course, that would necessarily include talking about mutual funds being sold out of banks. The same opportunity is there because you can talk about subordinated debentures or you can talk about a mutual fund which, for example, deals in a series of speculative types of securities; isn't that right?

Mr. HODGMAN. Yes, sir.

Mr. DINGELL. Do any other members of the panel have any comments on that matter?

(No response.]

Mr. DINGELL. Let me address, ladies and gentlemen, then, the situation here. I think we have talked then about a consumer who thinks he is buying something that he really is not buying. He never questions the nature of the investment, or if he does, he is given essentially dissembling information.

When he is asking questions, he is given misleading information, for example, that FDIC insurance versus SIPC insurance is going to be his protection, or that SIPC insurance goes beyond what he really, in fact, is getting.

Now, what are your comments on that matter? You made some comments, Mr. Hodgman, but we would be glad to hear additional comments you might want to make on that.

Mr. HODGMAN. I think the only additional comment that I would like to make, sir, is that the specter of the tragedy that occurred with ACC/Lincoln has not died and it could very well be present in a merger such as the one the subcommittee is contemplating.

Mr. DINGELL. Do the other members of the panel have a comment? Ms. Hill, Mr. Simon, Mr. Zipperstein?

Mr. SIMON. I think the word "insurance” is really a dramatic and an important word in this area. It is probably something that the subcommittee should keep its eye on. I think playing a shell game with FSLIC insurance versus SIPC insurance, which I discussed earlier, or again this issue of “Will you allow uninsured instruments to be sold under the roof of what appears to be an insured institution?” is really a crucial consumer protection issue.

It is what cost my clients their money. I am not sure even that SEC regulations is going to cure the problem as much as simply separating banks from nonbanks and making it clear to anybody who walks in the door of the institution they are in that they are in a bank which takes deposits or they are in some other entitythey are in K-Mart, or Sears, or Merrill Lynch or some other place and they are doing an entirely different kind.of transaction.

All the SEC can do, really, is go in after the fact. They can pick up the pieces. They can sue people. They can try to refer them to the U.S. Attorney, or we can sue them for money. But at the front end, I think a separation of the two types of instruments is very important.

Mr. DINGELL. I think I agree with you. Now, ladies of the gentlemen of the panel, we have a continuum of public policy options here. On one end we can allow more and more banks to enter the securities field, leaving more and more customers open to transactions which possibly have the situation that we have seen in the Lincoln Savings and Loan and with customers vulnerable to transactions they may or may not be able to understand.

On the other extreme, we could attempt to roll back the practices of banks selling and marketing securities because of concerns of consumer protection, or we could come in somewhere in-between where we allow existing transactions to continue but put a moratorium on expanding the business while we aggressively move towards plugging the consumer protection gaps.

From what you have seen in the Lincoln case, what do you believe would be the prudent public policy option for the Congress to exercise?

Mr. HODGMAN. Mr. Dingell, to continue a metaphor that was utilized earlier this morning, I believe it is time to shut the door to the barn. Maybe a few horses have gotten out, but for the remainder, they should be kept in the barn. For those who are running free in the fields right now, they should be looked at very closely by the appropriate regulatory agencies, and I believe the sort of ombudsmen regulation that this subcommittee and the chairman is considering is very important.

So I come down very strongly on the side of consumer protection in this instance because I have seen what happens when consumer protection interests are left in the dust.

Mr. DINGELL. Ms. Hill?

Ms. HILL. Mr. Chairman, I would comment that I believe Charlie Keating appreciated the fact that there was an opportunity to sell an uninsured product in an insured environment. He took advantage of that.

The reason that I know that he knew that this was a good opportunity for him was he referred to it as cheap money. He took the money from Mr. Simon's clients and used that to pay off debt that he had with more senior debt at institutional investors, that institutional investors held—junk bonds that Drexel had issue on behalf of ACC.

He used the little old ladies' money to pay off that debt. The reason he did that was because he could sell the junk bonds in the Lincoln branches for a lower interest rate. It was cheap money for him. He knew that he could do that because of the confusion between whether it is an insured product or an uninsured product.

The little old ladies, as Mr. Simon has said, would never have bought, the retirees would never have purchased these bonds if they had understood that they were junk bonds-risky, so risky that institutional investors, sophisticated investors, demanded a higher interest than Keating was willing to pay.

So, the lesson that I have drawn from that is that at least in the Lincoln environment, the blurring benefitted Charlie Keating. It al. lowed him to keep his operation in operation for far longer.

Mr. DINGELL. Mr. Zipperstein?

Mr. ZIPPERSTEIN. Mr. Chairman, I would just accept Ms. Hill's statements and adopt them as my own, with your permission.

Mr. DINGELL. How about it, Mr. Simon?

Mr. SIMON. I think Ms. Hill and Mr. Hodgman have covered it quite well.

Mr. DINGELL. Well, you have helped us greatly. I want to express my personal gratitude to each of you and also that of the subcommittee. You have come a long way, all of you, to assist us. We know that you have done it at some substantial personal sacrifice. I want you to know that the committee is grateful to all of you for your assistance today.

Thank you very much.
Mr. ZIPPERSTEIN. Thank you, Mr. Chairman.
Mr. SIMON. Thank you.
Mr. HODGMAN. Thank you.
Ms. HILL. Thank you.

(The following information was subsequently submitted by the subcommittee:)


1. What does the SEC's Complaint allege?

This matter concerns the fraudulent sales practices used in
the offer and sale by American Continental Corporation
("ACC") of subordinated debentures ("bonds") in the lobby of
its subsidiary, Lincoln Savings and Loan Association
("Lincoln"), and in offices near Lincoln. It also involves
false and misleading financial statements and disclosures in
the ACC prospectus used to sell the bonds and in periodic
filings with the Commission. Keating also is charged with
engaging in insider trading in connection with sales of his
ACC stock. Defendant Keating and four cthers currently are
scheduled for trial on May 12, 1994.

What were ACC and Lincoln?

ACC, which filed for bankruptcy in April 1989, was a financial services and real estate development firm headquartered in Phoenix, Arizona. Lincoln, a wholly-owned subsidiary of ACC, was a California-chartered savings and loan association based in Phoenix and Los Angeles, California. On April 14, 1989, the Federal Home Loan Bank Board placed Lincoln in conservatorship. In August 1989, Lincoln was placed in receivership. Currently, the RTC is in the process of liquidating Lincoln's assets.

What were ACC bonds?

ACC bonds were high risk "junk bonds" which were subordinate
to virtually all of ACC's debt. ACC offered and sold $275
million in bonds during the period from December 1986
through mid-February 1989 at interest rates ranging from 8
3/4% to 12 1/2 and maturities ranging from one to ten
years. Approximately $220 million of the bonds vère
outstanding when ACC filed for bankruptcy. ACC sold the
bonds in part to retire more senior debt which paid higher
interest rates.

Who sold the ACC bonds?

From December 1986 through approximately August 1989, the bonds were sold by ACC bond representatives in the lobbies of Lincoln branches. Beginning in August 1989, the bonds were sold in small ACC offices near the Lincoln branches. Most or all of ACC bond representatives were former Lincoln employees. The bond representatives were supervised by Lincoln employees. The bonds were self-underwritten by ACC, and most of the bond representatives were not registered to sell securities.



SEC Y. Charles H. Keating Jr. et al.
Civil No. 91-6785, Central District of California

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