INVESTIGATION OF LINCOLN SAVINGS & LOAN ASSOCIATION HEARINGS BEFORE THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS HOUSE OF REPRESENTATIVES ONE HUNDRED FIRST CONGRESS FIRST SESSION PART 3 OCTOBER 31 AND NOVEMBER 7, 1989 Printed for the use of the Committee on Banking, Finance and Urban Affairs Serial No. 101-59 WHEREAS: Pursuant to Section 8152 of the California Financial Code ("CC"), the Commissioner of the Department of Savings and Luan, State of California (the "Commissioner"), has received information resulting from the examinations of the practices and operations of Lincoln Savings and Loan Associati ("Lincoin") and American Continental Corporation (ACC). ("Lincoln" and "ACC shall be understood to include all of their subsidiaries unless a contran maning is apparent.) Included in the information received by Commissioner were the following facts: 1. Lincoln is authorized to operate a California savings and association under the supervision of the Commissioner: 2. ACC, an Ohio corporation, is a registered Savings and Loan Holding Company of Lincoln under the supervision of the Commissioner; 3. Charles R. Keating, Jr., is chairman of the board of directors of ACC owns 22% of its stock, and is a director of a number of subsidiaries of Lincoln; and 4. Charles R. Keating III is executive vice president of and owns 13% of the stock of ACC, and is an officer and/or director of a number of ACC' subsidiaries, including Lincoln and its subsidiaries. Based on the above-referenced examinations and reports, the Commissioner finds that the following practices and operations, when taken as a whole, result is Lincoln and ACC engaging in unsafe and unsound business practices. Transaction with Affiliated Perso Through its subsidiary, Lincoln funded a $20 million unsecured loan to a limited partnership (Hotel Pontchartrain Limited Partnership, hereinafter "Pontchartrain"), of which another Lincoln subsidiary was the only general Phoenician Financial Corporation, a wholly-owned subsidiary of Lincola, Incorporated in California. 2 The Crescent Hotel Group of Michigan, Inc., a wholly-owned 2nd tie subsidiary of Lincoln, incorporated in Michigan. INVESTIGATION OF LINCOLN SAVINGS & LOAN ASSOCIATION. HEARINGS BEFORE THE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS HOUSE OF REPRESENTATIVES ONE HUNDRED FIRST CONGRESS FIRST SESSION PART 1 OCTOBER 12 AND 17, 1989 Printed for the use of the Committee on Banking, Finance and Urban Affairs Serial No. 101-59 LINCOLN SAVINGS AND LOAN OF CALIFORNIA Fritts, Paul, Head of Supervisory Operations, Federal Deposit Insurance Cor- American Continental Corporation and Lincoln Savings & Loan Association, background information. 286 American Continental Corporation: Officers and directors salaries 290 Subsidiaries organizational chart... 304 Kaptur, Hon. Marcy, letter from a holder of defaulted ACC bonds.. 323 Lincoln Savings & Loan Association: Cash upstreamed by American Continental (ACC) through alleged tax scheme. 293 Financial profile Selected financial data. 292 Phoenician Resort: Information and rate schedule 17 Certain of those investments were used by Lincoln's manage ment to structure certain inside transactions which were reported as though they created large profits. However, when the transactions were properly analyzed, gains reported by Lincoln were illu sory and had to be reversed. We believe that linked transactions were instituted in which certain parties received benefits to enable Lincoln to report sham profits. As a result of their improper inflation of Lincoln's and ACC's books, the insiders of Lincoln's former management were able to fund excessive salaries and dividends from ACC and reap fraudulent profits on the sale of ACC stock. Many of these major transactions appear to have been orches trated directly by Mr. Keating and a few insiders, completely avoiding the use of underwriting staffs employed by the association. Many major loans were made on a nonrecourse basis and with inadequate security. We believe that the schemes used by the defendants involved both intentional fraudulent misdeeds and negligent activity. Elaborate misrepresentations, including sophisticated accounting abuses, were used to deceive the public about the true nature of the business being funded by Lincoln's depositors. The deception employed numerous false statements constituting wire fraud, mail fraud, bank fraud, and securities fraud. Because the defendants employed a pattern of such activity in furtherance of their fraudulent schemes, the RTC has sought additional_relief under the antiracketeering laws of Arizona and the United States. This would entitle the RTC to treble damages as an additional remedy designed to deter future misconduct by others, and to provide a more adequate remedy for the overall losses which are anticipated. The schemes which caused Lincoln's failure required the contributions of many individuals. Certain Lincoln directors and officers, while perhaps not themselves directly engaged in fraud, owed a duty of care to Lincoln which they breached by failing to look out for Lincoln's best interests and exercise independent judgment. Consequently, the complaint also seeks damages for the negligent conduct on the part of these individuals. The RTC has not completed its investigation of Lincoln. We believe that substantial additional investigation is warranted and may result in the filing of additional civil actions or allegations, including fraud actions. Some of the areas of additional investigation and potential causes of action which we believe warrant further review relating to Lincoln include: One: Liability of accountants. Two: Liability of appraisers in appraising the real estate held, sold, and purchased by Lincoln, its direct and indirect subsidiaries and holding companies. Three: Liability of attorneys in their counseling of and advice to ACC and Lincoln. Four: Liability of investment brokers and securities brokers. Five: Liability of borrowers, including possible straw borrowers, and kickbacks or side deals which those borrowers may have received. |