Charles Keating Trials: 1991-99

Defendant: Charles F. Keating, Jr.
Crimes Charged: First trial: Securities fraud; Second trial: fraud, conspiracy, racketeering
Chief Defense Lawyers: Stephen C. Neal; several other attorneys have represented him over the course of his many civil and criminal trials
Chief Prosecutor: William Hodgman; several others have prosecuted him at the state and federal level
Judge: Lance A. Ito
Place: Los Angeles, California
Dates of Trial: First criminal trial: November 18-December 4, 1991; second trial: January 3, 1993
Verdict: First trial: Guilty on 17 of 18 counts; second trial: guilty on 73 counts
Sentence: Second trial: 151 months in prison, overturned after Keating had served 50 months of the sentence; over the years, fines of several hundred thousand dollars

SIGNIFICANCE: Charles Keating was convicted for securities fraud in connection with the largest savings and loan collapse in history, which cost the American taxpayers $2.6 billion. The repercussions reached the U.S. Senate, where five senators (Cranston, DeConcini, Glenn, McCain, and Riegle), known as the "Keating Five" were investigated for ethics violations in connection with their helping Keating avoid federal regulators in return for large campaign contributions.

The problems experienced by the savings and loan industry did not begin with the spectacular wave of collapses in the late 1980s. In fact, there have been financial problems with savings and loan (S&Ls) institutions for nearly 20 years before then. In the 1970s, S&Ls chafed under federal restrictions that limited the amount of interest they could pay to depositors, the types of investments S&Ls could make and when they could borrow money. Many of these restrictions made the S&Ls uncompetitive with traditional banking and finance companies.

Congress bowed to S&L lobbying, abolished the interest rate limitations on deposits, and lifted restrictions that previously only permitted S&Ls to invest in single-family home mortgages. Congress believed that deregulation would bring private-sector money into S&Ls and revitalize the industry without federal involvement. In many respects, Congress deregulated the S&Ls rather than spend federal money to bail them out, with disastrous consequences.

Charles F. Keating, Jr., was one of many people who would treat S&L deregulation as a license to steal. Keating was a close associate of Carl Lindner, a wealthy businessman from Cincinnati, Ohio who owned the American Financial Corporation (AFC). In 1976, Keating bought a subsidiary of AFC called American Continental Homes from Lindner, which Keating later renamed American Continental Corporation (ACC). ACC embarked on several ambitious real estate development projects, mostly in Arizona and Colorado. To finance its activities, ACC set up its own in-house mortgage company and was a pioneer in creating the type of financial package and instrument known as the "mortgage-backed security." Keating, however, had his sights much higher.

ACC Buys Lincoln Savings and Loan

On February 24, 1984, Keating's ACC bought Lincoln Savings and Loan for $55 million. Lincoln S&L was one of the largest S&Ls in southern California, with assets at the time of more than a billion dollars. Keating was attracted to Lincoln S&L not only because of its size, but also because California state S&L regulations were very lax.

Keating and ACC installed their own management team to run Lincoln S&L and began to systematically pillage its assets through thinly disguised accounting gimmicks. Millions were funneled into ACC to cover its losses from real estate projects that had turned sour. In additions, Lincoln S&L was used as a conduit to sell hundreds of millions of dollars of ACC bonds to depositors. More than 20,000 people—many of whom were retired and were investing their pensions:embought ACC junk bonds from salesmen who told them that the bonds were federally insured, when, in fact, they were not.

Keating surrounded himself, Lincoln S&L, and ACC with an army of lawyers and accountants who thwarted the few efforts federal and state authorities made to look at ACC's transactions with Lincoln S&L. Finally, however, the house of cards fell in. On April 14, 1989, the Federal Home Loan Bank Board (FHLBB) exercised its authority and appointed a conservator, who took over Lincoln S&L. Unable to sustain itself on Lincoln S&L's assets any longer, ACC went bankrupt in the same month, and the purchasers of ACC bonds lost all of their money. After the conservator found that Lincoln was insolvent by more than $600 million, the FHLBB (later succeeded by the Office of Thrift Supervision, OTS) put Lincoln S&L into receivership on August 2, 1990. Cleaning up Lincoln S&L would eventually cost the taxpayers $2.6 billion.

Litigation Abounds

A myriad of civil litigation and criminal prosecutions followed the collapse of ACC and Lincoln S&L. Civil and criminal trials, followed by countless appeals, went on for nearly a decade. Civil class action suits were filed by the purchasers of ACC bonds against Keating; other officers and directors of ACC; and the banks, lawyers, and accountants who shielded them from regulatory scrutiny for so long. Federal and state criminal charges were filed against Keating and others. There were regulatory actions by the OTS against the same banks, lawyers, and accountants being sued in civil court. In March 1992, the OTS shocked the legal world when it froze the assets of the huge, 400-lawyer law firm Kaye, Scholer, Fierman, Hays & Handler, which had represented Keating. After bringing the firm to its knees, the OTS imposed a $41 million settlement on it.

The only criminal case against Keating occurred when the state of California prosecuted him for 18 separate counts of securities fraud in connection with the sale of ACC junk bonds under the misrepresentation that they were federally insured. This trial took place in Los Angeles before Judge Lance A. Ito. The chief defense lawyer was Stephen C. Neal and the prosecutor was Deputy District Attorney William Hodgman.

The trial began on November 18, 1991. Many of the elderly investors who had purchased ACC junk bonds attended the trial, and yelled angrily at Keating both in the courtroom and as he was being escorted to and from trial. One spectator managed to punch Keating in the arm.

Keating's defense lawyers tried to argue that Keating had no control over what salesmen were telling investors about federal insurance coverage for ACC junk bonds, but after hearing all the evidence, the jury returned its verdict finding Keating guilty of 17 of the 18 counts.

Keating Draws Maximum Sentence

During the sentencing hearing on April 10, 1992, seven small investors testified, and begged Judge Ito to punish Keating to the maximum extent provided by law. One of the witnesses, Harriet Chappuise, stated that "Charles Keating did not steal a loaf of bread. He stole the bread out of the mouths of thousands of old people. Try, Mr. Keating, try living on Social Security checks." Ito sentenced Keating to the statutory maximum of 10 years in prison, and to pay a $250,000 fine, but Keating's lawyers immediately began to appeal the conviction and sentence. Keating's lawyers argued that the number of legal actions against him violated his right to due process under the Constitution. Defense attorney Neal stated:

You can make a pretty good case that it is overkill and a waste of taxpayers' money.

Joseph W. Cotchett, an attorney representing one of the plaintiffs in the civil cases against Keating, did not concede that there was any due process violation resulting from "overkill" litigation, but agreed that there are too many federal agencies jumping on the bandwagon too late to do any good:

Where were all the inside-the-beltway bureaucrats when Charley Keating was riding high on the backs of the public?

Keating was prosecuted in a second criminal trial in Los Angeles, this time for violating federal laws against fraud, conspiracy and racketeering. The case went to trial in October 1992, and on January 6, 1993 the jury returned a guilty verdict on all 73 criminal counts against Keating. This trial resulted in a sentence of 151 months in jail. As with the state trial in Los Angeles, Keating's lawyers immediately began to appeal the conviction and sentence. His lawyers argued that the jurors in the federal case were influenced by Keating's conviction at the state court level. After several years of appeals, UJ.S. District Judge Mariana R. Pfaelzer disagreed with Keating's attorneys but still overturned the conviction, citing a presumption of prejudice and finding that the law compelled her to grant Keating's motion for a new trial. By this time, Keating had already spent nearly 50 months in a federal prison.

Keating Loses in Civil Court, too

The first civil case against Keating was a class action lawsuit filed in federal court in Tucson, Arizona. The lawsuit was filed on behalf of the more than 20,000 people who lost their money after buying ACC bonds. In addition to Keating, there were three other defendants, who had been involved in ACC's real estate schemes: a wealthy businessman in Tempe, Arizona, named Conley Wolfswinkel, Continental Southern, Inc. of Atlanta, Georgia, and the Saudi European Investment Corporation.

The trial began on April 1, 1992, before Judge Richard Bilby. Keating did not appear at the trial or have any lawyer represent him during the proceedings, claiming that he was too busy preparing for the October 1992 federal criminal trial in Los Angeles. The other defendants, however, denied that they had acted jointly with Keating in causing Lincoln S&L's collapse, and the case dragged out for more than three months.

After deliberating for eight days, on July 10, 1992, the jury found Keating and the other three defendants guilty of violating federal antifraud laws. The plaintiffs' lawyers had sought $288.7 million in compensatory damages from Keating alone, but the jury awarded $600 million in compensatory damages, with an additional amount of $1.5 billion awarded for punitive damages. Because the compensatory damages were tripled under federal antiracketeering statutes to $1.8 billion, the total amount of the verdict against Keating was $3.3 billion. The jury rendered similarly large verdicts against the other three defendants as well.

Shadows Fall over Senators

Keating's downfall had repercussions at the highest levels of government. During the height of his power, Keating contributed heavily to the political campaigns and causes of U.S. Senators Alan Cranston, Dennis DeConcini, John Glenn, John McCain, and Donald W. Riegle, Jr. These senators intervened on Keating's behalf several times with federal regulators in the late 1980s to allay growing suspicions about Keating's activities. Cranston was the largest beneficiary, receiving roughly $850,000 in contributions from Keating. When Keating's empire collapsed and the senators' involvement was revealed, they were labeled the "Keating Five" by the press. After an investigation of several months by the Senate Ethics Committee, the committee voted on November 19, 1991, to rebuke Cranston for improper conduct, but did not recommend formal censure by the full U.S. Senate. The other Senators received nothing but minor chastisement.

In reality, the connection between Charles Keating and the senators did little to hurt their political careers. By 2000, the press hardly mentioned John McCain's involvement with the "Keating Five" when the Arizona senator ran for the Republican presidential nomination.

A Final Resolution?

Throughout the 1990s, in trial after trial, Charles Keating never publicly admitted any wrongdoing. This changed in April 1999, when he pleaded guilty to four federal counts of fraud. In doing so, Keating admitted that he had siphoned $975,000 out to the ACC just a few days before the company filed for bankruptcy. A new federal trial had been scheduled to begin in 1999, but Keating's turnaround precluded it.

In announcing the guilty plea, U.S. Attorney Alejandro Mayorka said, "For more than 10 years, Charles Keating has fought us, denied any guilt, and refused to accept responsibility for his illegal conduct. Today, that fight is over."

Keating, 75 years old at the time of the plea, was spared more jail time. He was sentenced to the 50 months he had already spent incarcerated before his conviction was reversed.

—Stephen G. Christianson and

—Ron Formica

Suggestions for Further Reading

Davis, Sally Ogle. "Keating's Folly." Los Angeles (November 1991): 58-62.

Fowler, Jack. "The Keating Fizzle." National Review (February 1991): 22-23.

Glassman, James K. "The Great Banks Robbery: Deconstructing the S&L Crisis." The New Republic (October 1990): 16-21.

"House of III Repute." The New Republic (December 1990): 7-9.

United States Senate. Preliminary Inquiry Into Allegations Regarding Senators Cranston, DeConcini, Glenn, McCain, and Riegle, and Lincoln Savings and Loan. Washington: U.S. Government Printing Office, 1991.