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Former Lincoln Savings Official Says Keating Decided to Lie to Investors

September 20, 1991

LOS ANGELES (AP) _ Charles Keating Jr. and the chief financial officer of his American Continental Corp. decided to lie to some of their bondholders in October 1988, a former aide told jurors Thursday at Keating’s fraud trial.

Robin Scott Symes, ex-chief executive of Keating’s Lincoln Savings & Loan, was testifying in the first criminal case stemming from the collapse of Lincoln, which carried a record bailout tab of $2.6 billion to taxpayers.

The testimony was significant because it marked the first time a witness had asserted Keating plotted to dupe investors in his now-crumbled financial empire, which has become one of the symbols of investment fraud in the 1980s.

Symes said the topic of lying arose during a conference at ACC’s headquarters in Phoenix. Keating took a call from James Dahl, a star trader at Drexel Burnham Lambert Inc., the one-time leader of dealings in junk bonds, the high-risk corporate IOUs that offer double-digit interest rates.

Dahl, his voice amplified so Symes and others in the room could hear, said he had located investors willing to sell their ACC bonds at a large discount from the face value, Symes said.

Dahl wanted to know if Keating wanted to buy back the bonds, and Keating said he did, Symes testified.

He said Dahl explained he was telling the potential sellers there was only a 50-50 chance that ACC could meet interest payments on the bonds, because worried banking regulators were trying to cut off a big income source: dividends from ACC’s main subsidiary, Lincoln Savings.

There was one problem, though, Dahl said: the bondholders wouldn’t sell if they knew that the buyer was ACC, Symes testified.

He said Keating put his chief financial officer, Andy Liggett, on the line to assure Dahl that any bondholders who asked would be told ACC had no plan to buy back its securities.

Keating then told Dahl to go ahead with the purchases, Symes testified.

Those bondholders held higher-quality debt and are not the ones named as victims at Keating’s trial, which is focusing on alleged fraudulent sales of junk bonds at Lincoln branches. The judge instructed the jury to use the testimony only to help them evaluate comments made later.

But to some of the Lincoln investors who lost $250 million on ACC junk bonds it was clear evidence that Keating was willing to misrepresent the truth to investors.

″He said not to tell the bondholders who called what he was doing,″ said Mike Lappin of Sherman Oaks, who said he lost $35,000 on Keating’s bonds.

″It’s the first time the jury has seen how he misrepresented things,″ Lappin said outside the court. ″Hopefully, it’s the first nail in his coffin.″

Prosecutors also hope it will help convince the jury that Keating knew regulators thought his companies were in trouble, but continued to allow bond sellers at Lincoln branches to portray them as healthy. The bonds became worthless when the companies collapsed.

Under cross-examination by Keating attorney Stephen C. Neal, Symes acknowledged that when the sales began, the bond sellers were told clearly that the bonds were risky and shouldn’t be sold to investors who couldn’t afford to lose money.

He said he personally was unaware of any times when bond sellers discussed anything with prospective buyers that wasn’t covered in the prospectuses describing the risks of the bonds.

Keating, 67, faces up to 10 years in prison. He blames power-hungry regulators for hounding his businesses into insolvency and causing the losses to bondholders. He says the bond sales were set up by the best lawyers and accountants in the country and he was unaware of any deceptive sales pitches.

Symes, who has pleaded guilty to securities fraud in the case in hopes of a light sentence, also testified Thursday how Keating commanded each detail of junk bond sales at Lincoln, deciding on maturity dates and interest rates and getting daily phone updates on the risky bonds.

″The bond sales were always a very high priority, in fact, the highest priority for the branches,″ testified Symes, the top-ranking officer at Lincoln’s headquarters in Irvine.

Keating sat staring at Symes as he testified Wednesday and Thursday. Symes never looked at his former boss, turning instead toward the jury.