Irvine-Based S&L; : Cranston Calls for Inquiry Into Sales of Notes at Lincoln

U.S. Sen. Alan Cranston called Friday for a government inquiry to determine if federal deposit insurance funds should be used to pay back about 22,000 people who bought $200 million in high-risk debt securities issued by the parent company of Lincoln Savings & Loan in Irvine.

The California Democrat said he has asked the General Accounting Office to investigate the sales of subordinated debentures--a form of corporate IOU--issued through Lincoln branches by its parent company, American Continental Corp. in Phoenix.

American Continental filed for bankruptcy protection on April 13, and regulators seized the S&L; the next day. The firm has stopped making interest payments on the debentures, and it is uncertain if the holders will recover any of the funds they invested in the notes.

“If Congress were to study legislation to indemnify the bondholders, the first step in that process would be to have the GAO make a study,� Cranston said in an interview Friday.

The senator stopped short of saying that such legislation would be proposed or that state or federal regulators were partly at fault for action or inaction that led to the apparent losses.

The bondholders, mostly Southern Californians, make up an unusual group. Bondholder representatives have said that most were unsophisticated investors without the ability to evaluate the risks of the subordinated debentures. Many were elderly S&L; customers who had been living off the income from insured certificates of deposits before they were persuaded to buy the uninsured debt securities.

A number of bondholders have said that Lincoln tellers pitched the merits of the bonds to them and led them to American Continental desks located in the lobbies of Lincoln branches in Southern California. They said they were assured by tellers or American Continental representatives that the debentures were safe, the company was “solid as a rock,� and they had little to fear.

In a letter to the GAO, Cranston asked the investigative arm of Congress to determine the answers to 11 questions, including what role state or federal regulators played in approving and monitoring the debenture sales, what actions they took to make sure purchasers were protected, what improprieties Lincoln and American Continental sales representatives may have committed, and what investors were told about the debt securities.

“The bondholders allege that they were misled by marketing techniques or verbal comments into believing that the bonds were insured by the Federal Savings and Loan Insurance (Corp.) fund,� Cranston said in the letter.

He also asked the agency to analyze “whether federal regulators were responsible, by any action or failure to take action, for events which led to the losses . . . and whether it would be appropriate to have the federal government indemnify them through the FSLIC.�

Cranston is one of five U.S. senators who have been criticized for helping American Continental Chairman Charles H. Keating Jr. in his battles with federal regulators.

A group of about 60 people, including Keating, members of his family and American Continental executives, have contributed about $300,000 to the campaigns of the five senators. Of that amount, about $39,000 went to Cranston.

The senators questioned regulators two years ago about an unusually long examination of Lincoln by regulators. Earlier this year, Cranston asked two bank board members to consider more seriously a proposed sale of Lincoln that later fell through.

The senators claimed they were only helping a constituent, noting that the failure of American Continental could damage the Arizona economy and devastate bondholders.

Cranston’s request for a GAO investigation drew a mixed reaction from state and federal regulators and a lawyer representing a number of bondholders.

“This is ridiculous,� said an angry William J. Crawford, commissioner of the California Department of Savings and Loan. “How can you prefer the creditors of Lincoln or American Continental over the creditors of any of the other S&Ls; in the state?�

Bank board spokesman Karl T. Hoyle, though, said he commended Cranston for “trying to get to the bottom of the issue to find out if these people were misled.�

He also said he does not believe that Cranston has acted inappropriately in dealings with the bank board over Lincoln.

But, Hoyle said, the bondholder issue has little to do with the bank board or its FSLIC unit. The regulators’ only functions, he said, are “to protect the deposit insurance fund and to make good on the accounts of depositors� at insured S&Ls.;

Attorney Ronald Rus of Orange, one of several lawyers representing bondholders in class-action lawsuits, said it was “terrific� that Cranston wants to look at the debenture sales.

But from information available so far, Rus said, “it’s apparent that somebody knew,� at least at the state level, that American Continental and Lincoln were in financial trouble and would find it difficult to repay the notes.

Lawsuits filed by Rus and other lawyers claim that the state Department of Corporations, which approved the debenture sales, and a number of accounting firms and law firms joined with Keating in perpetrating a fraud on S&L; depositors who knew little about stocks and bonds.

“Anybody sophisticated enough in these matters knows that these were obviously junk bonds marketed at artificially deflated rates,� Rus said. “What was so diabolical was that these bond sales were clearly targeted so they would not signal any risk to the investor.�

The debentures generally carried rates of 9.5% to 10.5%, well below the 15% to 16% rates on risky junk bonds. The lower rate was comparable to yields on more secure corporate bonds.

Cranston’s request for the GAO investigation came as a result of a conversation that his administrative assistant, Roy F. Greenaway, had with Donald Mikami, a Fountain Valley dentist who has become a source of information for bondholders.

Greenaway said the senator’s San Francisco office had been looking into about 30 individual requests from bondholders for help. But it wasn’t until Mikami began to seek broader assistance that Greenaway and Cranston realized that something more was needed.