In the largest civil judgment against an individual in U.S. history, a federal jury in Arizona yesterday ordered Charles H. Keating Jr., the former owner of Lincoln Savings & Loan, to pay $2.1 billion in damages to thousands of investors he defrauded.
The jury also ruled that three co-defendants aided Keating in the fraud and assessed them damages of $2.3 billion. Attorneys in the case said that it was unclear how much the defendants would ultimately pay victims but that it could be between $3 billion and $4 billion.
U.S. District Judge Richard Bilby must approve the final damage awards. And it was uncertain how much the 23,000 investors can recover since Keating, serving a 10-year prison term for state securities fraud, claims he is broke and two co-defendants are bankrupt.
Nonetheless, the investors and their attorneys were pleased with the decision. "We're delighted with the verdict," said Leonard Simon, one of the lawyers for the plaintiffs. "This is another major step in the direction of bringing full recovery."
The verdict followed a 3 1/2 -month trial on several class-action lawsuits in which thousands of small investors claimed losses of jTC $288.7 million after buying American Continental Corp.'s junk bonds, many of which were sold in branches of Lincoln Savings, the Irvine, Calif.-based thrift owned by American Continental.
The investors lost their money when American Continental declared bankruptcy and Lincoln was seized by the government in April 1989. Lincoln's collapse, linked largely to bad real estate investments, will cost taxpayers a record $2.6 billion.
Numerous lawsuits were filed against Keating and his associates in the wake of the failures. The lawsuits originally named more than 90 people and companies as defendants, including several major law and accounting firms. Most of the defendants agreed to settle out of court for a total that plaintiffs' lawyers estimated could reach $250 million.
Continental Southern Inc., Conley Wolfswinkel and Saudi European Investment Corp. remained as co-defendants. Mr. Wolfswinkel, an Arizona developer, and Continental Southern, an Atlanta real estate firm, were accused of engaging in sham transactions with Keating to inflate the value of his companies. -- Saudi European, a Paris-based bank owned by wealthy Arabs, was accused of taking part in a circular transaction that brought the company $5 million in fees and let Keating book a $38 million profit the plaintiffs contend did not exist.
The 11-member jury found that all three defendants conspired with or aided Keating. It found that Keating conspired to mislead investors.
Saudi European, the only defendant to mount a defense, said that it would appeal the verdict and ask for a new trial. The company's attorney argued that it, too, was a victim of Keating and that it could never afford to pay so large a judgment.
Testimony during the trial showed that customers received phony sales pitches, often being told that the risky junk bonds were government-backed; some thought they were buying or renewing federally insured certificates of deposit.
Near the end of the trial, Judge Bilby said that he had found a pattern of "racketeering activity," which included mail, wire and securities fraud. He also found that the actions, including sham deals to record fake profits and inflate the apparent strength of American Continental and Lincoln, violated common law.
The decision by the jury in Tucson "sent a pretty good message," the judge said in a phone interview after the verdict. "The message to banks, savings and loans, congressmen and politicians and everybody else is that the system failed."