Keating Retrial Pushed in Spite of Difficulties

A retrial of Charles H. Keating Jr. will pose difficult challenges to federal prosecutors, but they believe they must go to court again to send a message that financial fraud will be punished.

Keating won a retrial Monday on charges that he looted the failed Lincoln Savings & Loan and defrauded investors. A federal judge found that jurors improperly learned about and discussed Keating’s prior state court fraud conviction.

On Tuesday, the judge also granted a new trial to Keating’s son, who was convicted with him nearly four years ago.

Though the U.S. Department of Justice in Washington has hedged about its plans for a retrial, it is almost certain that prosecutors in Los Angeles will push to retry the case.

Justice Department spokesman John K. Russell said Tuesday that Washington and Los Angeles officials will consult before making a decision. The Justice Department has the final say in such cases, but usually draws heavily on the judgment of local U.S. attorneys, he said.

Prosecutors can be reluctant to retry cases unless there is a strong belief they can win, and the complexities of the case against Keating make the outlook uncertain.

In addition, “Keating’s served half the time he normally would; he’s 73 years old and the cost of the prosecution was exorbitant,” said Donald C. Randolph, a Santa Monica lawyer who represents former top Keating aide Judy J. Wischer, who became a key prosecution witness. “I certainly think those factors will be taken into consideration.”

The government also must weigh the cost against current cases on the crowded work list of the Justice Department. And the U.S. attorney has to break in two new prosecutors and a team of investigators on a complex case that the trial judge wants before a jury as soon as possible.

Despite these reservations, however, the government isn’t likely to walk away from one of the most famous cases of recent years.

“The government has an obligation to prosecute Mr. Keating, who clearly is responsible for one of the greatest financial institution failures in American history,” said U.S. Rep. Henry B. Gonzalez (D-Tex.), a central force in the legislation to clean up the S&L; industry.

Said Lawrence Barcella, a former federal prosecutor now practicing law in Washington: “In spite of the massive amount of resources it will take to retry him, they will probably do so.”

Keating, after all, has become the symbol across the country of everything that went wrong in the wheeling-dealing thrift industry of the 1980s. The bad loans, the allegations of fraud, the political clout, the unwary investors were all major parts of the Lincoln saga.

He used his American Continental Corp. in Phoenix to buy Irvine-based Lincoln Savings in 1984 and take advantage of California’s liberal investing laws. He put federally insured deposits in high-risk ventures, such as development of raw land, junk-bond purchases and corporate takeover efforts.

Keating has adamantly denied any criminal wrongdoing, charging that regulators wrongly hampered his operations.

The collapse of Lincoln and American Continental eight years ago stands as a tombstone to the thrift industry’s $500-billion debt, including interest, which taxpayers are covering.

But the state of the nation and the economy in the late 1990s are much different than during Keating’s recession-era trial in late 1992 and even further removed from Lincoln’s 1989 failure.

“You just don’t have any of that publicity in recent memory laying the blame of whatever financial woes the country is suffering at the doors of the S&L; industry,” said Mark E. Beck of Los Angeles, who represented a Keating son-in-law.

However, the justice system is now dealing with another kind of publicity problem.

There is strong public perception that the system has been failing, particularly when a defendant like Keating gets a new trial based on legal issues that have nothing to do with the merits of the case.

Prosecutors seem to be taking a beating on high-publicity cases. Not only have both the state and federal convictions against Keating been thrown out, but the public has absorbed the acquittal of O.J. Simpson in the murders of his wife and her friend. The Menendez brothers got a hung jury in their first trial for killing their parents, though they were convicted in the second.

“This does not inspire confidence in the criminal justice system,” said one court officer.

Generally, prosecutors win retrials, say lawyers on both sides. But many believe that prosecutors will have a more difficult time proving racketeering, conspiracy and fraud charges against Keating for several reasons:

* The prosecution already has played its hand. Keating knows what its witnesses will say and can tailor responses to their allegations to add reasonable doubt.

* The government has lost the hammer it held over the heads of its key witnesses, who testified under plea bargains while they awaited sentencing. They have since served their terms and no longer worry about their fates.

* The government may find it harder to reproduce evidence through witnesses because they may appear over-rehearsed or uninterested. And some witnesses may not be available, forcing prosecutors to read their prior testimony from transcripts.

Keating’s lawyer, Stephen C. Neal, said he expects to call new defense witnesses who wouldn’t testify before out of fear of prosecution. Those witnesses, he said, no longer face that threat and can now corroborate Keating’s position.

“There’s a great distrust of big government now,” Randolph said, “and Keating’s defense in the main was that this whole S&L; debacle was basically brought on by government, which whipsawed entrepreneurs like him by changing the rules. That defense may sell a lot better in 1997 than it did in 1992.”

Other lawyers, however, believe the prosecution has the upper hand.

The most obvious advantage is that they have Keating’s testimony from the first trial and can use it in presenting their case or to impeach him should he take the stand again, said David W. Wiechert, a former federal prosecutor who represented Raymond C. Fidel, a former Lincoln president who pleaded guilty to fraud and testified against Keating.

In addition, judges and juries in five civil proceedings brought by various regulators and by investors have determined that he looted Lincoln Savings and swindled mostly elderly Southern Californians out of more than $285 million. Investors hold a $1-billion judgment against him, but he has pleaded poverty.

While the Keating case has become important because of the alleged pervasive wrongdoing and Keating’s outspokenness and political clout, it has taken on a human face from the thousands of elderly investors.

“I went and sat with depositors who lost their money,” said Washington lawyer Roger Lerner, recalling the events at a Lincoln branch in Alhambra when he worked for banking regulators.

“These were old people, a retired house painter, and a man from India who couldn’t speak English,” he said. “Keating hurt lots of little people.”

Granelli reported from Orange County and Rosenblatt from Washington. Times staff writer Robert L. Jackson in Washington contributed to this story.