KEATING WINS NEW TRIAL : JUDGE OVERTURNS FEDERAL CONVICTION.

Byline: Janet Gilmore Daily News Staff Writer

A federal judge ordered a new trial Monday for Charles Keating Jr., saying that jurors who convicted the Lincoln Savings & Loan boss of fraud and racketeering were contaminated by learning of an earlier conviction.

Prosecutors told U.S. District Judge Mariana Pfaelzer that it wasn't clear the jurors had learned of Keating's prior state court conviction. If they had, the effect on their deliberations was negligible, prosecutors argued.

But Pfaelzer sided with Keating's lawyer, who said that similar cases had been reversed when the contamination was nowhere near ``as pervasive or as detailed as it was in this case.''

After an hour of arguments, Pfaelzer simply said ``All right, the motion's granted.''

Keating's state convictions in Lincoln's failure were overturned by an appellate court months ago.

Federal prosecutors said they will ``absolutely'' prosecute Keating again.

Free on bond since allegations of juror misconduct were first aired in October, Keating, 73, emerged from the federal courtroom in Los Angeles hugging his small granddaughter.

``Feeling good?'' a friend asked him.

``Absolutely,'' he answered, beaming, and accepting a firm handshake.

Keating became a symbol of the country's S&L debacle after his Phoenix-based American Continental Corp. bought Irvine-based Lincoln and invested its taxpayer-insured deposits in high-risk land, hotel and securities deals.

The collapse of Keating's empire rendered worthless the junk bonds issued by his American Continental Corp., leaving thousands of mostly elderly bondholders out of nearly $282 million.

``Our reaction as bondholders, is one of great frustration and confusion,'' said Thomas Shelley, one of the co-founders of the Lincoln ACC Bondholders Action Committee. ``This is the clearest-cut case of fraud in the annals of history.

``It's very hard to explain this to aged, anxious, tension-riddled senior citizens. They just won't understand. These technicalities are rearing their ugly head again, and questioning our judicial system.''

But outside court, Keating lawyer Stephen C. Neal talked about the brilliance of his client's investments and suggested that investors would have profited if the government did not interfere.

``Both of these trials,'' Neal said of the federal and state case, ``were permeated with fundamental problems . . . he is an innocent man.''

Neal argued in court that ``public venom'' toward his client should not prevent the judge from following the law and agreeing that his client was severely prejudiced when at least two jurors in the federal case discussed the state conviction.

He noted that sworn affidavits and comments from jurors inside the judge's chambers in October show that one juror learned of the state court conviction before jury deliberations and while reading a newspaper headline.

Another juror asked a fellow panelist about the outcome of the state case and was told it ended in conviction. Several jurors knew that both cases involved older investors and that the state and both case involved the same basic allegations.

Sharon McCaslin, an assistant U.S. attorney, contended that one juror's thinking was ``muddled'' and unreliable and that another juror appeared to be mistaken.

In the worst case scenario, she contended, a 20-second conversation occurred.

``They relied upon the evidence in this case,'' McCaslin said. ``There is absolutely no doubt that if it (jury misconduct) happened, it could not have possibly affected the verdict.''

The fate of Keating's son, co-defendant Charles Keating III, was not clear Monday. Pfaelzer told deputy public defender Paul Abrams that he had presented too little evidence for her to feel comfortable in ruling whether the son should have a new trial.

Abrams argued that ``the father and son were essentially linked at the hip'' in the prosecution case, and that the younger Keating must be granted a new trial as well.

The judge said she would study the issue further and rule today.

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Photo

PHOTO (color) Charles Keating Jr. and his attorney, Steve Neal, talk with reporters outside federal court in Los Angeles.

Associated Pres