S&L PROSECUTIONS PUT IN DOUBT : KEATING'S APPEALS COULD COST GOVERNMENT ITS SYMBOL OF BLAME.

Byline: James Sterngold The New York Times

Just a few years ago, Charles Keating was the poster boy of the savings and loan crisis, a shady operator accused by the government of having committed about every crime associated with the debacle. He was often described as the symbol of a crisis regulators attributed largely to individual criminals rather than fundamental problems in the industry.

But in a striking turn of events, Keating had his state criminal conviction overturned earlier this year because the judge, Lance Ito, famous for his handling of the O.J. Simpson murder trial, gave the jury improper instructions, and then earlier this month, Keating was released from prison on bail because his federal conviction may be overturned on the ground that several of the jurors knew of and discussed the state conviction.

Suddenly, government officials and other experts are having to confront the question of what it means if the supposed archvillain of the savings and loan crisis is not found guilty.

Keating has not commented since being released Oct. 3 on $300,000 bail, but his lawyer, Stephen C. Neal, has said the prospect of having his final criminal conviction overturned amounted to a de facto vindication of Keating's contentions that he was innocent and that he was railroaded by overzealous regulators.

Indeed, Keating had insisted for years that regulators caused the crisis.

``You've got a bunch of know-nothings trying to tell business people how to invest money,'' Keating once said.

``That's baloney,'' said M. Danny Wall, the former director of the Office of Thrift Supervision and now a consultant in Salt Lake City. ``This reflects ineptness on the part of the courts, that's all. It's disappointing that someone who did things as egregious as this can get off.''

L. William Seidman, the former chairman of the Resolution Trust Corp., said, ``You have to make the point that he's been in jail for four or five years. He didn't get off scot-free.''

It is also true that these developments do not affect the results of a civil suit against Keating, in which he and his former companies were found to have defrauded investors and were hit with a $1.6 billion judgment.

``He may get the criminal convictions overturned, but it doesn't mean he is not culpable,'' said Ronald Rus, a lawyer in that civil suit.

Investors, mostly elderly retirees, who lost money on bonds Keating's company sold, also were upset.

``People have sort of mellowed a little bit, but when they picked up the paper and saw the headlines that Keating was out, it made them angry all over again,'' said Leah Kane, who bought $15,000 of bonds less than three months before Keating's Lincoln Savings & Loan was seized. ``What does this tell you about our justice system?''

But some experts say what Keating's story shows is that regulators made the mistake of placing too much emphasis on the role of individuals in the crisis, rather than looking at more fundamental issues like changes in interest rates and changes in regulations.

By insisting that individual crooks caused a substantial part of the crisis, the government allowed its credibility to be questioned if someone like Keating was released.

``The focus on the individuals diverted attention from things like the Congress, the president and the regulators, which were important to the problem,'' said James R. Barth, a finance professor at Auburn University and a former savings and loan regulator.

``Clearly, some individuals did engage in wrongdoing, but that wasn't the biggest part of the problem. It's not even clear the government got back from these people more than it spent going after them.''

Robert E. Litan, a Brookings Institution scholar who helped lead a congressional study of the crisis, commented: ``This came to be about scapegoats, and when a scapegoat is freed, you have these questions. I'm not saying there wasn't fraud, but it probably caused well under 10 percent of the costs.''

Lincoln Savings & Loan, of Irvine, was seized by the government in 1989, and it eventually cost taxpayers more than $3 billion to clean up. Keating controlled Lincoln through a holding company, American Continental Corp., based in Phoenix.

He was a symbol of the era's problems in part because he moved more aggressively than most away from the old staple of the industry, making mortgage loans, and into riskier investments, including junk bonds and real estate development.

Keating also contributed heavily to politicians when regulators began to rein in his investment style. This resulted in reprimands for a quintet of U.S. senators, known as the Keating Five, who accepted his money and lobbied on his behalf.

Keating achieved even more notoriety because he had sold millions of dollars of bonds, which later defaulted, to his own depositors. One sales document introduced in the civil trial exhorted salesmen with these words: ``And always remember the weak, meek and ignorant are always good targets.''

Various accountants and regulators later charged that Keating's empire was built on sham transactions and fraud.

Judge Stanley Sporkin, who ruled in one civil suit, wrote: ``Bluntly speaking, their actions amounted to a looting of Lincoln. This was not done crudely. Indeed, it was done with a great deal of sophistication.''

Lawyers obtained huge settlements from Lincoln Savings' law firms and accountants for failing to detect or stop the fraud; Ernst & Young and Arthur Andersen were among the accountants and Jones, Day, Reavis & Pogue and Kaye, Scholer, Fierman, Hays & Handler were among the lawyers. Those millions of dollars were used to repay the bond purchasers, like Kane, who have received about 74 cents for each dollar of principal they invested.

Of course, some well-known people were put behind bars for their roles in the crisis, including Donald R. Dixon of Vernon Savings & Loan in Dallas and David L. Paul of the Centrust Bank in Miami.

But Keating's years of fighting may pay off; the next hearing in his appeal is scheduled for late next month. And he has the satisfaction of knowing that some of his most heavily criticized gambles have, years later, worked out.

The extravagant, 600-room Phoenician resort he built near Phoenix for $280 million was eventually sold by the government for significantly less than that, and some wondered if it would ever make money. Today it is owned by ITT Corp.'s Sheraton Hotels chain, and it is running at about 85 percent occupancy with rooms costing on average more than $400 a night.

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Photo: Charles Keating

Legal gambles paying off