WRONGED BONDHOLDERS FRUSTRATED BY REVERSAL IN KEATING FRAUD CASE.

Byline: E. Scott Reckard Associated Press 

Sam Epstein heard the spiels in a branch of Charles Keating's Lincoln Savings. He saw his family lose $65,000 on bonds from Keating's American Continental Corp. He watched Keating's trial from a seat in Judge Lance Ito's courtroom.

Epstein felt a chill Wednesday when Keating's 1991 state court conviction for securities fraud was reversed. Ito's flawed jury instructions on aiding and abetting a fraud had resulted in Keating being improperly convicted, U.S. District Judge John G. Davies ruled.

Epstein remembers the slick brochures filled with Keating's vision of shimmering planned cities in the Arizona desert, the Phoenician luxury hotel. Bond sellers handed them out while failing to mention details of how American Continental's fortunes were spiraling downward.

Epstein, 84, contends that what Keating did was like giving a gun to a child with orders to shoot someone. The someones in the Keating case turned out to include Epstein, a daughter he persuaded to buy the bonds and, by some estimates, 23,000 other victims for a combined loss of $288 million.

``It's hard for me to understand why he isn't the perpetrator,'' Epstein said Thursday.

Keating, 72, still imprisoned while also appealing a separate federal racketeering and fraud conviction, was ``delighted'' by Davies' ruling, his lawyer, Stephen Neal, said Wednesday.

Davies said that under a state Supreme Court ruling, direct perpetrators of securities fraud must either be aware of their misrepresentations and omissions or must have been criminally negligent in failing to acquire such knowledge.

Prosecutors William Hodgman and Paul Turley had based their case on Keating using the bond sellers as his unwitting dupes.

Davies said Keating couldn't be convicted as a direct perpetrator, since he hadn't conducted any bond sales himself. And since the actual sellers hadn't been shown to have committed a crime, Keating couldn't be convicted as an aider and abettor, despite a specially tailored Ito jury instruction.

``A prohibition against aiding and abetting crimes has been a part of California law for the past 63 years, but it has never been a crime to aid and abet an innocent act,'' Davies wrote.

Turley disputed that interpretation, saying California law can be applied to Keating's case. If not, anyone smart enough to con someone else into unknowingly doing the dirty work could avoid prosecution for securities fraud, he said.

Sanjay T. Kumar, the deputy state attorney general handling the appeal, said he was confident that higher federal courts would reverse Davies, who got the case after state appeals courts upheld Keating's conviction.

``If you get a 5-year-old to rob a bank for you, the 5-year-old is too young to have any criminal intent, but you're still liable for the crime,'' he said.

Tom Shelley, a bondholder who lost $17,000, said he was puzzled by what the faulty jury instructions could have been but called the development ``a moot point. Based on all his federal crimes, he won't be seeing freedom anytime soon.''

Shelley noted that he and other plaintiffs in a class-action suit against Keating's professional advisers are just now getting the last of the settlements, seven years after American Continental went bankrupt and Lincoln was taken over by the government.

Their total recovery was 61 cents on the dollar.

``As far as I'm concerned it's sure a travesty of justice,'' Epstein said.