Lincoln S&L; Figure Pleads Guilty

A key figure in the failure of Lincoln Savings & Loan pleaded guilty Tuesday to bank fraud and agreed to cooperate with the continuing federal investigation of the thrift’s collapse 18 months ago.

Ernest C. Garcia II, a 33-year-old Tucson developer, admitted that he fraudulently obtained a $30-million line of credit in a series of transactions that also let Lincoln hide from regulators its ownership in Arizona desert land. Regulators then had been pressing Lincoln to rid itself of risky investments such as the desert property.

Garcia is the first person charged with a crime in the federal probe of Lincoln’s collapse.

A federal grand jury in Los Angeles has been investigating Lincoln’s failure for more than a year. Charles H. Keating Jr., a Phoenix developer whose company owned Irvine-based Lincoln, is the central target of the probe.

Garcia entered the plea Tuesday before U.S. District Judge James M. Ideman in Los Angeles after federal prosecutors filed an information--essentially an indictment agreed to without going through a grand jury.

Garcia, free on a $5,000 personal bond, is scheduled to be sentenced April 19. The bank fraud charge carries a maximum of five years in prison, a $250,000 fine and restitution. Both he and his real estate company are in bankruptcy.

In a prepared statement, Garcia said he entered the plea “with tremendous feelings of remorse.”

Federal prosecutors said the plea agreement requires Garcia to cooperate in the continuing Lincoln probe, but they declined to detail what would be required of him. Lincoln’s failure is expected to cost taxpayers $2 billion.

Garcia’s testimony could be potentially damaging to Keating, former American Continental chairman. Keating is awaiting trial in state court on 42 counts of securities fraud relating to the sale of American Continental bonds to state officials.

Neither Keating nor his lawyer could be reached for comment.

Early this month, lawyers for Keating identified the deal with Garcia as one of three activities that they said the federal grand jury was concentrating on.

The bank fraud charge alleges that Garcia was a “straw borrower” used by executives at Lincoln and its parent firm, American Continental Corp. in Phoenix, to hide the true ownership of 1,000 acres of desert land outside Phoenix, according to federal prosecutors.

“This type of white-collar scheme--using ‘straw borrowers’--is of particular concern because it is designed to conceal the true nature of the financial transactions involved,” said U.S. Atty. Gen. Dick Thornburgh in a prepared statement from Washington. “In the process, federal regulators are deceived, the institution is defrauded and the taxpayers are left to foot the bill.”

The convoluted arrangement involving Garcia and a partnership called Westcontinental Mortgage & Investment Corp. was the first of 10 transactions involving property in a planned development called Hidden Valley Ranch.

Garcia is accused of obtaining a $30-million line of credit from Lincoln by “creating the materially false and misleading impression” that the borrowing was not related to the simultaneous purchase of the desert acreage.

The property was bought in 1987 by Westcon, a partnership with few assets created and run by a Garcia friend to accommodate the transaction.

The information charges that, instead of being an arms-length transaction, the sale of the desert land for $14 million actually was an illegal quid pro quo for Garcia’s line of credit. Westcon put $3.5 million down--money regulators claim came from Lincoln through Garcia--and borrowed the remaining amount from a Lincoln subsidiary.

Garcia and his company recently agreed to settle civil lawsuits filed by small investors in American Continental for $1 million. But because both he and his company are in bankruptcy, the claim for that money is expected to be reduced to $97,000 to $145,000, said Ronald Rus of Orange, one of the attorneys for the security holders.