Desert Dream Turned Nightmare -- Community A Front For Fraud? -- Prosecutors Say Keating Conducted Phony Transactions

PHOENIX - The Estrella planned community was typical of Charles Keating Jr.'s desert developments: a 20,000-acre oasis dotted with sparkling lakes, luxury resorts and fancy homes.

At first, plans for the development west of Phoenix even embodied Keating's Roman Catholic beliefs, in deed restrictions forbidding residents from having abortions or perusing pornography.

Now, government prosecutors say the development was the vehicle for phony land transactions that hid from regulators and investors the fact that Keating's companies were headed for bankruptcy.

The allegations are contained in a federal indictment unsealed Dec. 12 in Los Angeles accusing Keating and four associates of racketeering, bank and securities fraud, conspiracy and other crimes in the demise of his Irvine-Calif.-based Lincoln Savings & Loan and its parent, American Continental Corp., based in Phoenix.

Keating and his co-defendants have pleaded not guilty.

The 77-count indictment alleged schemes to defraud bondholders, divert money and carry out a complicated series of deals to fool regulators about the health of the companies that collapsed in 1989 at a cost to taxpayers of $2.6 billion.

The indictment and a civil lawsuit filed in federal court in Tucson, Ariz., by bondholders describe a pattern of sham land sales by Lincoln subsidiaries. The thrift, they allege, loaned developers money, which was given to the subsidiaries as down payments.

The circular transactions created a paper profit for Lincoln and American Continental while the companies were trying to persuade regulators they had enough capital to stay afloat, the charges say.

Six sham deals falsely inflated Lincoln's bottom line by $82 million, the indictment says.

Three transactions involved land in Hidden Valley, part of the Estrella development now controlled by the Resolution Trust Corp., the government agency charged with cleaning up the S&L mess.

When launched in 1987, the project envisioned housing for 200,000 people. Now, just 120 families live in the mostly vacant tract in the desert below the Estrella Mountains 20 miles west of Phoenix.

Keating's lawyer, Stephen Neal, describes the sales as normal business practice in the superheated real estate market of the 1980s.

"All these transactions were legitimate business decisions, with sound economics underlying them," Neal said.

One deal involved the sale by Lincoln subsidiary Amcor Investments of 1,000 acres at Estrella to Westcontinental Mortgage, a Tucson mortgage lender that a government accountant characterized in court testimony as a "straw buyer."

The 1987 transaction also involved Ernie Garcia, a Keating business associate who pleaded guilty last year to bank fraud and who is expected to testify against Keating.

According to court documents, here's how the deal worked:

Westcontinental Mortgage agreed to buy the land from Amcor for $14 million - including a cash down payment of $3.5 million and a promissory note for $10.5 million. The loan was secured by the land.

Westcontinental got the down payment from Garcia, who that same year received loans totaling $28.5 million from Lincoln.

Neither Garcia nor Westcontinental made loan payments, officials have said. On paper, Lincoln made a $9.7 million profit on the sale it financed itself. The transaction also added $3.7 million to American Continental's books, according to the documents.

Garcia's attorney, Larry DeBus, did not return a phone call requesting comment. Westcontinental isn't listed in telephone directories.

When launched, Estrella was pure Keating.

He battled local governments over plans for the lakes that were a Keating project trademark. He envisioned 18,000 acres for homes, shopping areas and resorts and 5.6 million square feet of office space.

He wanted deed restrictions barring residents from having abortions. He also wanted the right to strip businesses and homes of art and publications he and his board saw as smut.

Keating later dropped the restrictions after acknowledging they wouldn't survive a court test.

Estrella lay dormant through the worst years of the thrift and real estate crash in the Southwest.

But some building has resumed, and real estate advertisements for individual lots are appearing again.

The RTC is trying to sell the whole project and has reportedly received bids of $25 million and $40 million.