Senator Dennis DeConcini has contradicted his own sworn testimony in the Keating Five scandal.
On Monday, DeConcini admitted he was aware as early as 1984 that his chief fund raiser, Earl Katz, was in business deals with the recently convicted financier Charles H. Keating Jr., who controlled the failed Lincoln Savings and Loan.
Until now, DeConcini has maintained that when he pressured federal regulators to go easy on Keating in the mid-1980s, he did so simply because Keating was an Arizona businessman in need of relief from overzealous bureaucrats.
DeConcini has insisted he was unaware that his two top aides, Katz and longtime campaign manager, Ron Ober, were both involved in multimillion dollar deals with Keating.
Under cross-examination on January 9, 1991, by the Senate Ethics Committee special counsel, Robert Bennett, DeConcini repeatedly denied any early knowledge of Katz's ties to the swindler.
"I first became aware of Mr. Katz having business--that I can recollect--having business connections in 1988 when I was driving around Las Vegas going to a fund raiser, and that he had some property there that Mr. Keating had financed," testified DeConcini under oath.
This week that story changed.
Responding to questions through his press secretary, Bob Maynes, DeConcini now acknowledges being aware of the Katz-Keating business connection four years earlier.
"Dennis does not know what kind of business relationship they [Katz and Keating] had," said Maynes. "He did know that they had a business relationship when that letter was written."
"That letter" refers to a controversial note from DeConcini to Keating in which the senator expresses gratitude in his own handwriting to the financier "for helping Earl Katz."
The correspondence is dated December 18, 1984.
Ober's financial relationship with Keating was much more complicated than Katz's and, in the end, proved much more damaging. It was the details behind Ober's $110 million in loans that helped convict Keating on massive fraud charges.
Hal Cole was ready to talk.
The last five years had not been easy on his homebuilding business. Once on the verge of going public and reaping millions of dollars, his company, R.A. Homes, was badly wounded.
Cole was being sued in a class-action lawsuit. He was being interviewed by FBI agents and the Arizona Attorney General's Office. Federal thrift regulators were grilling him for information about the failure of Lincoln Savings and Loan and his dealings with Keating. There was even a risk of criminal charges.
As Cole entered the majestic Arizona Biltmore hotel and headed for the Prescott Room on the morning of March 26, 1991, six high-paid lawyers were waiting for him to tell his story. He was ready to cooperate.
"There is a point and time when everybody has to give an honest statement," Cole would later tell the lawyers.
For Cole, that time had arrived.
A month before, the U.S. Senate Ethics Committee had concluded its historic, four-month hearing on the Keating Five. Senators John Glenn, Donald Riegle, Alan Cranston, John McCain and Dennis DeConcini had dodged the bullet. While they were rebuked by the committee for their dealings with Keating, they avoided the humiliation of facing a full Senate hearing on their ethical lapse.
DeConcini's defense during the hearings was bolstered by the lack of discussion about the senator's ties to R.A. Homes. Barely a word was mentioned during the proceedings about the homebuilding company. This was surprising, since one of Cole's partners, Ron Ober, was intimately linked not only to Keating but also to DeConcini.
If the Senate Ethics Committee had taken the time to fully explore the extensive financial ties between Ober and Keating, the outcome for DeConcini may have been far different. The committee merely accepted DeConcini's explanation that he didn't know that Ober, one of his closest and most respected aides, had done more than $110 million worth of business with Keating during the period DeConcini was waging war with thrift regulators on Keating's behalf.
While the details of Ober's dealings with Keating were not pursued during the public portion of the Keating Five hearings, the depth of the relationship slowly emerged from the tens of thousands of document pages entered in federal, state and civil suits that were later filed. This record, together with direct testimony and interviews, allows the first glimpse inside the DeConcini, Ober and Keating triangle.
It is an alarming picture.
Ober's deals with Keating included his participation in "sham" transactions, "land parking," and other sales concocted by Keating to hoodwink federal regulators; in other words, the sleazy practices that precisely characterized the collapse of the savings and loan industry.
When Dennis DeConcini went to bat for Charles Keating, the highflying financier was more than just a constituent who had oiled the senator's election machine with cash contributions. Because Keating's house-of-cards financial conglomerate hung in the balance, so, too, did the real estate empire of DeConcini's key aide Ron Ober.
DeConcini's "I didn't know" explanation regarding Ober's loans strikes a false note to Edwin Gray, the former federal regulator who was pressured by the five senators to go easy on Keating.
"You'd have to believe in the tooth fairy to believe in something like that," Gray says. "It's not plausible that he didn't know anything about this."
Now that DeConcini has capitulated on his long-held assertion that he didn't know that Katz had a business relationship with Keating until at the earliest 1987, the senator's claim that he was in the dark about Ober's extensive dealings rings particularly hollow. The question remains: How much did the senator know and when did he know it?
And no matter what answer you accept, how does DeConcini explain Ron Ober's continued influence in the senator's reelection campaign?
Ober earned his high status in DeConcini's camp by successfully managing all of DeConcini's election campaigns dating back to 1972 when DeConcini won the Pima County attorney's race. Ober directed DeConcini's three senate victories in 1976, 1982 and 1988. He's playing a central role in DeConcini's upcoming 1994 campaign.
There's another side to Ober: the businessman persona described by Cole during his eight-hour deposition that for the first time described the details of R.A. Homes' relationship with Keating.
As a businessman, Ober appeared eager to find the easy profit, the quick real estate kill. When Charles Keating came along in 1984 with his millions of dollars of instant money pulled out of the vaults of Lincoln Savings, it was apparently too much for Ober to pass up.
Ober liked doing business with Keating so much that he kept cutting deals with Keating even after the high-rolling financier broke crucial promises.
The loans came fast, furious and under unusual circumstances. One $25 million loan in 1986 was part of Keating's scam to move some property off Lincoln Savings' books to deceive federal regulators. Another $30 million investment in 1987 had all the markings of a Keating scheme designed to keep R.A. Homes from revealing details to federal regulators that would have been damaging to Lincoln Savings.
Wearing two hats, one as a businessman and the other as a top campaign aide to a U.S. senator, can get sticky, but that apparently didn't bother Ober. By July 1986, Ober and Katz were working both sides of the table with Keating through R.A. Homes and related partnerships.
The brazenness of their fund-raising/business relationship with Keating was typified by a July 24, 1986, letter Katz sent to Keating, a copy of which was made to Ober. The first paragraph of the letter discusses several business deals Katz and Ober had with Lincoln Savings. Then, in the next paragraph, Katz shifts gears and gives Keating an update on campaign contributions by Lincoln executives to DeConcini. Keating had promised to raise $100,000 for DeConcini's upcoming 1988 election.
Katz routinely sent copies of letters documenting his fund-raising efforts to DeConcini. But Katz, in a deposition during the Keating Five hearings, says he can't remember whether he ever sent DeConcini this particular letter outlining his and Ober's business relationship with Keating.
At the same time Ober was borrowing millions from Keating's Lincoln Savings, Keating was giving Katz more than $67,000 for DeConcini's campaign fund--money that Ober would later spend as campaign chairman. Katz also was talking to DeConcini once or twice a week, often relaying Keating's considerable concerns about how federal thrift regulators were wrecking Lincoln Savings.
Those concerns did not fall on deaf ears. DeConcini became Keating's chief war-horse on Capitol Hill. Even after other politicians backed away from Keating, DeConcini was still acting on behalf of the financier.
Incredible as it may seem, DeConcini still maintains through his longtime spokesman Bob Maynes that he didn't know that Ober, his campaign manager and close friend, was wheeling and dealing with Keating at the same time DeConcini was laying his reputation on the line on behalf of the savings and loan renegade.
Four years later, after the grimy details of Keating's operation slowly have been unraveled by an army of investigators, attorneys and court proceedings, Maynes says DeConcini still hasn't checked to see what role Ober had with Keating.
The senator should have. Ober's deals with Charlie became part of the evidence that put Keating behind bars. And Keating's deals with the senator are part of DeConcini's legacy.
Hal Cole's golfing vacation on Maui abruptly ended when the telephone rang at 6 a.m. on a balmy Saturday in mid-September 1986.
On the other end was Ron Ober, his business partner in R.A. Homes.
Ober had urgent news.
Cole must return immediately to Phoenix and be prepared to cut by far the biggest business deal in their homebuilding company's history. Arizona's most influential financier had called and time was short.
"Ron indicated that it was going to be necessary to immediately come back from Hawaii to meet with Charles Keating," Cole said in a sworn 1991 deposition.
On Tuesday, September 23, 1986, Cole and Ober met with Keating at his American Continental Corporation headquarters on East Camelback Road in Phoenix. In 25 minutes, a deal was cut with Keating that would forever link Cole, Ober and R.A. Homes to the collapse of Lincoln Savings and Loan--which, at $2.6 billion, is the most expensive thrift failure in U.S. history.
In a complicated series of transactions, some of which were not documented in the purchase agreement signed by Ober a week later, the two men agreed, in Cole's words, to "accommodate" Keating by purchasing 1,400 acres in Lincoln Savings' Continental Ranch development north of Tucson for $25 million.
The government would later allege the sale was not a true sale. It was, in the view of prosecutors, a "sham."
The deal was typical of scores of other real estate transactions Keating was conducting in 1986 and 1987 in which Keating would make the deals appear to be sales on paper, but, in fact, they were accounting tricks designed to improperly book profits. To make the deal work, it was essential to find "buyers" of real estate who would consent to a set of side agreements that would not later appear in the written contracts.
Among the unwritten side agreements Ober and Cole cut with Keating was that Keating would continue controlling the property and, in fact, sell it within a year. R.A. Homes knew it was incapable of developing the property and never even assigned an employee to monitor the largest land purchase in its history.
R.A. Homes' job was only to hold legal title to the property. Cole said in a 1991 deposition that he understood that such an arrangement meant that Keating was trying to move the land off Lincoln's books. The tactic is known as "land parking" and, in this case, was used by Keating to book a false $8 million profit in an effort to deceive regulators and investors.
While there is no evidence proving that Ober and Cole knew Keating was planning to book an illegal profit on the deal, Keating provided a strong inducement for R.A. Homes to enter the transaction. Keating promised to pay the company $2.5 million from profits Keating expected to generate by selling the land he had supposedly just sold to R.A. Homes.
Michael Manning, the lead government attorney in the Resolution Trust Corporation's suit against Lincoln Savings, said the R.A. Homes deal was another example of "borrowers that we alleged Keating used to accommodate his looting of Lincoln."
Mike Hawkins, a former U.S. district attorney who represented R.A. Homes, said Ober and Cole believed Keating had the "Midas touch" and that the deal appeared to be a low-risk one with a nice profit. Hawkins said Ober and Cole had no idea of how Keating would record the deal on Lincoln's books or why Keating was willing to offer the lucrative deal to R.A. Homes in the first place.
"The transaction had every appearance of appearing to be a legitimate transaction from R.A. Homes' end of things," Hawkins says.
While Cole and Ober might claim the deal was on the up and up, the Continental Ranch transaction later became key evidence in Keating's federal criminal trial held last year in Los Angeles and in the American Continental bondholders' class-action civil suit. The deal contributed to the conviction of Keating, who was ultimately found guilty on 73 federal counts of fraud, racketeering and conspiracy. Keating was sentenced to 12.5 years in prison on July 8. He's already serving a ten-year prison sentence stemming from a state conviction.
Keating's top lieutenant, American Continental president Judy Wischer, would also plead guilty to one count of bank fraud stemming from the land sale to R.A. Homes. Wischer faces sentencing later this year. Lincoln Savings president Bruce Dickson also pleaded guilty to creating fraudulent documentation related to a $5 million operating loan Lincoln provided R.A. Homes as part of the Continental Ranch deal.
In a separate case, bondholders charged the R.A. Homes deal helped Keating create false profits at American Continental, allowing him to illegally dupe investors into purchasing $266 million in American Continental bonds that became worthless when the company filed for bankruptcy in April 1989. Ober, Cole and R.A. Homes were named defendants in the class-action civil case, which they settled out of court, neither denying nor admitting wrongdoing, but agreeing to pay $200,000.
Lawyers representing bondholders tried to name Earl Katz as a defendant in the case, but U.S. District Court Judge Richard M. Bilby refused to include the Phoenix businessman.
Ober says he was confident that R.A. Homes would have won its case, but that "it was a business decision" to settle because legal costs of defending would have been much higher.
However, when the opportunity came for Ober to testify in the bondholders' civil suit, Ober refused to cooperate by taking the Fifth Amendment protection against self-incrimination 120 times during a 38-minute deposition on April 1, 1991.
While the dust is still settling from the aftermath of the Continental Ranch deal with Charles Keating, Ober has managed to emerge more powerful than ever. His new political consulting business is growing and his influence with the DeConcini camp, especially on campaign issues, remains high, despite his financial ties to Keating.
"There's no question he's one of the people we turn to for advice; there's no question about that," DeConcini spokesman Bob Maynes says of Ober.
This role is crucial to Ober's financial success in his new political consulting business. He sells his ties to elected officials and government agencies to those who need access. Thus Ober, whose role as DeConcini's campaign manager included a $110 million relationship with Keating, is once again using his connections to political figures to help fuel his private business.
Ober has extended his political network to other top Arizona Democrats, including U.S. representatives Sam Coppersmith and Karan English. He's also a political player locally, having assisted Maricopa County supervisors Mary Rose Wilcox and Ed King during their campaigns.
Today, at age 40, Ober is the most-seasoned political warrior the Arizona Democratic party can lay its hands on. He is an integral cog in DeConcini's effort to win a fourth term to the U.S. Senate.
"You can't mention the name of an extremely bright politician in the Western United States without Ron Ober's name coming up," says Barry Dill, DeConcini's Arizona staff director. "He has an innate capacity for political thinking."
Ober isn't the only person with ties to R.A. Homes that DeConcini still relies on for advice. Earl Katz continues to play a central role in the DeConcini camp. R.A. Homes paid Katz a $400,000 consulting fee, and Katz occasionally did real estate deals with Ober using Lincoln Savings loans. Katz is well-known in Democratic fund-raising circles across the country. He's raised money for more than 50 Democratic congress members and has been supporting DeConcini since the mid-1970s.
Ober had not publicly addressed the circumstances surrounding R.A. Homes' $110 million relationship with Keating until an interview with New Times this week. Katz could not be reached for comment. The loans resulted in huge losses that taxpayers ultimately covered. By 1989, R.A. Homes had defaulted on $94 million of the loans.
Last winter, the Resolution Trust Corporation reached a settlement on the outstanding loans with Ober, Katz and other R.A. Homes partners and investors. The agreement calls for Ober, Katz and others to pay more than $5 million to the RTC.
If DeConcini somehow didn't know about Ober's ties to Keating, he was well aware of Keating's heavy campaign contributions. More than $67,000 rolled into DeConcini's coffers from American Continental employees between 1985 and 1989, much of it collected by Katz.
DeConcini fought hard on Keating's behalf. He wrote letters, he went to meetings, he pressured regulators, he sought appointments, all for Charles Keating. At the same time, Ober was routinely tapping Keating's Lincoln Savings, never letting the senator know how these deals were turning out.
In the end, it was DeConcini who took the biggest hit for playing ball with Keating. DeConcini is forever branded as one of the Keating Five senators. His name is forever tied to the scandalous Michael Milken decade of the 1980s--where greed was revered and politicians like himself were bought for mere crumbs by gamblers disguised as honest business people.
While DeConcini took the direct shot, Ober remained in the background. Even after it has become clear that Keating didn't act in a vacuum, that a bevy of accountants, appraisers, law firms and borrowers played accommodating roles in Keating's financial shenanigans, DeConcini has never asked Ober about his business dealings with Keating.
"I don't think Dennis would have seen any reason to do an exhaustive review. There have never been any indications of wrongdoing," Maynes said. "It is unfair to assume that people who did business with Keating should somehow be required to prove they are not guilty."
This explanation skirts the many questions still surrounding the triangular relationship among Ron Ober's homebuilding company, Charles Keating and DeConcini's supposedly unrelated actions on behalf of Keating.
DeConcini aides dismiss such talk. They offer the standard political line that DeConcini should be reelected next year because his seniority in the U.S. Senate means clout for Arizona and that the Keating affair is history. They claim Ober's ties to Keating are not an issue with DeConcini because Ober was never charged criminally in the Keating cases.
The DeConcini camp is taking the view that Ober--rather than knowingly entering sleazy deals with Keating--was actually one of the many victims of Keating's ruthless schemes.
"There are hundreds of small businessmen who lost money as a result of having financial dealings with Charles Keating and they are all victims," Maynes says.
Mike Hawkins says there was no way the government or bondholders could prove that Ober or other R.A. Homes executives knew how Keating was handling his end of the transaction.
"I think the reason they couldn't prove that was that R.A. Homes didn't know what Keating's plans were and why they were doing the transaction," Hawkins says.
But Michael Manning, the RTC's top lawyer in the government's $1.5 billion civil suit against Lincoln Savings, says Ober was lucky to get out of the legal thicket. He credits Hawkins, who was nominated for U.S. attorney by DeConcini, for circling the wagons around Ober early in the legal proceedings.
"His attorney was very astute in getting him out early, because I think his attorney probably recognized the degree, the level of his exposure," says Manning.
Ober's Continental Ranch deal with Keating in September 1986 was the biggest transaction, but hardly the first. They'd been doing business deals since at least 1985.
At the same time, DeConcini had been actively supporting Keating in his battle against federal regulators who were trying to place restrictions on how savings and loans invested federally insured deposits. Keating was upset because when he purchased Lincoln Savings on February 22, 1984, for $51 million, it was a California-chartered thrift that had no restrictions on how federally insured deposits were invested. But suddenly, regulators were trying to tell him how to run his business.
Edwin Gray, then-chairman of the Federal Home Loan Bank Board, which oversaw the nation's thrifts, believed thrifts like Keating's Lincoln Savings were threatening to bankrupt the nation's insurance fund by heavily investing insured deposits in wildly speculative deals in undeveloped real estate, junk bonds and stocks.
Prior to Keating's purchase of Lincoln Savings, the thrift was a traditional home-mortgage lender. Within a year, Lincoln only issued a handful of home loans, most of which went to Keating family members and other corporate insiders. Instead of home mortgages, Keating began investing the thrift's deposits into speculative real estate deals and Wall Street.
But in May 1984, Gray proposed rules that would greatly curtail Lincoln's operation by limiting the amount of direct investments a thrift could make to 10 percent of the thrift's total assets. If this rule went into effect, Lincoln Savings would have to unload millions of dollars' worth of real estate, stocks, bonds and other speculative investments. The investment rule change would have dried up Keating's cash cow that fueled his buying and trading mania.
Keating attacked Gray at every opportunity, using high-powered lawyers, lobbyists, public relations firms and political contributions to key members of Congress, including DeConcini, to fight his battle. The stakes increased in January 1985 when Gray convinced the other two members of the Federal Home Loan Bank Board to impose the 10 percent direct-investment rule. The same month, DeConcini introduced a bill that would delay implementation of the investment rule for a year.
But the investment rule stayed in place, and Keating had to adopt a new strategy. By August 1985, Keating enlisted the powerful Washington, D.C., law firm of Akin, Gump, Straus, Hauer and Feld to devise a scheme to weaken Gray by placing a Keating puppet into a vacant seat on the three-member bank board.
The firm developed a blueprint that was put into action. Soon, favorable stories about Keating and unflattering ones about Gray began appearing in prominent publications like the American Banker and the Wall Street Journal. Key congressional members began attacking Gray with hostile questions, often provided by Keating's attorneys, at every opportunity.
Keating kept up the pressure personally, firing off letters to the Reagan White House, including a hostile note dated July 1, 1986, to Chief of Staff Donald Regan. "The Federal Home Loan Bank Board under Edwin Gray is Nazi and diametrically opposed to everything your administration stands for," the letter read.
In the fall of 1986--about the same time Ober and Cole were meeting with Keating on the Continental Ranch deal--Keating was successful in getting his proxy, Atlanta businessman Lee Henkel, named to the bank board. DeConcini backed Henkel for the post, calling the White House six times urging his appointment, according to testimony from the Senate Ethics Committee hearings. When the White House confirmed Henkel would be named, DeConcini's staff called Keating in October 1986 to relay the news.
At Henkel's first bank board meeting on December 18, 1986, he proposed a rule that would raise the investment regulation to 40 percent of assets, a move that would benefit only one thrift in the country--Lincoln Savings. On the same day, Keating had $3.7 million transferred into a "blind trust" for Henkel to conclude a complicated real estate deal between Henkel and American Continental. Before long, the Wall Street Journal got wind of the details of Henkel's financial ties to Keating and Henkel was forced out in March 1987.
But that didn't stop DeConcini from going to bat for Keating. In March 1987, Senator Donald Riegle of Michigan flew to Phoenix to meet with Earl Katz, who took Riegle over to visit Keating and collect campaign-contribution pledges. When Riegle returned to Washington, he suggested to DeConcini that DeConcini host a meeting with Ed Gray to discuss Keating's problems.
Keating met with DeConcini later in March in Washington, further emphasizing the depth of his problems with Gray. A few days later, Gray received a call telling him to come to DeConcini's office for a late-afternoon meeting. Gray also was told not to bring any staff members, which Gray considered to be an unusual request.
The stage was set for the infamous April 2, 1987, meeting in DeConcini's office where four of the Keating Five senators--DeConcini, John McCain, John Glenn and Alan Cranston--asked Gray to waive the investment regulation for Lincoln Savings if the thrift agreed to increase its home mortgages. According to Gray, DeConcini was the chief speaker in the meeting, pressing most vigorously on Keating's behalf.
Gray refused the request, and two years later Gray told a Dayton Daily News reporter that the meeting in DeConcini's office was an attempt "to directly subvert the regulatory process" to benefit Keating, whom the senators described as "their friend."
A second meeting between the senators and thrift regulators was held a week later, also in DeConcini's office. During the meeting, regulators told the senators that they were preparing to ask the Department of Justice to file criminal charges because of the extensive problems at Lincoln Savings. News of the criminal referral startled the senators and Glenn and McCain severed their ties to Keating. But Cranston, and particularly DeConcini, kept working on Keating's behalf for almost another two years.
Gray's description of the April 2, 1987, meeting came several weeks after American Continental had plunged into bankruptcy and banking regulators had seized Lincoln Savings. By the end of 1990, the Senate Ethics Committee had opened an investigation into the Keating affair.
While four of the five Keating senators eventually admitted they met with Gray and pressured him to withdraw the regulation on behalf of Keating, DeConcini continues to maintain that nothing improper occurred during the April 2, 1987, meeting.
DeConcini's bullheadedness on the matter isn't surprising to Gray.
"DeConcini still is lying," Gray says.
Hal Cole cut off his vacation early, leaving Hawaii the day after receiving the urgent telephone call from Ober. He flew to Tucson on Sunday, September 21, 1986, and early the following Tuesday, he and his attorney took an America West flight to Phoenix. There they met with Ober and drove over to the American Continental headquarters to finalize the biggest investment in their company's history.
Making deals with Keating's Lincoln Savings wasn't anything new to Ober. He was R.A. Homes' point man with the thrift. R.A. Homes and Lincoln had been busy the preceding year. Lincoln Savings extended real estate loans to R.A. Homes for $6 million on December 31, 1985, $11.9 million on July 2, 1986, and $1.5 million on July 17, 1986.
Ober also had done deals with Lincoln outside of R.A. Homes. Lincoln Savings extended a $3 million loan to R.A. Group II Limited Partnership on July 17, 1986, an Arizona limited partnership that included Ober and Katz.
Not surprisingly, Ober was emphatic with Cole that it was important to keep Keating happy so that credit lines to Lincoln would remain open. Keating already had made it clear to Ober that Continental Ranch was a do-or-die deal.
"If we don't do this deal with Charlie Keating, we will never do another deal with Lincoln or AMCOR [a Lincoln Savings subsidiary] or American Continental again," Cole said Ober told him while the men were driving to meet Keating.
"I never said that to him," Ober now says. Rather than being the ultimatum described by Cole, Ober says he told Cole that it was important "to consider what the ramifications might be any time you turn down a lender" who is seeking to do a project.
The meeting was held in a second-story conference room, adjacent to Keating's private office. It was Cole's first meeting with Keating and Keating dominated discussion during the brief encounter. Keating knew his company was in trouble and he needed to act quickly.
Judy Wischer, American Continental president who kept a close tab on the bottom line, had told Keating earlier in the month that American Continental was about to show its first quarterly loss, an event that would surely anger already nervous shareholders who were worried about the high salaries Keating paid himself and his family members running the company.
Bank regulators also were poring through the books of Lincoln Savings, escalating fears regulators would criticize the thrift for its large slate of raw land investments. A quarterly loss and a negative bank audit could prove deadly to the cash-strapped corporation that desperately needed access to bank loans to keep afloat.
To solve both problems, Keating needed to immediately unload some of Lincoln's real estate at a profit. All summer the thrift had tried to sell a 1,400-acre parcel along the Santa Cruz River, north of Tucson, called Continental Ranch. But buyers were nowhere.
With the third quarter drawing to a close, Keating already had held one meeting with Ober to see if R.A. Homes would buy Continental Ranch. R.A. Homes earlier had turned down a previous offer to purchase land in Continental Ranch. The company was hesitant to get involved in the rural property that was bisected by the flood-prone Santa Cruz River.
But this time, Keating offered an added inducement, Judy Wischer would later testify, and R.A. Homes was ready to deal.
The Saturday-morning meeting between Keating and Ober ended with a tentative agreement for R.A. Homes to buy Continental Ranch on Keating's terms. Minutes later, Ober was on the telephone to Cole in Hawaii, outlining the proposal and telling him to immediately return.
Cole's okay was essential for the deal to go forward. The University of Arizona law school graduate, who also received an accounting and engineering undergraduate degree from UofA, was a founder and president of the homebuilding company. After practicing law for 15 years in Tucson, Cole and a partner started R.A. Homes in 1977. Ron Ober's father, Hal Ober, joined the company in 1980, setting up a Las Vegas homebuilding division. Three years later, the company decided to expand into the Phoenix market and Ron Ober was brought in to handle that operation.
Cole, Ron Ober and their attorney arrived at the American Continental headquarters around 10 a.m. They cut through the campuslike compound to a building in the rear and entered Keating's conference room. After a brief round of introductions, Keating laid the deal on the table:
R.A. Homes would purchase 1,400 acres of Continental Ranch for $25 million, including a $5 million down payment, but R.A. Homes would not take over its newest purchase. A Lincoln Savings' subsidiary, AMCOR, would continue to control development of the project; R.A. Homes wouldn't have to make any payments on the $20 million balance because AMCOR intended to sell the land within a year; the $20 million loan would be a nonrecourse loan, meaning there were neither corporate nor personal guarantees of repayment. In other words, Ober, Cole and R.A. Homes wouldn't have to repay the $20 million if things got tough.
And then Keating added the sweetener: R.A. Homes would receive the first $2.5 million in profit from the future land sale, plus 50 percent of any additional profit. All R.A. Homes had to do was hold title to the property.
The deal sounded too good to be true, but Cole said there were a few problems. The biggest one was that R.A. Homes didn't have $5 million available to make a down payment. The company had already committed that amount to purchasing land in Las Vegas and paying off a partner, who was getting out of the business.
Keating came up with a solution, a plan that would eventually lead to Keating's conviction on federal counts of bank fraud and racketeering. Lincoln Savings would extend a $5 million operating line of credit to R.A. Homes, allowing R.A. Homes to free up cash to make the down payment. This proposal set off warning bells with Wischer.
"I cautioned Charlie that you can't make the down payment out of borrowed funds from the seller," Wischer testified last November in Keating's federal criminal trial in Los Angeles. "The down payment must be--under accounting rules--must be independent of the seller's funds."
Keating, Wischer testified, then told Ober and Cole that Lincoln would provide the $5 million line of credit and that it wouldn't have to be repaid until after the Continental Ranch property was sold. But Keating added a caveat: "Don't use any of our money to make the down payment. You must have your funds independent of ours."
Cole told Keating he understood the condition of keeping the money separate. Cole, who majored in accounting, worked 15 years as a lawyer and ten years as a developer, later testified in the bondholders' trial that Keating's demand to keep the money separate "was something I really wasn't focusing on."
Cole said the key thing in his mind was making a $2.5 million profit and the only way that would happen was if Keating supplied the $5 million loan to free up other R.A. Homes funds for the down payment on Continental Ranch.
"We had our money committed for other purposes, and there was no way to purchase it without the $5 million operating line," Cole said.
Even though Ober admits the deal wouldn't have gone forward without Keating's $5 million operating line, he says the money did not constitute the down payment. Ober says the company could have decided not to go forward with its other obligations and used that money to make the down payment. But once Keating offered the operating loan, it made sense to accept it, he says.
Before the meeting was over, Cole raised several more questions, irritating Keating, who wasn't used to being challenged. Besides the down payment, Cole wanted to be sure there was a development agreement between R.A. Homes and AMCOR that specified in writing Keating's guarantee that AMCOR would be the responsible party for any future development on the property.
Keating promised that a development agreement would be drawn up with the closing papers that would be ready for signing before the end of the month, which was also the end of American Continental's third quarter. An expected development agreement, along with Keating's promises to control the land, sell the property, pay R.A. Homes $2.5 million for holding the title and Keating's guarantee that R.A. Homes wouldn't have to make any payments on the $25 million in loans until the land was sold, satisfied Cole.
"Based on those assurances, we were really looking to accommodate Lincoln Savings and American Continental and Charlie Keating," Cole testified.
Thus, the biggest land deal in R.A. Homes' history by more than eightfold was negotiated in less than a half-hour. No appraisals were conducted. No soil testing ordered. There were no extensive negotiations in regard to the total amount of acreage, the terms or the price. A deal that would typically take three months to close would be ready for signing in less than eight days. In effect, no true down payment was required nor were monthly installments anticipated. If the deal failed, Keating would have no recourse against Ober and Cole for the $20 million loan. And if that weren't enough, Ober and Cole expected to make $2.5 million for doing nothing.
Despite the unusual circumstances surrounding the deal, Cole said in a deposition he never suspected that R.A. Homes was engaging in a shady deal with Keating even though he understood the terms of the transaction meant Keating was trying to move the Continental Ranch land temporarily off Lincoln's books.
Ober says he didn't "have the slightest idea" that Keating was attempting to move the property off Lincoln's books.
"I don't know what Charlie Keating's motivations or his intentions were," Ober says. "Ours were to enter into a business transaction where we were going to make a profit."
At the conclusion of the meeting, Keating, who enjoyed playing craps in the world's fanciest casinos, shook Cole's hand on the way out the door, stopping to say, "You don't know me, but I'm deeply indebted to you, and you have my marker."
If Cole somehow didn't suspect anything was afoul at first, his suspicions might have been aroused a week later when Ron Ober signed the purchase agreement even though key parts of the deal were not included.
The nine-page Continental Ranch sales agreement signed by Ober and Keating failed to contain crucial provisions promised by Keating during the September 23, 1986, meeting including:
Keating's promise that R.A. Homes would be holding the land for no more than a year.
Keating's pledge that AMCOR would develop the property and act as owner while R.A. Homes retained title to the land.
The $5 million operating loan was not mentioned in the purchase agreement.
And, most important, Keating's promise to pay R.A. Homes the first $2.5 million in profits resulting from the sale of the land within the next 12 months. Also missing at closing was the development agreement, which Keating had promised would be ready.
These provisions were not included in the written purchase agreement, Wischer would later testify, because they would have been a signal to American Continental's outside auditors and federal regulators that the Continental Ranch transaction was not a true sale and that it would have been improper for the company to book the $8 million profit.
"Representations that were made to R.A. [Homes] and the way in which the loans and the sale were actually handled over a long period of time would have definitely affected the fact that this was not a sale and that the profit could not have been recorded," Wischer testified.
Despite the absence of key provisions, most notably the promise to pay R.A. Homes the $2.5 million profit-sharing arrangement for holding title to the land, Ron Ober plowed forward and signed the purchase agreement.
Ober says he expected the development agreement would soon be ready. He says Keating's pledge to sell the land within a year was never to be included in written documentation. As for the $2.5 million, he says that was documented when the loan was refinanced in August 1987.
The promised development agreement never materialized.
Cole said he repeatedly asked Lincoln Savings for the development agreement, but it never appeared. Mike Hawkins says R.A. Homes' insistence to get a development agreement proved that the homebuilding company was not part of Keating's conspiracy to cook Lincoln's books.
Before long, other problems popped up. The actual amount of property sold to R.A. Homes was only 1,300 acres, rather than the 1,400 acres promised. Some of the property had already been sold to Silverado Savings in Denver.
On November 25, 1986, Ober sent a letter to Wischer reminding her that R.A. Homes expected to receive the first $2.5 million of profits stemming from the expected sale of Continental Ranch and to split 50-50 any additional profits with Lincoln Savings.
Lincoln would do nothing to confirm the profit-sharing arrangement in writing until the following summer, when a crisis developed.
Throughout the spring of 1987, R.A. Homes devoted 90 percent of its time conducting lengthy and expensive negotiations with Wall Street investment bankers about the possibility of taking the homebuilding company public, according to Cole.
Dealing with armies of lawyers, accountants and investment advisers was expensive and R.A. Homes needed some more working capital. Lincoln Savings was tapped for an additional $2 million loan on April 7, 1987, five days after DeConcini and three other senators held their meeting with Ed Gray on behalf of Keating.
But going public would also require R.A. Homes to make complete disclosures of its financial activities, including its unusual land deal at Continental Ranch with Keating.
On May 1, 1987, R.A. Homes prepared a draft disclosure statement that would be sent to the Securities and Exchange Commission. A copy was sent to Lincoln Savings. In the disclosure, the company said it intended to sell $20 million in stock and $30 million in subordinated debt, also known as junk bonds. There was plenty of incentive to make the public offering work. A portion of the stock proceeds would be distributed to R.A. Homes' owners.
Cole said in a sworn deposition that the draft SEC disclosure also contained details on the Continental Ranch transaction, including the stipulations that a Lincoln Savings subsidiary still controlled the land and intended to sell the property and that R.A. Homes planned to enter a formal development agreement. These were the same stipulations that Judy Wischer said never appeared in the Continental Ranch loan documentation because they would be red flags to auditors and thrift regulators.
Soon after Lincoln Savings received R.A. Homes' draft SEC disclosure, the Obers, Cole and Earl Katz met with Keating and his aides. During the meeting, Keating began discussing the problems and expense of running a public corporation and urged the R.A. Homes executives to reconsider going public.
Instead, Keating proposed that R.A. Homes sell $30 million worth of junk bonds to one of Keating's companies.
"It caught us all by surprise," Cole said of Keating's offer.
Keating added one stipulation to the $30 million junk-bond deal. He wanted the right to recall the bonds within 30 days if the Obers left R.A. Homes. Keating didn't like doing business with Cole because Cole asked too many questions.
Cole, in a deposition, said that Ron Ober told him "the relationship with Lincoln Savings would better be served if he [Ron Ober] would negotiate with Lincoln Savings and I would remove myself from it."
Cole said that was fine with him.
The terms offered by Keating were essentially the same that R.A. Homes was negotiating with Smith Barney, a New York investment firm. However, Smith Barney made it clear that if R.A. Homes opted to go with Keating, it would be impossible for the company to also sell stock.
Remarkably, R.A. Homes executives abandoned their plans to go public and forwent the sale of $20 million worth of stock, much of which would have gone into their personal pockets. Instead, they accepted Keating's offer and signed the papers on June 30, 1987.
Ober says the company decided not to go public because the company didn't want to deal with shareholder hassles. "Our biggest motivation was to raise working capital and we were able to do it without having other shareholders. To us, that was a big advantage," he says.
R.A. Homes used the $30 million from Lincoln Savings to repay several other loans from Lincoln, including the $5 million operating line of credit needed to make the down payment on Continental Ranch and to purchase land in Las Vegas.
Keating also got what he wanted. Not only was the company of a top aide to DeConcini deeply in debt to Lincoln Savings, Keating had kept important financial information related to the Continental Ranch deal secret from investors and thrift regulators--for a little longer.
Cole said in a deposition that it never occurred to him that Keating was trying to hide information from federal regulators by keeping R.A. Homes from going public. Ober says the SEC already had a draft of R.A. Homes' disclosure statement so the company was not hiding anything from regulators.
On the same day Keating and R.A. Homes signed the $30 million debt deal, Ed Gray left office, his term as chairman of the Federal Home Loan Bank Board expired. His departure was celebrated by Keating and DeConcini.
DeConcini's pleasure with Gray's exit was revealed during the Senate Ethics Committee hearings. In a note to Keating, DeConcini said: "How thoughtful and insightful you have been in this area. Maybe things will change now that he [Ed Gray] is gone. I sure hope so."
By the end of 1987, Keating had failed to sell the Continental Ranch property and, rather than paying R.A. Homes a $2.5 million profit for holding title to the land for a year, Keating asked R.A. Homes to make a 10 percent interest payment on the $20 million Continental Ranch loan extended a year earlier.
Under the terms of the loan, R.A. Homes could simply have walked away from the deal by returning the land to Lincoln Savings. But R.A. Homes agreed to Keating's new terms, Cole said in a 1991 deposition, because Keating had just invested a fresh $30 million in the company.
Cole would add a new twist to this story in 1992 testimony in the bondholders' trial. Cole testified that Keating demanded an interest payment on the Continental Ranch loan during the time R.A. Homes was preparing to go public in the spring of 1987, rather than the end of 1987.
"We were in the process at that point in time of doing a public offering ourselves with Smith Barney, so we didn't have any choice but to make the interest payments so we wouldn't be in default when we went to the public market," Cole said in sworn testimony.
But records from the same trial and Cole's own statements in depositions make it clear that the interest payment wasn't requested until December 1987, well after R.A. Homes had abandoned its plans to go public.
Rather than not having any choice to continue doing business with Keating as Cole testified in 1992, the company could have broken off any further dealings with Keating.
By December 1987, Ober's homebuilding company was facing serious cash-flow problems, in large part because of the two huge loans it took out with Lincoln. The company was facing a $1 million interest payment every quarter, stemming from the $30 million junk-bond deal and a $2 million annual interest payment related to the Continental Ranch deal.
Adding to the problems was the sudden collapse of the real estate market in Arizona, making it unlikely that the Continental Ranch land would be sold in the near future.
But rather than looking for a new business partner or just defaulting on the Continental Ranch loan, R.A. Homes continued working with Keating to the point of helping Keating out of a fizzled real estate deal.
In March 1988, R.A. Homes agreed to assume a $7.4 million loan from another company that had become dissatisfied with a 600-acre land purchase at a Keating real estate project in Hidden Valley, an undeveloped stretch of desert southwest of Phoenix.
R.A. Homes bailed Keating out. It was another of Keating's sham real estate deals.
In this case, R.A. Homes agreed to assume the $7.4 million loan to purchase land that was appraised at only $4.7 million. This deal made little economic sense. It would be like assuming a $74,000 mortgage on a house worth only $47,000. Ober says he wasn't aware of the difference between the appraised value and loan amount.
Lincoln made the loan to R.A. Homes even though, by this time, Ober's homebuilding company was saddled with total liabilities 59 times greater that its capital base. But by manipulating the books, Lincoln was able to overstate its income on the transaction by $7.7 million.
Ober characterized the Hidden Valley deal as "a win transaction for us" because it allowed the company to spread out its risk between the Tucson and Phoenix markets. The trade also brought a major homebuilder into Continental Ranch, Ober says.
R.A. Homes later defaulted on the loan.
By this time, Keating was desperately trying to keep his thrift afloat any way possible. He was hoping that the new bank board chairman, M. Danny Wall, a former Senate Banking Committee staffer known for being timid, would go easier on Lincoln Savings than Gray had. Keating's hopes came true. On May 20, 1988, the bank board signed an agreement with Lincoln granting the thrift a reprieve from an impending criminal referral to the Department of Justice.
Just as DeConcini had hoped in his letter the year before to Keating celebrating Gray's departure, Keating was given new life, but just for a while.
Wall ordered a new examination of Lincoln in July 1988 that also included American Continental. The examination wrapped up in December 1988 and found massive problems. A month later, Texas Representative Henry Gonzales, the newly named House Banking Committee chairman, held hearings on Lincoln Savings in San Francisco. It was clear the end was near for Keating's ownership of Lincoln Savings.
With Keating's control of Lincoln Savings hanging by a thread, Keating called on the one senator whom he knew might help. Keating wanted to sell Lincoln Savings and he needed to do it fast. Keating asked Earl Katz if DeConcini could help.
DeConcini promptly called federal thrift regulators, including an early morning call to the home of former Federal Home Loan Bank Board member Roger Martin. DeConcini also pressed William Seidman, chairman of the Federal Deposit Insurance Corporation, for assistance. The senator, his press secretary says, asked that Keating's application to sell the thrift to a group of California investors led by a former congress member be given serious consideration.
But bank regulators rejected the proposed sale of the thrift.
It was December 1988. The lucrative borrowing-and-contribution game with Lincoln Savings was just about finished. And according to DeConcini spokesman Bob Maynes, this was when Ober finally told DeConcini that he had business ties to Keating.
Ober says he was visiting Lincoln Savings in December 1988 when he became aware that Lincoln was having a problem with regulators. "They asked me if I would talk to Dennis DeConcini and get them some help and I said no. I told them that I was a borrower and could not and would not do that for them," he says.
After the meeting at Lincoln Savings, Ober says he told DeConcini about his business ties with Keating. DeConcini reportedly thanked Ober for telling him about the financial dealings with Keating and went on with his business.
Ober says he didn't tell DeConcini about his business relationship with Keating earlier because he never informed DeConcini about any of his financial dealings.
"My business didn't have anything to do with his business as a United States senator," Ober says.
Four months later, the ax finally fell on Lincoln Savings. Keating took American Continental into Chapter 11 bankruptcy, one day before federal regulators seized Lincoln Savings on April 14, 1989.
With the government in control of the thrift, Ober's access to easy cash was over. Keating's contributions to DeConcini were terminated. A new game plan was needed. Rather than battling regulators to keep Lincoln open and the money flowing to Ober's homebuilding company and DeConcini's campaign coffers, the strategy shifted to damage control.
And it worked.
As usual, it was the taxpayers who were left holding the bag. Losses stemming from Lincoln Savings' loans to R.A. Homes, even after the RTC settlement with Ober, Katz, et al., may exceed $70 million.
Ober has emerged from the ordeal nearly unscathed. His political power is undiminished. He's never been forced to testify about his company's $110 million relationship with Keating. When the opportunity came, he took the Fifth Amendment.
His defenders claim Ober was a victim of Keating's.
But Ober expected to pocket a $2.5 million profit on a deal with Keating that evidently had no appraisal, no genuine down payment, no recourse and no basis in reality, except the reality of Keating's attempt to subvert banking regulations.
One year later, Ober and R.A. Homes sold Keating $30 million in junk bonds rather than take its company public and reap $20 million in equity. This move, from Keating's point of view, avoided public disclosure of the first sham deal.
And one year after the junk-bond deal, Ober and R.A. Homes entered into a second sham transaction with Keating, agreeing to pay nearly twice the appraisal on a large parcel, thus allowing the financier to book more phony profit.
Ron Ober hooked his wagon to Charles Keating's star, participated in Keating's scams and was a "victim" to the extent that federal authorities finally closed the operation down before more taxpayers could be bilked.
The attorney for R.A. Homes, Mike Hawkins, did a masterful job. Ober, the point man for the homebuilding firm with Keating, had an all-too-obvious DeConcini connection. Ober was kept out of the line of fire and out of sight. Hawkins, who at one point in his career was a visible member of the senator's brain trust, allowed the unknown Cole to provide the testimony that helped shut the jail-cell door on Keating.
DeConcini steps out of the fray with the unlikely line that he never knew his top aide was up to his gills in loans from Keating. We are to believe that the politically astute Ober never said a word even though Katz in his Senate Ethics Committee deposition said he and Ober discussed whether the senator should be informed. As DeConcini went to war on Keating's behalf, we are to believe Ober never mentioned his $110 million connection to the financier.
In other words, Ober helped embroil the senator in the biggest political scandal of DeConcini's 22-year career, was an active participant himself in the most notorious thrift collapse of the century and for this sort of judgment, Ober has been rewarded with a position of trust in the DeConcini reelection campaign.
There is one other explanation that must be considered.
And that is Ed Gray's belief that DeConcini knew all along that his aides were conducting million-dollar business deals with Keating. DeConcini has always argued that he went to Keating's defense to protect Arizona's economy. But he never mentioned that if Keating fell, two of his closest friends, Ober and Katz, would suffer.
On December 18, 1984, DeConcini wrote a short note to Keating thanking him for an invitation to a New Year's Eve party. At the bottom of the letter, DeConcini, whose family made its fortune in real estate and who had made several real estate investments with Katz, added a short handwritten message:
"Thanks for helping Earl Katz. I have no monetary interest, only my friendship for Earl."
When Senate Ethics Committee attorney Robert Bennett showed the letter to Katz during his November 1990 deposition, Katz said he didn't know what DeConcini was referring to.
"I can only offer conjecture," Katz said.
"All right," Bennett replied.
"It may have been that Mr. Keating or somebody communicated to him that there was, that I was involved in a deal with --," Katz said, cutting off in midsentence.
"Well, the thanks presumably would be that Keating or Lincoln is lending you money. Is that right, or not?" Bennett asked.
"I don't know. I didn't communicate this to Senator DeConcini," Katz said.
"Well, what else could it be? What else could he be thanking Mr. Keating for doing for you?" Bennett asked.
"I don't know," Katz replied.
The Senate Ethics Committee dropped this line of inquiry. At the time, DeConcini's note was only a thread; the tapestry of financial records that eventually surfaced in the courts was not available.
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The paper trail of R.A. Homes is finally a matter of public record.
And now the senator's office is belatedly acknowledging that in 1984, Dennis DeConcini knew more than he'd previously admitted in sworn testimony.
The senator knew about Katz and Keating.
Today, there is only the question of what you believe DeConcini knew about Ober.