Mark J. Saladino was on the spot. Under professional ethics rules, the young attorney was required to maintain the confidences of his law firm’s clients. However, a coworker — a secretary to a powerful partner in his office — had come to him seeking advice. Should she invest in the bonds being offered for sale by the bank downstairs, in the lobby of their Los Angeles office building?
The time was late 1988, just as the financial follies of the decade were beginning to unravel. Saladino and his co-worker are bit players in one of the era’s grander confidence schemes. Much has been written about the personalities that perpetuated the megafrauds of the era, yet little attention has been given to the role of their lawyers. Some lawsuits were filed and settled — including two against Saladino’s law firm that netted $75 million for investors and the government. Despite the settlements, lawyers who agreed to pay also made public rationalizations for their conduct. These claims were widely accepted — as were their claims they couldn’t withstand lengthy litigation. The agreements permitted the pretrial testimony to remain out of public view. As a result, little has been revealed about how intimately connected the elite members of the legal profession were to the decade’s massive white-collar criminality. With the facts hidden, no reform was undertaken. In fact, the cultural and economic underpinnings that created enormous pressure for dishonesty have worsened as the demand for expensive legal services has slowed.
Now, a recent decision by a federal judge overseeing lawsuits against a notorious savings and loan operator makes the sworn testimony by his lawyers public for the first time.
The events described in these transcripts are classic examples of elite, powerful lawyers using the law on behalf of a wealthy and powerful client. In contrast, Saladino’s response to his co-worker exemplifies how an attorney may uphold his professional obligations to maintain client confidences while at the same time protect third parties from harm.
A graduate from the New York University Law School, Saladino was an up-and-comer in a fast-expanding megafirm: Jones, Day, Reavis & Pogue, one of the world’s largest with more than 700 attorneys and 13 offices dotting the globe from its home in Cleveland to London, Paris, and Saudi Arabia.
His obligation was to keep the secrets of the companies controlled by Charles H. Keating Jr.: American Continental Corp. and the bank it owned, Lincoln Savings & Loan. Yet, it was Lincoln that was in his building’s lobby. In fact, each day when he came to work, he could see two signs when he glanced through its window: the first announced that the thrift’s deposits were federally insured; the second promoted the sale of the bonds of ACC –American Continental Corp.
Like others at Jones Day and insiders at Lincoln, Saladino knew just how insidious that juxtaposition was and just how bad an investment the bonds were likely to be. Two years earlier, he and others in his law firm participated in a clandestine landing of legal troops. Swarms of highly disciplined attorneys were dispatched on a day’s notice to the companies’ chief offices in Irvine, California, and Phoenix, Arizona. Working around the clock, they sorted through Keating’s paper work for three weeks and quickly learned of a multitude of dubious transactions — red flags that warned of serious financial troubles ahead. Later that year, Saladino and other Jones Day attorney performed key legal work that allowed Keating to skirt federal and state laws and sell his ACC bonds directly to unsuspecting Lincoln depositors.
Saladino felt a duty to prevent the secretary from buying the bonds. He realized he could wave her off without revealing a trace of his insider information. A basic public document filed with the Securities and Exchange Commission, a prospectus, would do the job.
A careful lawyer, he wrote her a memo explaining two of the bonds’ important features.
First: Unlike her certificates of deposit, the bonds were not backed by federal insurance. Adding to the risk, they were actually subordinated debentures, that is, they would be paid only after ACC had paid off its other debts, totaling $207 million.
Second: The bonds were not underwritten. That is, no investment professionals, such as Merrill, Lynch & Co., had scrutinized the finances of the company and put their firm’s reputation and assets on the line to back the bonds. Therefore, no independent party had determined the interest rate the bonds would pay. That was key: With underwritten bonds, the risky ones pay high interest rates to reward their buyers for taking chances. By the same token, safer bonds pay lower rates. With no underwriter, the bonds would be next to impossible to sell to anyone other than ACC.
Saladino acted in a manner consistent with the demands of his profession and his humanity. But that could not be said for others at his firm. Rather than take any steps to warn potential investors away from the bonds that would become the instrument of the largest fraud in U.S. history of individual — rather than institutional –investors, Saladino’s superiors were Keating’s architects, drawing up the plans of how the bonds could be sold.
It is bond sales that set Keating apart from other thrift owners convicted of crimes. Like them, Keating is accused of cheating taxpayers by draining the thrift’s cash for personal use. But only he was charged with defrauding individual depositors though a huge confidence scheme. In essence, the bonds were the vehicle Keating used to entice 22,000 Lincoln depositors to transfer their savings from a safe place to the coffers of ACC, where Keating could use the cash as he pleased.
The firm’s spokesmen explain their work at Lincoln as the actions of conservative, responsible professionals acting in accord with traditional ethical guidelines. They say this even though the fundamental principle of legal ethics is that an attorney must act in the best interests of his or her client. Lincoln became insolvent; ACC bankrupt; and Keating a convicted felon.
In January 1986, when the firm’s relationship with Keating began, Jones Day was run from its Cleveland base by Richard W. Pogue, a second-generation member of the firm. (The Pogue in the firm name was his father). A politically conservative, ambitious autocrat, young Pogue rose to power in 1984 and his energy and charisma had propelled Jones Day from a 330-lawyer firm with five domestic offices, through a huge merger to become the nation’s second-largest law firm with nearly 600 lawyers and international offices.
Pogue in the mid 1970s founded Jones Day‘s California beachhead in Los Angeles, one of the first incursion’s into that state by a “foreign” firm. Its first office was in L.A.’s Century City, a business, hotel, shopping complex that is a haven for West Coast real estate and entertainment lawyers. The real estate boom in California had faded by the mid 1980s, and Pogue began pushing the Los Angeles branch to break into the lucrative business of advising banks and other financial institutions. California’s huge and profitable savings and loan industry was a natural target. Jones Day hired the chief enforcer of the federal thrift rules, William J. Schilling, late in 1985 and persuaded him to move to L.A. To dramatize its intent to enter a field that had been dominated by old-line Los Angeles firms, Jones Day leased a second office downtown, in the heart of the city’s financial district and in the middle of the competition’s turf.
Such expansion strains a law firm’s cash supply. Each office, even those with a single attorney, has a lease, upscale office furniture, a library, computers, secretaries and other support staff. Law firms are partnerships, so if the firm is strapped for cash, the partners’ paychecks diminish accordingly. As a result, members of expansionary firms are keenly aware whether a particular office is a drain or a boon the bottom line.
After Schilling came aboard, Jones Day‘s top thrift lawyer, Richard K. Kneipper, followed up on a memo he had received from a young associate that said Keating was looking for lawyers. Kneipper, a Pogue protege and the Dallas-based head of the firm’s financial institutions practice, quickly arranged to meet with Keating and his general counsel, Robert J. Kielty, a former assistant U.S. attorney, to make his Jones Day sales pitch. To lay the groundwork, Kneipper wrote an 11-page letter touting Jones Day‘s savings and loan experience. It cited the firm’s assistance to a Florida savings and loan when it sold a $40 million in nonunderwritten, subordinated debt directly to its customers.
After Schilling came aboard, Jones Day‘s top thrift lawyer, Richard K. Kneipper, followed up on a memo he had received from a young associate that said Keating was looking for lawyers. Kneipper, a Pogue protege and the Dallas-based head of the firm’s financial institutions practice, quickly arranged to meet with Keating and his general counsel, Robert J. Kielty, a former assistant U.S. attorney, to make his Jones Day sales pitch. To lay the groundwork, Kneipper wrote an 11-page letter touting Jones Day‘s savings and loan experience. It cited the firm’s assistance to a Florida savings and loan when it sold a $40 million in nonunderwritten, subordinated debt directly to its customers.
When face-to-face with the Lincoln brass, Kneipper promoted the firm’s new service for thrifts: compliance audits. Jones Day attorneys would go over the books ahead of federal examiners and spot any potential regulatory violations. This would give the management time to head off problems. To add even more firepower to his presentation, Kneipper brought along his most recent acquisition, Schilling, the former federal enforcer. Within weeks, Kielty asked Kneipper to begin the job.
Kneipper, in turn, recruited Ronald L. Fein, head of the L.A.’s corporate department, to act as billing partner, the person responsible for the work. He was the logical choice. Fein’s earlier work as the public servant in charge of enforcing California’s securities broker regulations put him in a good position to understand both corporate law and government regulations. The short, round chief of the office’s corporate practice was in his mid-40s, the make-or-break period for a legal career. With hazel eyes that blaze when he is irate, Fein was known to be demanding, at times dictatorial. He jumped at the chance to marshal lawyers from several offices — young women just out of law school, senior associates, top name partners, the whole gamut.
On the weekend of March 8 and 9, Fein and his chief associate, Marilyn Fried, rounded up eight younger attorneys and explained the assignment. Schilling went over the federal regulations. One attorney who attended recalls that Fein waved the $250,000 retainer check to impress the crowd. Fein stressed that the client wanted the operation to be highly confidential, adding that Keating was publicly at odds with Edwin Gray, the federal savings and loan chief advocating tighter government control. The dynamic he set up was clear: “us versus them.” Once dispatched, the troops worked in an atmosphere of paranoia. For twelve hours at a stretch, they pored over the thrift’s records in conference rooms with door shut doors and draperies drawn. They whispered to one another so their conversations could not be picked up by any listening devices. They avoided any discussion of their tasks in the public elevators and lunch rooms.
Fein was in charge. Schilling was not a partner, but “of counsel.” That entitled him to a certain amount of respect but no deference. Second, he was widely thought of as a nice guy, a former bureaucrat who still rented sub-compact cars while traveling on the client’s tab, a man who didn’t quite grasp that he had crossed over to the other side. An example of Schilling’s relative powerlessness was cited by a junior attorney who was part of the Lincoln team: One evening during a rare dinner out for the entire team, Schilling slipped and referred to Lincoln by name rather than “the client.” Fein gave him a vehement dressing down in front of their much junior colleagues. Schilling, now in the Jones Day Washington, D.C., office, declined to be interviewed.
Lincoln’s headquarters were in a black-glass high-rise in the business boom-town of Irvine, Calif. Within days after the Jones Day cadre arrived, state and federal examiners landed in Irvine as well. They were given the floor just above the one occupied by the Jones Day team and began going over the same records.
To help keep the Jones Day operation top-secret, its war room was set up at its branch office, just a few blocks away from Lincoln. There, Ron Fein and Marilyn Fried issued the commands to the troops. A chart on the wall displayed the names of all the lawyers on the project, their locations and the nature of their assignments. At times when the grunts reported in at the end of their long work day, the air seemed nearly blue with the smoke from the cigarettes favored by heavy smokers Fein and Fried — long, thin, brown Mores produced by another Jones Day client, RJR/Nabisco.
Plaintiffs lawyers have alleged and Jones Day has denied that what evolved in Irvine during that frantic month was a process in which Jones Day attorneys identified what was wrong with the files and Lincoln staff did their best to patch them up before turning them over to federal regulators.
Two weeks into the operation, Keating sent a second check for $250,000. No one had asked him to; he just did it. He was, as Fein described him later, a “quick pay.” Eventually as many as 23 Jones Daylawyers were dispatched to work on ACC and other Lincoln matters in this period. In 1986, Jones Day would bill $1.2 million for its work.
Saladino was one of the first to arrive in Irvine. His job was to go over the official minutes of the meetings of Lincoln directors. These records are vital to federal regulators because they indicate whether a group of responsible individuals sat down together, deliberated, and reached agreements on such decisions as making loans, raising or lowering interest rates, investing in stocks, joining others in development projects, and the like.
He quickly found problems. Minutes approving some transactions were missing. In others, all board members’ signatures appeared in the same hand. Still others had signatures of former board members. Saladino reported this to his superiors at Jones Day. Later, when he returned to follow up, he noticed that the missing minutes had appeared but, once again, all the directors’ names seemed to be signed by the same person. At night, in the war room, he told Fein what he had concluded, that the corporation’s official records were being forged. Fein challenged him for using the word forgery rather than the phrase “signature irregularities.” Fein argued that Saladino did not know whether the person whose signature was on the document had authorized someone else to sign on his behalf.
At about the same time, another younger lawyer, Ronald L. Rodgers, working in ACC’s office in Phoenix, discovered that other Lincoln documents — board resolutions approving loans and other deals — were back-dated. That is, the official records falsely indicated that the board had approved a loan before it was made. According to later testimony, this could be traced to the person who was signing the minutes, a paralegal working directly for the company’s top lawyer, Robert Kielty.
Alarmed, Fein, Schilling and Fried, “simply walked upstairs and … into Bob Kielty’s office and closed the door,” to discuss the problem, Fried subsequently testified. Fein added in his testimony that Kielty knew of the practice and he was surprised Fein was “expressing such concern.” At the end of the meeting, the Jones Day lawyers claimed they left believing the problem had been solved.
But it hadn’t. Several weeks later, on April 3, Rodgers reported to Fried that the paralegal in question told him she had just been given another document to backdate, as was her longstanding practice, and no one had told her to do otherwise. Fein, Schilling and Fried conferred. What to do?
Then, Rodgers lobbed his other bombshell. He reported to Fried that Lincoln’s chief appraiser was simply not completing appraisals for a particularly complex set of real estate transactions that harmed Lincoln and helped ACC. The guy had a good reason, too. Keating had told the top appraiser not to commit anything to writing if the person actually assessing the property’s worth found it less valuable than Keating thought it should be.
On Friday, April 4, Fein traveled to Baltimore. Fried and Rodgers reached him by phone that night and told him the latest developments. Rodgers was told to write up what he had found and then Fein began phoning Kielty at home. He kept trying throughout the weekend.
That Sunday, Rodgers outlined Jones Day‘s plan to fix the “signature irregularity” problems. Rodgers and Fried would make a comprehensive list of all the nonexistent or faulty board resolutions and they would draft blanket ratifications in which the board would retroactively approve the improperly authorized transactions. In explaining the size of the task before him, Rodgers noted that the paralegal had told him that a March board meeting, called at Jones Day‘s urging to carry out similar blanket ratifications, had never taken place.
On that same Sunday, Saladino finished some quick research that Fried requested. He explored the civil and criminal penalties for making a false statement to federal authorities or filing misleading documents — including those without proper signatures. Fried did not mention to Saladino what Rodgers had found. She gave no explanation why this work was needed. Nor did Saladino ask. It is usual practice in many large law firms not to provide junior attorneys context for their work. It is a sanitizing routine that begins in law school and continues throughout the early period of an attorney’s career, reflecting a widely held belief that the research should not be tainted by the circumstances requiring it.
However, when Saladino delivered his memo, his inquisitiveness overcame him, and he asked Fried whether someone had misled the feds. Fried replied she “wanted the information for its shock value,” Saladino later testified. He added he assumed she intended to use the information to warn the client against making such a serious mistake.
On Monday, Fein, now back in L.A., finally reached Kielty in Phoenix. Schilling was also on the line. The three had what Fein described as an emotional conversation about the faulty signatures, backdated documents and missing appraisals. Kielty had explanations for everything and assured both men that there would be no recurrence. In his testimony, Fein said he warned Kielty that if the conduct continued, Jones Day would have to quit.
That was on April 7, 1986.
Two days later, Fein had a face-to-face meeting with Kielty in Phoenix — this time to make a pitch for more work. With him was yet another partner from Jones Day, a tax specialist, Abraham N.M. Shashy, who would eventually leave Jones Day to become the Internal Revenue Service’s chief counsel. During what Fein described as a “real estate syndication seminar,” the discussion turned to a recent securities rule that permitted employees of a company –under certain strict guidelines — to sell that company’s securities. Kielty asked whether Lincoln employees could sell securities under this provision.
The idea was born.
Fein stayed over for another meeting the next day, this one was with Kielty and Schilling. The results of the compliance audit were in, and problems typical of thrifts being drained by their owners were abundant. Schilling went over his 35-page memo sketching out all that Jones Day had found. The review included concerns about Lincoln’s largest client — an Arizona real estate developer with a total of $270 million in Lincoln loans or other funds. He was projected to be $12 million in the hole during the coming year — even if he managed to refinance his debts and found new money to borrow. Schilling also noted that appraisals of eighteen properties used as collateral for these loans were “after the fact.”
The regulatory work wound down after that. Keating knew he was in trouble and he turned to another firm that had helped him in his previous jams. Jones Day was able to pick up some of the securities work, however.
Kielty phoned Fein in May and asked about the new securities rule he had mentioned at the seminar. Fein set an associate to work on the problem. By mid-June, Fein flew to Phoenix to meet with Kielty and Lynn Toby Fisher, a lawyer from a New York law firm Keating had frequently relied on. The topic for the meeting—Lincoln employees’ selling ACC’s subordinated debentures.
Fisher has testified that Keating wanted to use his employees to avoid paying 8 percent brokerage fees for selling the debentures. She did not mention the plan’s other clear advantage. Brokers must abide by what is called the “know your customer” rule: That is, they could lose their licenses or be found liable if they sold a risky investment to a naive investor or, as the brokers say, “a little old lady in tennis shoes.” Lincoln or ACC employees would not be burdened by this restriction.
Fein and his colleague sat in the library that day with Fisher waiting for Kielty to appear. Fein testified he did not mention to Fisher any of the problems he and other Jones Day attorneys had found at Lincoln. He had “no reason to,” he said. “They were there to talk about broker-dealer issues.” He added that Fisher’s firm had taken over the responsibility for dealing with federal bank examiners and he “wasn’t there to tell her about the examination.”
In her testimony, Fisher recalled that during the all-day meeting that included Keating, Kielty and Lincoln officials, she was told then that Keating was considering issuing subordinated debentures — to be sold at Lincoln branches by employees of ACC.
It was already that specific.
Two weeks later, Fein sent a memo to 12 members of his Jones Day “Lincoln team” stating that the federal and state bank examiners planned to make numerous serious criticisms of Lincoln operations. Also during the summer, Fein read, for the first time, according to his testimony, the SEC’s 1979 injunction and settlement against Keating. The agency had charged him personally with violations of anti-fraud statutes, including receiving preferential loans from a bank for which he was an officer and a director. Fein testified he discounted those charges because the claims were settled without Keating’s admitting guilt.
Fein went forward, helping Keating design a legal way to sell the bonds. Fein advised that banking regulations barred tellers from selling the bonds; only bona fide ACC employees could. Fein or his colleagues told Kielty that the bond sellers must be work in a separate area, away from the tellers’ windows; that the sellers should not make any unsolicited phone calls; that Lincoln could not make its mailing list available to ACC, but could mail ACC’s sales materials to Lincoln’s clients.
Fein agreed for his firm to act as the California attorney needed to attest to the validity of the ACC bonds under California state law. As part of this process, the documents to be filed with the Securities and Exchange Commission were sent to him. However, Fein claimed he didn’t read them completely so he cannot be held accountable for misleading statements such as: “Lincoln Savings complies with the rules and regulations promulgated by the FHLBB [Federal Home Loan Bank Board] and the California Department of Savings and Loan regarding appraisals…” Or the fact that the ACC board had authorized the issuance of $100 million in bonds and the documents said ACC would issue $200 million.
In January 1987, Keating began selling his bonds in Lincoln branches. And just as he ignored the federal rules for running an insured financial institution, he and his subordinates ignored the rules for selling the bonds. His sales staff took no pains to educate sales prospects about the bond’s inherent risks. To the contrary, most were told the bonds were just as safe as their federally insured certificates of deposit.
Saladino’s co-worker was lucky enough or smart enough to get a prospectus and seek appropriate advice. Twenty two thousand other Lincoln customers weren’t. By one estimate, 60 percent of the buyers were over the age of 60. Nearly all the buyers believed their bonds were federally insured just as their certificates of deposit were.
Margaret L. Maire was a typical bond buyer. She is a retired legal secretary who had banked at the same Lincoln branch in Los Angeles for years. Her monthly income in 1987 came from a small pension, Social Security and 9.9 percent interest she was earning on her Lincoln certificates of deposits. She did not know what a subordinated debenture was, even as she began trading in her insured certificates to purchase them.
Five years later, in a Tucson, Ariz., federal courtroom, she testified during a federal civil trial that in 1987 she purchased the bonds paying 9.75 percent because she was “looking for safety, and I had accumulated savings I wanted to reinvest.” She explained that, in late 1988, assured by regular interest payments on her other ACC bonds and persuaded by ACC’s direct mail sales pitches, she bought more with the cash she received from selling her home. In the spring of 1989, she was standing at a Lincoln teller’s window, writing checks, when she overheard a teller inform someone else that ACC had filed for bankruptcy.
“I was stunned,” she testified, and from that moment forward her ordinarily good health began to deteriorate. “Just — it’s hard to believe how it affected me.”
To date, Maire and the others who bought ACC bonds have received only 58 percent of their investment back from the proceeds of various legal settlements.
Shortly before Maire testified, Jones Day reached a $24 million settlement with Lincoln investors. On the day the it was reached, Dick Pogue held a news conference and said that the firm had done nothing wrong. He added that he made the agreement only after concluding that the jury selected to hear the case would never understand his complex defense. The following year, the firm also agreed to pay $51 million more to settle a law suit brought by federal regulators — even as it continued to proclaim its innocence.
Several months later, Pogue stepped down as managing partner — a year earlier than the firm’s partnership agreement required. He is now retired from Jones Day and has gone to work as a senior adviser to its public relations counsel, Cleveland’s Dix & Eaton –the largest between New York and Chicago, he explains.
He says he believes that the lawsuits against his firm were a “travesty of justice,” and that Jones Day was the scapegoat for the failure of federal banking regulators. “Fein is a careful lawyer and the opinion he wrote was extremely narrow — it was limited to the advice that the ACC debentures were valid under California law,” Pogue adds. “Jones Day had no duty to ACC, Lincoln, to Lincoln’s depositors, or to the government to refrain from giving the extremely limited California law opinion that was requested,” Pogue said in a recent interview.
Keating began serving his 12 1/2 year federal prison sentence in 1993. He was also sentenced to 10 years on state charges of fraud. His son, Charles Keating III, was sentenced at eight years and a month in prison and ordered to pay $97.3 million in restitution. Eight others, ACC and Lincoln employees or borrowers, entered pleas and co-operated in the government’s case against Keating. Kielty exercised his Fifth Amendment rights against self-incrimination, did not cooperate with government investigators, and was not prosecuted. He is living in Phoenix.
Schilling, now in the firm’s Washington, D.C. office, was barred by federal regulators from appearing before federal banking regulators. Saladino left Jones Day, as did most of the associates who worked on Keating matters, and now supervises bond offerings for the County of Los Angeles. Fein was promoted at the end of 1986 to head up the firm’s corporate finance and mergers and acquisitions work. With that and the million-dollar Keating billings in his portfolio, he was able to leave for an established high-profile L.A. firm and take four other attorneys with him, including Fried. That firm subsequently fell apart and he now is of counsel with a Los Angeles bankruptcy firm, Stutman, Treister & Glatt.
In a recent interview, he maintained that he had no way of knowing that Keating’s operations were fraudulent until last year when the former Lincoln and ACC employees entered their guilty pleas.
Pogue’s and Fein’s gift for calling attention to the leaves and claiming they never noticed the forest is not the most troubling aspect of their viewpoints. True, it is shocking that Jones Day lawyers never warned Lincoln’s board of directors of the potential for criminal charges if things continued as they were; never quit working for the client in alarm after the second forgery discoveries; and never said no even when the client wanted to sell the junkiest of the junk bonds to depositors.
Most disturbing of all is that Jones Day may be right. Its actions on behalf of Keating may actually be typical of the way the most respected lawyers practice their craft within today’s megafirms.
The profession’s response to the litigation brought by the bondholders and government agencies has been to chastise bondholders for being greedy exploiters of know-nothing small investors. This is a public relations charade, many lawyers acknowledge. In private discussions, lawyers turn to their day-to-day reality. The inducements to ignore ethical obligations are vast and the possible penalties for drawing a line and refusing to cross it are immense.
Only a handful of leaders have been willing to break ranks and proclaim that the actions of law firms who represented Keating — five firms in addition to Jones Day were sued and settled—cry out for the profession to address its philosophical and ethical underpinnings.
One such critic is Stanley Sporkin, a Washington, D.C., federal judge who presided over a related case involving Keating but who is unaware of facts relating to Jones Day‘s work. He is also the former head of enforcement for the Securities and Exchange Commission.
“Without the complicity of this nation’s lawyers and accountants, the financial crimes of the 1980s would not have occurred,” Sporkin said in a 1993 speech before the committee of the federal bar association. “If our professions are hiding behind continued rules and practices that no longer have any vitality or place in today’s society, then they must be drastically altered or shed completely.”
©1995 Rita Henley Jensen
Rita Henley Jensen, a former senior writer for National Law Journal, is a freelance writer in New York City.
