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Funding's assets were filed with the court, and
that no one had contacted brokers to avoid another
inadvertent sale of hundreds of millions of dollars
of securities.

The most recent example of the regulators' pattern of pursuing its vendetta against ACC and Keating to the detriment of the best interests of the assets under their control came on November 16, 1989 when, at approximately 2:00 a.m., FDIC employees, FBI agents, local police and other security personnel stormed The Phoenician Resort and Crescent Hotel to seize control of them, without warning and without any discernible business or economic justification. After seven months of effort, the FDIC

had persuaded the minority shareholder of the hotels to approve a change of management.

Both the decision to change management and the methods used to implement that decision fail to pass the muster dictated by good business practice and sound business discretion.

The decision to change management, which was ultimately made by the FDIC-controlled Subsidiary management charged with the fiduciary duty to safeguard the Subsidiaries' equity interest in the Resort and Hotel, is perplexing when analyzed as business decisions must be analyzed, independent of the emotion-charged actions taken by the FDIC and related Federal agencies in their vendetta against ACC, Lincoln and Keating.

At the time of the takeover, both the Resort and the Hotel were experiencing record bookings and revenues, notwithstanding their relative infancy. The Phoenician Resort opened in October 1988 and yet, on November 16, under Keating's management, guests occupied in excess of 90% of The Phoenician Resort's 605 rooms. Moving into the Resort's busy season, the Resort's future seemed bright, secure and profitable under management controlled by Keating. Outside certified public accounts audited the Resort's daily operations and no claims of mismanagement, incompetence or inappropriate conduct have been asserted. The Crescent Hotel was operating at a level consistent with other similarly situated business hotels.

The continuity and synergy of the Resort and Hotel staff, painstakingly assembled over months, was shattered in the early morning hours. As the Federal agents stormed the hotels, hotel employees thought by the agents to be favorable to Keating were terminated without cause by the hideous act of tacking termination notices to the front doors of their homes at or around 3:00 a.m. (Not surprisingly, one termination letter found its way to the wrong front door, proving to be an embarrassing and possibly actionable incident for the terminated employee, whose neighbor discovered the letter on their door by mistake.) Apparently it

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did not occur to the regulators (or if it did, they rejected the notion) that an orderly transition, avoiding employee and operational disruption and personal embarrassment, could have occurred if they had raised their assertion of right to possession of the hotels at the Bankruptcy Court hearing scheduled only hours after the seizure.

In light of the unquestionably successful operations of the Resort and the Hotel, the FDIC decision to change management of the Resort and Hotel defies good business practice and logic, betraying the well known maxim that if "it ain't broke, don't fix it!"

The FDIC method of implementation of its questionable business decision likewise defies logic and rational explanation. If the decision to oust management had been justified and prudent, which it wasn't, sound business practice would mandate a quiet, orderly transition, both to avoid negative publicity and to negate the economic impact of the transition on the Resort and Hotel operations. Smart business managers seek to maximize value and minimize negative publicity. However, the FDIC called in the press and the television cameras to prove to the world that they had finally thrown Keating out, without regard to the economic devastation that the Resort and Hotel will surely suffer.

The Federal agents commandeered their offensive by changing locks, denying employees access to their desks and personal papers, posting agents throughout the premises, and turning a vibrant, exciting Resort into a facility populated by walkietalkie carrying men with bullet clips and a siege mentality. Local law enforcement officers were present to keep the peace.”

Resort visitors and conventioneers require peace and quiet, but not a "peace' mandated by armed FBI agents and FDIC hall patrols. Business quests seek reliable service and quality, not operations disrupted by a paramilitary action taken in the night.

During the hotel takeover, attorneys for ACC informed lawyers for the FDIC and other parties that United States District Judge Richard Bilby had ordered that all documents within the ACC umbrella of entities remain in place, without tampering or destruction. The FDIC also was formally notified that the automatic stay of Section 362 of the Bankruptcy Code protected the assets of the ACC Chapter 11 estate and that the FDIC takeover might be in willful violation of Section 362. Further, the FDIC was advised that certain documents and assets of ACC had been seized by them and must be returned.

As ACC outside attorneys were vacating their rooms at the hotels, FDIC agents attempted to stop, detain and search private ACC vehicles, without regard to the fact that the attorneys had only access to their rooms and personal possessions.

The tactics of intimidation by the FDIC and its minions were best illustrated when 12 to 15 FDIC agents surrounded one ACC outside attorney, as he and two female ACC employees exited The Phoenician Resort, each carrying a file box. The horde of FDIC enforcers demanded to search the file boxes and threatened to call the police, amidst defamatory allegations of theft and violation of Judge Bilby's document protection order. The FDIC agents finally backed away when consent was given to allow them to look in the file boxes, which contained such subversive items as underwear, socks, and an unopened bottle of Jack Daniels whiskey. The FDIC sheepishly moved aside after their Keystone Cops techniques had failed.

On Friday morning, November 17, 1989, FDIC attorneys who had not been present during the takeover reported their version of the takeover and subsequent incidents to Judge Bilby, claiming that the FDIC was only trying to enforce the orders of Judge Bilby. The Court asked the FDIČ lawyers to explain "under what authority of law your people have a right to make a stop pointing out that "you do not have a duty to use any kind of breach of peace or any threats to enforce the orders of this Court [and] you do not have a right to search ... the Fourth Amendment still exists. -1167

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The FDIC takeover of The Phoenician Resort and Crescent Hotel served no economic or business justification and ignored the fiduciary responsibilities assumed by the FDIC when it took control of Lincoln and the Subsidiaries. It was just another attempt by the FDIC to intimidate and embarrass ACC, Keating and other ACC officers and directors, providing additional grist for the media's mill.

The Bankruptcy Code requires counsel for a debtor, like each of the subsidiaries to be free from interests adverse to the debtor's estate. Counsel initially engaged by the FDIC to represent the Subsidiaries was not free from such conflicting interests. Winston & Strawn's legal fees for services to the Subsidiaries were guaranteed by the FDIC, creating a loyalty to the FDIC which could outweigh loyalty to the Subsidiaries. Indeed one lawyer for the Subsidiaries testified that he would not likely bring a lawsuit against the FDIC, even if one of the Subsidiaries had a claim. ACC has filed motions with the Bankruptcy Court to

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Transcript of hearing in the United States District Court for the District of Arizona on November 17, 1989, at pp. 60-62.

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disqualify both Winston & Strawn and its successor, Johnston Maynard Grant & Parker (formerly the Phoenix office of Winston & Strawn) on the foregoing grounds as well as on the grounds that generally a firm cannot serve two masters (the Subsidiaries and their creditors versus the FDIC). The pattern of FDIC management of the Subsidiaries suggests strongly that the FDIC's interests are not always consistent with those of the Subsidiaries.

While the details of the FDIC's management of Lincoln have been cloaked in the secrecy inherent in a regulatory conservatorship, the FDIC has regularly leaked information to the press concerning the conclusions drawn`about Lincoln's financial condition (which, somehow, were never contemplated during the three years of almost constant PHLBB scrutiny since March 1986) and other information has come to ACC's attention to suggest that the FDIC consciously recalculated asset values and reversed gains on transactions which had previously been passed upon by nationally recognized accounting firms to enable it to announce, for the first time, its view that Lincoln was insolvent.

Even

In December 1988, after two and one half years of regulatory examinations involving the regulators' scrutiny of all of Lincoln's transactional and financial records, the FHLBB directed writedowns of assets, reversals of gain and reserves of an aggregate of $137 million. According to the FHLBB, therefore, assuming their adjustments to be correct, Lincoln had a positive net worth on December 31, 1988 of $114 million. Somehow, by the end of July 1989 (during a period when the FHLBB had substantial control of Lincoln's operations under the 1988 supervisory directives and the April 14, 1989 conservatorship, Lincoln had incurred, according to public announcements by the PHLBB, $847 million in losses in the first six months of 1989.117/ today, after reviewing the FHLBB's administrative record on the conservatorship decision and other documents since made public, ACC is unable to determine the source or basis for these purported losses. It is difficult to comprehend how the regulators' own assessment of net worth could have changed so dramatically in such a short period of time; certainly the 1988 calculations were based on no less information. The Thrift Financial Reports ("TFR") filed by the conservator for June 1989 suggested that the conservator calculated reserves for Lincoln's real estate loans, not with reference to the quality or risk of a particular loan, but rather by applying a uniform discount rate to the book value of these loans without any indication of why this method was used

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See, 9.a., Granelli, J., "Lincoln S&L Posts $847 Million Loss in 1st Half of Year," Los Angeles Times, August 3, 1989 at 1; Savings Unit Has Big Loss," The New York Times, August 1, 1989; and Morell, L., "Regulator Labels Lincoln Insolvent," The Azizona Republic, August 1, 1989 at C5.

or how any particular discount rate reasonably could be applied to the entire portfolio.

The

In the same TFR, additional reserves on real estate assets appear to have been established on a propercy-by-property basis; however, the basis for these reserves has not been disclosed. conservator also "marked to market Lincoln's corporate bonds resulting in a writedown of $80 million. GAAP requires that securities intended and capable of being held to maturity be booked at cost.1187 The writedown resulting from the apparent decision of the conservator that these bonds would not be held to maturity has nowhere been explained, but certainly cannot be attributed to actions or inactions of ACC management.

The reasonableness of any of these adjustments must therefore be questioned; no tribunal has concluded that these adjustments are appropriate. As Charles J. Gozdanovich, FHLBB Examiner-inCharge, OTS, Pittsburgh said, in commenting on testimony regarding accounting adjustments made in the 1988 examination, "honest people disagree. And we had to apply a lot of judgment as it pertained to these individual loans and assets. Whether there was a loss or not at that point in time is debatable . . but it was not as cut and dry as (California Examiner] Newsom is leading [one] to believe. It simply was not the case. .119/

These adjustments have now been publicized as if they were truth to portray ACC as having reported its financial condition improperly and to accuse major accounting firms of wrongdoing.

One of the most startling bases for the writedown of assets and reversal of gains was the report of Kenneth Leventhal & Company ("Leventhal") to the law firm Squire, Sanders & Dempsey, the FSLIC, and the FHLBB, dated July 14, 1989 "Leventhal Report and released to the press by the FHLBB on August 3, 1989.12 This report purports to reanalyze fifteen selected real estate transactions by Lincoln between October 1986 and June 1988 (all of which were, therefore, previously subject to analysis by the FHLBB in its several regulatory examinations of Lincoln). All

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119/

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FIRREA, enacted after the TFR was prepared, now permits markto-market accounting.

Testimony before the House Banking Committee on October 31, 1989.

In fact, two separate and different versions of the Leventhal reports have been identified, both of the same date, one of which was released to the press for purposes as to which ACC can only speculate, and the other of which apparently was provided to the FHLBB.

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