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Lincoln to the extent it, in fact, has ever occurred, resulted from the issuance of these directives and their aftermath, and not from the actions of ACC or its management.907

Dochow clearly knew that his directives signalled the end of Lincoln. The letter accompanying the December 20, 1988 directives anticipated the decision to sell Lincoln, stating, "We have encouraged your representatives to vigorously pursue these actions for the purpose of restoring Lincoln to a financially strong and safe and sound condition. . . . You should take every action to ensure that details of the proposed sale are completed... so that we can expeditiously review it for regulatory acceptability. We will endeavor to work with all acceptable acquirer(s) to ensure that any regulatory questions can be answered and that the resulting institution is in sound condition."

Throughout January and early February 1989, Dochow and the ORA continued to issue supervisory directives to Lincoln. For example, by letter dated January 30, 1989, Dochow referred to oral commitments for loans or other transactions and required that this "fundamentally unsafe and unsound activity immediately cease. The directive also required that various information regarding such oral commitments be provided for approval. On February 6, 1989, Dochow prohibited Lincoln from agreeing to any legal settlement involving cash payments in excess of $50,000 or the release of liens in excess of $500,000 without prior consent of his office. He further required written summations of any such proposed settlements be provided at least ten business days prior to any settlement agreement. These directives further tightened the control of the ORA over Lincoln and precluded Lincoln from

907

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Former California Savings and Loan Commissioner Lawrence W. Taggart pointed out that "[i]t's very, very unusual for an association to be examined three and a half three to three and a half years. One, it's an extreme disruption on the operations. There's very few associations in this country that can withstand that kind of pressure . . . It totally disrupts everything. Number two, there was even a comment that was made in the paper. . I believe it was one of the supervisors from the Federal Home Loan Bank [who] made it

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'We haven't found anything yet, but we know when we get When

in there we're going to find something.

Representative McDermott responded to this testimony and
asked "Well, then it's your testimony that this was some kind
of witch hunt that they got into and, by God, they were going
to find something no matter how long it took, and that,
really, the regulators brought down the institution?"
Taggart responded, "Yes, sir." Testimony of Lawrence W.
Taggart on November 7, 1989 before the House Banking
Committee.

proceeding with any activity without prior consent. The cumulative effect of the supervisory directives imposed by the ORA was effectively to terminate Lincoln's ability to conduct its business or to realize income and profits from its investments.

Additionally, the ORA, on February 3, 1989 sent Lincoln an Interim Agreement for execution, which in essence eliminated what little remained of any level of control Lincoln have over its own business. The proposed Interim Agreement required prior written approval for virtually all of Lincoln's investments and its day-to-day operations. Dochow also suggested that the 1988 ORA Examination Report was perhaps only an "estimate" and that "very poor underwriting and appraisal practices' increased his concern over the quality of Lincoln's assets, leading him to "consider Lincoln to be even more severely undercapitalized" than previously

believed.

On February 14, 1989, the FHLBB commenced yet another examination of Lincoln, citing that its previous position on Lincoln's capital adequacy as of September 30, 1988. was based upon 'estimated figures and could not be relied upon." Such "estimated figures, however, had taken the 1988 examiners six months to develop and had been the basis for the Dochow's debilitating directives .

XIV. ACC's Sale of Subordinated Debentures

Charges have been advanced that the sale by ACC of its subordinated debt in Lincoln branches was somehow unusual and represented an intent to divert Lincoln deposits to ACC. charges are unfounded.

These

ACC has been a public company since 1971. Prior to its Chapter 11 filing, its equity securities were quoted by NASDAQ and listed on several stock exchanges, including the Pacific, Cincinnati and Philadelphia Stock Exchanges. Since becoming a public company, ACC had issued its debt securities in public offerings underwritten by major national and regional underwriters which, by mid-1987, aggregated approximately $1.017 billion in private and public debt securities. Of that amount, close to $850 million principal amount has been repaid and, prior to ACC's filing for protection under Chapter 11, ACC had never failed to make any principal or interest payment at or before any due date.

By mid-1986, ACC had become aware that Lincoln's financial institution competitors were offering, either directly or through affiliates, a wide array of uninsured financial products to existing and potential savings and loan customers, including fixed and variable annuities, money market funds, limited partnership units and equity and debt products of all types. The institutions offering these products did so, ACC learned, as a means of

preventing or controlling "disintermediation"

the loss of depositors' funds flowing out of insured accounts into other instruments because of the higher yield, greater liquidity, or other advantages such instruments offered. To keep such funds within the institution or its affiliates, these institutions expanded their product offerings beyond fixed rate or fixed term insured deposits. Like other institutions, 91/ ACC and Lincoln concluded that many customers would keep part of their assets in insured accounts and place another part into uninsured products. Indeed, Lincoln, under pre-ACC management, had offered alternative securities and investment products in its branches under an agreement with Prudential-Bache Securities which provided Lincoln with 25% of securities commissions earned on sales of securities in the branches.

By mid-1986, ACC was considering a public offering of its subordinated debentures92/ through Lincoin branches. In compliance with rules of the SEC allowing employees of an issuer to sell the issuers' securities without registering as broker dealers, ACC intended to use full-time employees, who were not registered brokers, to market the debentures in Lincoln branches. Indeed, the idea of using ACC employees rather than unaffiliated securities brokers originated in part from the FHLB-SF which, in 1985, had approved a Lincoln subordinated debenture offering to be sold in Lincoln branches with the debentures being marketed and sold only by employees of Lincoln.

ACC filed a registration statement with the SEC, which declared the registration statement effective in November 1986, the same month that the California Department of Corporations issued its order of qualification for the offering. The California Department also reviewed the plans for marketing ACC securities through Lincoln branches and, in January 1987, granted ACC permission to sublease space in the Lincoln branches for that purpose. The FHLBB and the FHLB-SF were provided copies of the

917

92/

Even today, savings institutions offer a variety of uninsured securities products. For example, Bank of America has a securities affiliate through which depositors can invest in mutual funds, stocks and high yield bonds; Glendale Federal Bank also has a brokerage capability with a similar range of products available. Columbia Savings and Home Savings of America also makes available to depositors a similar range of investment products; Home Savings also offers precious metals through its brokerage affiliate.

"Subordinated' debentures rank junior to other debts of the company in priority upon liquidation, but senior to all equity, including preferred and common stock.

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registration statement in ACC's H-(b) 12 filings and as part of ACC's annual debt budget application.

Each of these agencies was advised, both in the "Plan of Distribution section of the registration statement and, with respect to the California Department, in correspondence, that "the debentures will be offered for sale only at the branches of Lincoln Savings and Loan Association, by persons who are full-time employees of the Company or an affiliate of the Company (other than Lincoln Savings)." Until the California Department, for reasons ACC believes to be wholly unrelated to the way the debentures were marketed, rejected ACC's application to renew the branch subleases in June 1988, no agency with regulatory or supervisory oversight of Lincoln or ACC objected to this plan of distribution.

Because the debentures were to be offered in Lincoln branches, ACC was acutely aware of and sensitive to the need to avoid any possibility of confusion in the minds of depositors as to the identity of the issuer of the securities or the fact that such securities were not FSLIC insured. Consequently, the debenture prospectus which was provided to each customer carried on the cover page (in the type substantially larger than any other on the page) the heading:

American Continental Corporation

Subordinate Debentures

In bold type, also on the cover, was the following legend:

THE DEBENTURES BEING OFFERED ARE THE SOLE
OBLIGATION OF THE COMPANY AND ARE NOT BEING
OFFERED AS SAVINGS ACCOUNTS OR DEPOSITS AND
ARE NOT INSURED BY THE FEDERAL SAVINGS AND
LOAN INSURANCE CORPORATION.

All personnel associated with the offering were repeatedly instructed that there could be no implication, no matter how remote, that Lincoln was the issuer of the debentures or that the debentures were insured. Advertisements noted that the debentures were not FSLIC insured. ACC employees in the branches were not permitted to provide Lincoln-related services to the public, and Lincoln employees were not permitted to provide information about the debentures to the public, other than to state how more information could be obtained, and provide other information of the most routine kind, and were instructed to refer any interested customers to the "securities desk' where an ACC employee could provide information to them, and sell debentures to them if they desired.

To the best of ACC's knowledge, during the life of the program, no actual or prospective purchaser ever reported any confusion or misunderstanding about the identity of the issuer or the insurance of the product to any of the governmental agencies involved in the oversight of the program. Indeed, as recently as November 14, 1989, in his testimony before the House Banking Committee, SEC Chairman Richard Breeden confirmed that, prior to ACC's Chapter 11 filing, he did not believe the SEC had received any complaints about ACC's sales practices. Both the California Department and the California Department of Corporations conducted anonymous inquiries and tests to make sure that the offering was being made in accordance with their authorizations, and in public and private statements acknowledged the propriety of ACC's marketing efforts. In 1987, the Chief Deputy Commissioner of Savings and Loans of California "said his agency does not object to the sale of American Continental's debentures in Lincoln's offices. 'We looked into that, and we determined that there is no Lincoln Savings personnel involved (in the sale of

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securities) They (the salesman) are very precise in pointing out that the debentures are not insured by the FSLIC.937 In response to concerns raised by California Savings and Loan Commissioner Crawford, the California Commissioner of Corporations sent one of its investigators to a Lincoln branch to inquire about the debenture offering on an undercover basis. That investigation concluded that the debentures were being offered only as obligations of ACC, that the absence of FSLIC insurance was set forth on the cover page of the prospectus, and that there was no advertising in use indicating anything to the contrary. 947 ACC specifically requested the California Department to provide all information it had received suggesting confusion; ACC was advised by the California Department in writing that it had no such information.

ACC's subordinate debenture program was among the most heavily regulated securities offerings in history, with five independent government agencies (SEC, FHLBB, FHLB-SF, California Department of Corporations and California Department of Savings and Loans) closely monitoring all marketing activities. ACC conducted the offering according to all applicable rules and misled no one.

937

941

Luke, R., "More Problems for Thrift with Regulation Link,"
American Banker, February 23, 1987 at 1.

Memorandum dated August 16, 1989 from Wayne Simon, Chief
Deputy Commissioner of Corporations, to Janice Rogers Brown,
Deputy Secretary, Business, Transportation and Housing
Agency.

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