Acg 4325

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Zach Myatt, Patrick Mullen, Daniel Osman, Jill Hass, (Group 8) Chapter 12 Lincoln Savings & Loan
1. What "red flags" might have warned Arthur Young that LS&L was a high risk client? * They used land swaps and circular transactions to overstate the thrift's earnings. * The SEC charged Lindner and Keating with issuing $14 million of sweetheart loans to AFC insiders through Provident Bank. In the most egregious alleged violation, the SEC charged that Keating borrowed $500,000 and then ordered the loan written off. * AFC settled the charges in 1979, assigning most of the blame to Keating. Keating was fined $1.4 million and banned from the securities markets for three months.

2. What motive did Charles Keating have to understate LS&L's loan portfolio when he purchased the thrift? * Keating allocated an improperly small amount of the $51 million purchase price to LS&L's loan portfolio and inflated the amounts allocated to other assets. * When LS&L subsequently sold the loans at their true value, it reported a gain for the difference between the selling price and the understated carrying values. 3. LS&L reported $153 million of gains on real estate sales in 1986 and 1987. What facts might have caused the auditors to question whether such gains were feasible? * Its ability to report profits and pay dividends depended entirely on its ability to report gains on land transactions. Without the $153 million of gains on real estate sales reported during 1986 and 1987, LS&L would have reported pretax losses totaling $8 million. * This type of seller-financed deal was common for LS&L during 1987. Most of the parties who purchased Hidden Valley land at inflated prices received direct or indirect loans from LS&L. * Keating and his family reaped $34 million from salaries, bonuses, and sales of stock between 1985 and 1988. 4. Why wasn't LS&L closed in spring 1987 as investigators from the San Francisco office of the FHLBB recommended? * Among the unsafe operating practices described in the investigators' report were investing millions of dollars in unrated junk bonds, extending land development loans without appraisals, and back-dating loan applications. * The senators, later dubbed the "Keating Five," met with FHLBB commissioner Ed Gray twice during April and urged him to leave LS&L alone. * On July 1, Ed Gray was replaced as head of the FHLBB by Danny Wall. In September, Wall took the highly unusual step of removing the LS&L audit from the San Francisco office's jurisdiction. * The change gained Keating an extra 18 months and cost U.S. taxpayers hundreds of millions of dollars. Keating's generous campaign contributions may have had something to do with the senators' support. * Over a period of several years, Dennis DeConcini received approximately $40,000 from Keating and his associates; John McCain $110,000; John Glenn $200,000. Alan Cranston received donations and loans of almost $1 million. * In 1986, Keating recommended to Ronald Reagan's Chief of Staff, Donald Regan, that Lee Henkel be appointed to fill a vacant seat on the FHLBB. * Henkel received a presidential appointment to the FHLBB in November 1986. But he resigned only four months later when the Wall Street Journal disclosed that LS&L had advanced more than $60 million in loans to corporations and partnerships in which Henkel had an ownership interest. 5. Auditors must maintain independence in fact and appearance. What events might raise doubts about whether Jack Atchison and the Phoenix office of Arthur Young were independent of Charles Keating and LS&L? * While supervising the audits, Atchison wrote several letters to the FHLBB defending LS&L's operating practices. * He also wrote to and met with senators urging them to intervene on LS&L's behalf. Atchison was richly rewarded for his advocacy. * In the spring of 1988, shortly after the completion...
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