Judge Rejects Keating Suit; Sees 'Looting' of Lincoln

In a blistering opinion, a Federal judge today dismissed the lawsuit brought by Charles H. Keating Jr. to regain control of the failed Lincoln Savings and Loan Association. The judge said that the Government seizure of Lincoln was ''fully justified'' and that the actions of Mr. Keating and his associates amounted to a ''looting'' of the institution.

In handing the Government an across-the-board victory, Federal District Judge Stanley Sporkin found that Mr. Keating and other Lincoln directors engaged in ''unsafe and unsound practices'' that warranted the seizure last year by regulators. The judge said Mr. Keating and other executives had executed a series of improper transactions to funnel money from Lincoln to its parent company, the American Continental Corporation.

The ruling, the first significant court decision to examine Mr. Keating's management of Lincoln and its takeover, came in a much-publicized lawsuit that Mr. Keating had filed to regain control of the institution, which was seized on April 14, 1989.

At more than $2 billion, the bailout is one of the costliest on record, and Mr. Keating's campaign contributions to lawmakers and his flamboyant personal style have made him a symbol of the savings and loan excesses leading to the nation's worst financial crisis. Mr. Keating has attributed Lincoln's demise to the Government, saying that regulators engaged in a vendetta against him.

'Not a Pretty Picture'

''What has emerged is not a pretty picture,'' Judge Sporkin said in his opinion. ''It is abundantly clear that A.C.C.'s officials abused their positions. Bluntly speaking, their actions amounted to a looting of Lincoln.''

''This was not done crudely,'' the judge wrote. ''Indeed, it was done with a great deal of sophistication. The transactions were all made to have an aura of legality.''

The judge's only criticism of the Government appeared in a footnote in which he said it was ''inexplicable and clearly inappropriate'' for the Federal Home Loan Bank Board, in the face of threats of lawsuits, to have agreed to transfer the investigation of Lincoln and ignored an earlier critical report of the institution by its San Francisco branch.

''This is an extremely important victory in a very significant case,'' said T. Timothy Ryan Jr., director of the Office of Thrift Supervision, the successor agency to the bank board. Harris Weinstein, the agency's chief counsel, said the ruling reinforced the view that Mr. Keating and the senior management operated Lincoln ''primarily for their own benefit at the expense of the institution and its depositors.''

One of Mr. Keating's lawyers, Robert K. Huffman, declined to comment on the opinion or say whether an appeal would be made.

Directors Criticized

Moving broadly beyond the Keating claims, Judge Sporkin also questioned why lawyers and accountants at Lincoln and American Continental had failed to stop or at least disassociate themselves from the improper transactions.

Judge Sporkin said the Government's evidence proved ''beyond question'' that the main purpose of many transactions ''was to create paper profits to 'window dress' the financial statements of Lincoln and its parent.''

''The entire board of directors, in addition to Keating and the others that controlled and operated Lincoln, must be held strictly accountable.''

Exploring a tax agreement plan in which Lincoln transferred more than $94 million to American Continental purportedly to take advantage of loss carry-forwards at the parent, the judge called it a ''dishonest scheme.'' He said it was ''nothing more than a clever but impermissible way of looting Lincoln by upstreaming funds from Lincoln to A.C.C.''

''Plaintiffs used the concept of tax sharing as a way of dipping into Lincoln's coffers,'' he added.

Land Sale Criticized

The judge said that another transaction involving the sale of 20,000 acres of land outside Phoenix by a Lincoln subsidiary was engineered solely to enable Lincoln to transfer $4.4 million to American Continental.

While Mr. Keating appeared confident throughout much of the proceedings that led to today's decision, few lawyers had said they thought he would be handed a favorable ruling from Judge Sporkin, who earlier in his legal career had vigorously prosecuted corporations as director of enforcement at the Securities and Exchange Commission. His decision today represents a small piece of the enormous legal battle between the Government and Mr. Keating.

Mr. Keating is under parallel investigations that are being conducted by a grand jury in Los Angeles, the S.E.C. and the Internal Revenue Service. A civil lawsuit was filed two weeks ago by the Office of Thrift Supervision against Mr. Keating and others seeking $40.9 million. Earlier, a racketeering case was brought by regulators naming Mr. Keating as a defendant and asking for $1.1 billion.

Bondholders Suing

He is also the target of lawsuits brought by bondholders of American Continental, many of whom are elderly and say they were defrauded by sales made to them in the lobbies of Lincoln branches. The company is in Chapter 11 bankruptcy proceedings.

Mr. Keating has struck back at regulators in other lawsuits, but the Sporkin proceeding stands out, not only because it addressed many legal questions for the first time, but also because it served as a critical turning point in the public relations battle between Mr. Keating and regulators.

Mr. Keating's lawsuit provided him with a powerful forum to strike back at the Government, putting regulators on the defensive and introducing important pieces of evidence that at the least raised questions about how officials had handled the affair.

Took the Spotlight

At the same time, Judge Sporkin's willingness to question both the Government and Mr. Keating at great length over more than six months emboldened the Phoenix developer to move into the public spotlight. Only a month before the Sporkin hearings began last December, the normally loquacious Mr. Keating sought to maintain a low profile. He declined to answer any questions before a Congressional committee examining his campaign contributions to five senators who regulators say intervened on his behalf, and instead invoked his Fifth Amendment privilege against self-incrimination.

Once the hearings were under way and it became clear that Judge Sporkin would permit Mr. Keating wide latitude, he radically changed his tack, appearing on television and arranging interviews with virtually anyone who would listen.

For hours, Mr. Keating would engage in a casual colloquy with Judge Sporkin, who seemed to be enjoying the event, often asking questions as he leaned back in his chair, almost supine, and stared at the ceiling, his glasses perched atop his head. The judge questioned, interrogated, debated and chatted with Mr. Keating during several days of testimony from January to May.