`Somebody Has To Pay' And That Means S&L Lawyers, Too

In his heyday, convicted savings and loan kingpin Charles H. Keating Jr. deployed battalions of well-paid lawyers to blunt the regulatory assault on his high-flying California-based thrift, Lincoln Savings & Loan Assn. In the three years since Lincoln's $2.6 billion failure, many of those advisers have been sued for alleged misdeeds.

But on Mar. 2, the feds sent out their strongest signal yet that it's payback time. Thrift regulators ordered the prestigious New York law firm of Kaye, Scholer, Fierman, Hays & Handler to pay an unprecedented $275 million in damages for allegedly misleading regulators about the true state of Lincoln's finances. They also sought to freeze the firm's assets and bar it from practicing banking law. The firm, which took in $13 million for representing Keating, denies the charges and promises a vigorous defense. "It's pure vindictiveness," says one Kaye Scholer insider.

`STRIKING BACK.' The move is part of a sprint to the finish for the government. Banking regulators, racing against a three-year statute of limitations in the 1989 thrift-bailout law, are pursuing cases against a dozen or more law firms that assisted now-failed thrifts (table). Lawyers also face attacks from state officials. Says Miami lawyer Thomas Tew: "Regulators are tired of being embarrassed, and they're striking back."

The Office of Thrift Supervision (OTS) case against Kaye Scholer and managing partner Peter M. Fishbein attacks the very way lawyers represent clients before regulatory bodies. The government accuses the firm of breaching its professional duties in the mid-1980s by keeping mum about Lincoln's problems. The firm also failed to disclose that Lincoln's auditors had resigned out of concern over the thrift's fiscal health, the regulators charge. And they contend that Kaye Scholer neglected its obligations to Lincoln's board and had a conflict of interest in representing both Lincoln and its parent, American Continental Corp. in Phoenix.

Some legal experts say that if the government's claims hold up in court, they will revolutionize the attorney-client relationship, forcing lawyers to put loyalty to the state above loyalty to clients. "Lawyers have a duty of strict confidentiality to their clients," says Henry A. Kelly, a former head of the American Bar Assn.'s panel on lawyers' liability. Gary G. Lynch, a former Securities & Exchange Commission enforcement chief who is defending Kaye Scholer, says the government's position "would fundamentally undermine traditional lawyer responsibilities to clients."

SCAPEGOATED? That argument doesn't impress regulators, who are under enormous pressure to win scalps. With the thrift fiasco's tab now exceeding $150 billion, it's clear the search to fix blame for S&L excesses will continue. "At the government level, they're saying: 'Somebody has to pay,' " says the Reverend Robert F. Drinan, an expert on legal ethics at Georgetown University.

Some lawyers have already paid for their ties to Keating, who has been convicted of state tax-fraud charges and is now fighting federal fraud charges. Last year, Chicago's Sidley & Austin agreed to pay $7.5 million to settle malpractice charges. The firm gained notoriety when a 1988 memo written to Keating by Washington partner Margery Waxman became public. Waxman had boasted of putting regulators on the defensive. "You have them right where you want them," she wrote. She later told a Senate panel that her comments were hyperbole designed to impress her client.

Now, however, regulators think they have the lawyers where they want them. Kaye Scholer was ready to settle with other thrift regulators for roughly $20 million, say sources close to the firm, but the OTS wanted even more. That puts Kaye Scholer in a tight bind: It may prefer to defend the attorney-client principle, but if its assets are frozen and future business is imperiled, it may have to settle.

The legislators who wrote the 1989 bailout law acted not only to clear the wreckage of the thrift industry but also to punish those who did the damage. The action against Kaye Scholer is a clear sign that the feds' latest roundup may rope in other law firms.

        The firm is fighting a $50 million suit by regulators over its work for 
      Lincoln Savings & Loan
        The government is suing it and others for $192 million over the failure of 
      Midwest Federal Savings & Loan
        The firm agreed in June, 1991, to pay some $20 million to settle a federal 
      suit over work for Silverado Savings & Loan
        The firm, which represented Lincoln, has paid millions to settle cases filed 
      by the government and bondholders
      DATA: BW
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