CHARLIE'S AN ANGEL?

By ADAM ZAGORIN/SCOTTSDALE

The buzz ricochets like a hot stock tip from table to table on the spectacular dining terrace of the $600 million Phoenician resort hotel in Scottsdale, Arizona. Charles H. Keating Jr., his head held high, his gangly 6 ft. 5 in. frame clad in rolled-up blue jeans and a Windbreaker, strides in, startling a middle-aged couple at lunch. The man, still in golf togs, drops a steak knife and says, "Edith, I can't believe he's out of prison; it's the guy who built this hotel."

Oblivious to the commotion he is causing, Keating table-hops and shakes hands with hotel staff. The guy acts as if he still owns the joint, as if he's still a Southwestern Gatsby peddling hundreds of millions of dollars of soon-to-be-worthless junk bonds to elderly Southern Californians. Can Keating still summon U.S. Senators--the Keating Five--to his defense at the touch of a phone pad? Or procure the services of top law and accounting firms? Or hire Alan Greenspan, who, before he became Fed chairman, gushed over the "outstanding success" of Lincoln Savings & Loan, Keating's star asset? No. All that happened before Lincoln crashed in a $3.4 billion pile of broken dreams, the most costly savings and loan failure in U.S. history.

What seems forgotten now, though, is that he just got out of the joint, the Federal Correctional Institution in Tucson, improbably freed after serving less than five years of a 12 1/2-year sentence. Since Keating walked, at age 73, prosecutors have been beside themselves to reimprison or retry him. In the meantime, he lives in near seclusion, although he recently met with TIME for two days of interviews that offer his first detailed account of his case since his release. Tan, relaxed and defiant, he says he is not going to cop a plea, say, for time served: "I didn't come this far to cut a deal. My case will be fought on the merits, and I am completely innocent."

It sure didn't look that way in 1989, after Lincoln bit the desert dust and Keating faced a series of highly publicized trials. Prosecutors vilified him as a high-living, white-collar sociopath, and he was convicted on no less than 90 federal and state counts of fraud, racketeering and conspiracy. The main charges: that he directed the sale of fraudulently marketed junk bonds to tens of thousands of Lincoln customers and that he orchestrated a series of sham real estate transactions to inflate Lincoln's profits. Packed off to prison in handcuffs and chains under the glare of TV cameras, he became one of the most reviled white-collar criminals in America, the spat-upon face of a crisis that cost nearly $500 billion.

But now, in a recent reversal of fortune that has outraged many of the more than 22,000 losers in Keating's junk-bond schemes, all his convictions have been thrown out. Last April, a federal court found that O.J.-judge Lance Ito, who presided at Keating's 1991 California state trial, had bungled the job by issuing faulty instructions to the jury. Then, just last December, came an even bigger shock: a federal judge ruled that Keating's 1993 federal conviction was tainted. And in a separate rebuke, a three-judge federal appeals panel declared that the evidence of his guilt is "not overwhelming." That means Keating is no longer a criminal in the eyes of the law--but he is a deadbeat. He still faces roughly $5.2 billion in civil judgments against him stemming from Lincoln's collapse. All his identifiable property, including his home, was long ago auctioned off by the government.

Keating now lives in Phoenix, Arizona, sheltered by a close-knit clan: his wife Mary Elaine, six children and 29 grandchildren. House hopping between his children's homes like a visiting relative, Keating recently left the villa belonging to one daughter and son-in-law and moved into the more modest home of another of his children in a working-class Phoenix suburb, a Gulliver at rest in a granddaughter's cramped bedroom.

At a restaurant one night, as he chats over dinner with his attorney, Stephen Neal, the legal Houdini behind his release, Keating confronts naked hostility: a complete stranger, recognizing his craggy features like a ghost from an old "wanted" poster, drops by his table to hurl an unprovoked insult. He's unperturbed. "When I was first brought into the lockup I faced a howling, screaming mob," Keating says matter-of-factly. He points out that unlike other major white-collar felons of the 1980s, who sojourned in comparatively luxurious "Club Feds," he did "hard time." On the inside, he was known as "the old guy" and initially disliked by fellow convicts. "I was locked down for nearly five years, but I survived like a man." Keating even manages some humor on his jailbird days. "I like a clean toilet," the former tycoon remarks, noting that he volunteered to clean bathrooms for a unit of 48 convicts.

Those who knew Keating during his glory days evoke a complex, highly intelligent and driven executive who often worked 18-hour days. Keating made unmerciful demands on subordinates. He leaned hard on top-flight law and accounting firms; a number, including Ernst & Young, Jones, Day and Kaye, Scholer, together paid hundreds of millions of dollars to settle claims that they helped defraud investors. The firms denied any wrongdoing.

Lincoln's boss spent the company's money as if it were his own. Jetting around in a fleet of aircraft known as "Charlie's air force," he once went on a three-week tour of Europe with more than 20 family members in tow. His lavish parties would feature the host wandering around cradling a bottle of Dom Perignon, sometimes encouraging guests to jump in the pool fully clothed. His corporate executives would often find thick, neat packets of hundred-dollar bills under their plates when they went to Keating's house for dinner. Family members got a little more: Keating put relatives--including his son, sons-in-law and daughters--on the payroll and funneled them more than $37 million in about five years. But because much of it was in stock, little remains.

Keating's pretensions had a pious side too: a devout Roman Catholic, he gave millions in personal and corporate funds to charities, including Mother Teresa. Former Senator Dennis DeConcini, whose political career was wrecked by his association with Keating, remembers meeting Mother Teresa in Washington: "I introduced myself as coming from Arizona, and she asked, 'How is my friend Charlie?'"

Although many of Keating's junk-bond customers consider him "the Hannibal Lecter of finance," as one put it, he clings to his claim of innocence, blaming regulators and Congress for his troubles. Indeed, some of his fellow inmates told TIME that he never admitted guilt or regret for his actions. Kevin McKinley, a convicted Irish Republican Army weapons dealer, grew close to Keating as the two walked the prison yard. As he put it, "Charlie was never a rat. He refused to sell out his associates and wouldn't compromise with the government just to get a better deal. Charlie believes he is right."

Don't tell that to the thousands of losers in Keating's junk-bond schemes. Ramona Jacobs of Burbank, California, a telephone-company assistant manager who testified in one of the civil-fraud cases, says she lost $11,000 when the junk bonds she was talked into buying at Lincoln Savings turned out to be worthless. (Most of the purchasers have since recovered about 70 cents on the dollar.) The loss, she says, delayed desperately needed medical treatment for her daughter Michelle. "The people at his bank told me it was safe; they said there was nothing to worry about."

Larry Flynt, publisher of Hustler magazine, certainly has not forgotten Keating either. In the 1970s and early '80s, Keating became an antismut crusader, attacking Flynt and winning an appointment from Richard Nixon to an antipornography commission. Flynt told TIME, "The Keatings of this world are the real perverts. You can't dismiss him as someone who just wanted to take people's money; he's one of the most dangerous men in America because he is completely intolerant of others and believes he is always right."

Oddly, in one sense he was. Many of his real estate deals--confiscated and resold by the feds at fire-sale prices--are today worth a fortune. If Keating had been able to ride out the real estate crash that bankrupted operators just as smart as he was, bondholders might have got their money back. But that's a junk-bond if. The Phoenician, derided as a symbol of Keating's wretched excess, is a crown jewel for its new owner, ITT-Sheraton, and worth at least twice what Keating spent to build it.

Prosecutors trying to reopen his case will have a tough time. Many of the witnesses, including key subordinates from Lincoln and its parent, American Continental Corp., are far from eager to repeat their performance now that their own cases have been settled. So it seems that Keating may have beaten the rap. True, he has served more time than nearly all the major white-collar criminals of the '80s, including notorious junk-bond king Michael Milken, with whom he did hundreds of millions of dollars in deals.

Milken is still raking it in. Keating is itching to get back on the horse too. He told TIME that he is already considering going back into business should his legal difficulties clear the courts. What sort of business? "I may go back into business--let's just leave it at that." In fact, unencumbered by legal obstacles, there is no reason why Keating could not buy another S&L and start all over again.