Private Ledger Firm Shows Signs of Recovery After Rocky Year

Given the year Private Ledger Financial Services had in 1984, it’s a slight wonder that the firm still exists.

Last year, the company was sued by several former clients, got caught in the web of a collapsed and fraud-ridden Del Mar real estate investment firm, and was juggled back and forth between warring factions in complicated and protracted court battles.

“It could have been an unmitigated disaster,” acknowledged President Phillip Montross. “But we didn’t batten down the hatches and embrace a siege mentality.”

What Montross did was perform a careful balancing act.

He simultaneously prevented a complete takeover by Private Ledger’s former parent firm, American Principals Holdings Inc., while pitching his company’s value to Crown Life Insurance of Canada.

Crown had loaned APHI $9 million in 1983, taking an option to buy Private Ledger as collateral.

So when APHI collapsed after an April, 1984, disclosure that an “internal investigation” had unearthed financial improprieties, Crown had to choose between waiting in line as an APHI creditor or taking over Private Ledger.

Montross convinced Crown to do the latter.

Because of that, and despite $600,000 in losses and a 26% drop in revenues to $32 million for the year ended March 31, Montross maintains that Private Ledger is “stronger than it ever has been . . . from the standpoint of providing service and being a significant competitor.”

The company was “battered and bruised,” Montross said. “We took our lumps, we came out of it and we’ve a story to tell.”

Indeed, Private Ledger has been profitable since January and is rebuilding its stable of broker representatives. The firm is a registered stock broker-dealer that hires stockbrokers as independent contractors. It now has 664 registered brokers around the country who are drawing commissions of more than 85% of sales. That number is up from a low of 630 last fall, but still below the peak of 713 in April, 1984. About two-thirds of the brokers are in California.

It is Private Ledger’s network that Crown Financial Services, a subsidiary of Crown Life Insurance, believes could be lucrative. Originally, Crown officials had eyed Private Ledger’s brokers as peddlers of its insurance programs. But since the resignation last year of Donald Payne, the Crown executive who fashioned the purchase of Private Ledger, Crown has reassessed the San Diego-based broker-dealer and determined that selling securities could be more profitable than selling insurance.

Crown’s purchase of Private Ledger has not been completed, pending an independent appraisal of Private Ledger’s net worth.

As of March 31, the firm’s book value was $1.5 million, according to Montross.

Last summer, a federal judge ordered the sale for $750,000 plus the market value of the firm as of July 19, 1984.

(The appraisal has become something of an issue itself, with Montross claiming APHI is intentionally delaying the evaluation, and APHI sources protesting the cost of such a venture.)

Private Ledger was American Principals Holdings’ biggest subsidiary, and the court’s action was a blow to APHI. The sale, combined with the judge’s refusal in May to consolidate all of APHI’s limited real estate partnerships, has left American Principals with few financial options other than bankruptcy, several sources familiar with the firm believe.

However, Ashley Orr, APHI’s receiver, insisted that he will avoid filing bankruptcy and maintained that he wants to “get the remaining partnerships either on their own feet or assist them in disposing of the property.”

That activity is a far cry from American Principals Holdings’ heyday, when the firm managed assets worth about $250 million, after raising about $90 million from nearly 3,000 investors.

The funds were so fraudulently commingled, however, that the only way to properly dispose of the properties was to combine all of the partnerships into one “super fund,” Orr had argued.

But U.S. District Judge Leland C. Nielsen rejected his court-appointed receiver’s claim, allowing five of the remaining 44 partnerships to be separated from APHI, taking with them half of the existing $66 million worth of properties.

About 60% of the money APHI raised was from Private Ledger clients. In turn, commissions from APHI represented 5% of Private Ledger’s business.

That type of financial dependence likely won’t happen again at Private Ledger.

“As long as I’m here, we won’t be so invested in a firm that it controls a part of our business,” Montross pledged. “We just don’t allow that anymore (and) we’ve terminated half a dozen such relationships.”

There have been other lessons from Private Ledger’s dealings with APHI. Although Montross insists that Private Ledger has “no liability” for its role with APHI, he goes out of his way to discuss the firm’s emphasis on “due diligence,” the process of analyzing financial records for any possible improprieties.

Montross insists that Private Ledger officials didn’t know about APHI commingling. However, the commingling was so obvious that it “jumps out at you looking at the partnership books,” according to one APHI source.

For his part, Orr will not directly criticize Private Ledger officials, although he insisted that both APHI officials and the brokers selling the partnerships had an obligation to conduct due diligence.

The legal ramifications of APHI’s allegedly fraudulent business practices may not be known for some time. The firm has been sued for fraud both by former investors and by the Securities and Exchange Commission, and those cases are not likely to be settled soon. In addition, federal prosecutors in San Diego are investigating the firm.

Orr has drastically cut back operations at APHI, moving from a 6,000-square-foot headquarters in Del Mar to a 1,500-square-foot office in Kearny Mesa. The staff has been cut to eight from 13 last month, and further layoffs are planned, Orr said last week.

At Private Ledger’s year-old 32,500-square-foot headquarters in the Lusk Mira Mesa Business Park, 6,500 square feet sit empty. The empty space was supposed to be the new headquarters for APHI--before last year’s imbroglio. But empty space is not a foreign concept to Private Ledger, as the modern offices have far fewer workers than capacity.

The corporate staff numbered 95 two years ago; now there are 71 workers. “But we’re doing more with 24 fewer people than before,” said Montross, adding that half of the staff is new and that some of the departed workers were forced out.

In addition, Montross has initiated other cost-cutting measures--from a reduction in public relations and advertising to decreased air-conditioning usage and less executive travel--that have trimmed Private Ledger’s break-even point by $6 million per year.

Legal fees also will be cut, much to Montross’s delight. Legal expenses totaled only $97,000 in fiscal 1983, but ballooned to $245,412 in 1984 and to $410,000 in fiscal 1985.

Officials expect legal costs to be reduced to $264,000 this fiscal year.

But Montross said he won’t sacrifice his legal liability to cut costs.

“Private Ledger shouldn’t be judged liable because principals of APHI stole money,” he said. “I don’t like to settle cases I think we can win.”