Wespac Sues Brokers for $31 Million : Claims Its Trusts Were Mismanaged, Spurring Big Losses
Wespac Financial Corp. of Irvine has sued the Los Angeles investment banking and securities brokerage firm of Morgan, Olmstead, Kennedy & Gardner for more than $31 million, alleging fraud, misrepresentation and breach of fiduciary duty in the company’s handling of its investments.
The suit, filed Friday in Orange County Superior Court, says unauthorized and misrepresented investments by Morgan, Olmstead caused two Wespac-sponsored real estate investment trusts (REIT) to lose $3.7 million in principal and $1.5 million in potential earnings. In addition, Wespac is asking $25 million in punitive damages, as well as more than $900,000 in fees it claims it lost because of reduced real estate purchases by one of the trusts.
One of Morgan, Olmstead’s brokers, Gary W. Rollason, also is named as a defendant. A Wespac official said Rollason originally sold Wespac on the investment arrangement that led to the trusts’ losses.
Wespac Financial President Neil Elsey said that he and Wespac Chairman Janet Decker personally loaned the corporation $3.7 million, which then was given to the two trusts to cover the lost principal. The move was made to protect the parent company’s reputation, he said. Elsey and Decker also gave the trusts $1.5 million in letters of credit to reimburse them for “lost opportunities”--earnings a consultant said the trusts would have made with proper investments.
Offering Cut Short
John Pruitt, Wespac Financial’s vice president, said the Securities and Exchange Commission last December cut short the offering by one of the trusts because of the losses--an action Pruitt said ultimately cost Wespac Financial more than $900,000 in lost property management, advisory and acquisition fees.
James G. Vocke, Wespac’s financial officer, said Monday that Wespac began doing business with Morgan, Olmstead in July, 1983. He said the securities firm agreed to handle the investment of $30 million raised by Wespac Investors Trust II and Wespac Investors Trust III. The money was a portion of $95 million that the two trusts ultimately raised in public offerings.
Vocke said Wespac wanted Morgan, Olmstead to invest the funds in real estate-related securities to maintain the REITs’ tax status until Wespac Financial could find appropriate real estate properties to purchase with the money.
The suit claims that Morgan, Olmstead falsely told Wespac it “could protect . . . investment principal and greatly reduce or eliminate the risk of loss by the use of certain hedging techniques.”
The originally agreed-upon plan, Vocke said, was for Morgan, Olmstead to invest some of the trust funds in pooled mortgage securities, such as Fanny Mae mortgages, and, as an investment hedge, to use the remainder of the funds to purchase mortgage securities futures.
Instead, Wespac alleges, Morgan, Olmstead initially failed to acquire any kind of hedge for the two trusts and later made unauthorized and “risky” investments with the trust funds.
Ann Anderson, general counsel for Morgan, Olmstead, said she had not yet seen the lawsuit and couldn’t address the specifics of the complaint. However, she said “we unequivocally reject” the general allegations of fraud, misrepresentation and breach of fiduciary duty.
Vocke said Wespac Financial last January compensated the two trusts for the investment losses, acting partly in an attempt to save Wespac’s credibility with the investment community.
Wespac knew little about the type of investments Morgan, Olmstead was making, he said. “We are real estate people, not bond investors,” he added.
The company’s public offerings had raised money faster than expected, Vocke said, and the firm had been obliged to find a temporary investment. “We could have put the money in CDs (certificates of deposit),” he said, “but then we would not have qualified as an investment real estate trust.”
