Wespac Financial Corp., a Newport Beach sponsor of real estate investment trusts, has filed a federal suit against the Los Angeles-based investment banking and securities brokerage firm of Morgan, Olmstead, Kennedy & Gardner, claiming that violations of federal securities and commodities laws by the firm led to nearly $6 million in losses.
The suit, filed in U.S. District Court in Los Angeles, also charges Morgan Olmstead, the Chicago Corp. and two individuals with "a pattern of racketeering activity" and seeks treble damages under the civil provisions of the federal Racketeer Influenced and Corrupt Organizations Act. Such so-called RICO suits have become commonplace in business litigation, largely because of the triple damages feature and because of the stigma attached to an allegation of "racketeering."
Wespac's federal suit is based on the same circumstances cited in a lawsuit the company filed in Orange County Superior Court last July. But the new suit was filed in federal court because the claims of federal law violations can only be heard there, said Charles R. Hartman of Los Angeles, attorney for Wespac.
Hartman said Monday that Wespac will still pursue the state suit, which names only Morgan Olmstead and one of its Newport Beach brokers, Gary W. Rollason.
Morgan Olmstead and its attorney, Phillip L. Bosl of Los Angeles, said the lawsuit is groundless and the racketeering claim is "sheer nonsense."
"There is no basis for the state court claims, and going to federal court does not change the picture," Bosl said.
The federal action alleges that beginning in 1983, Morgan Olmstead, Rollason, the Chicago Corp. and former Chicago Corp. investment adviser Edward Lezack fraudulently induced Wespac executives to invest more than $35 million in mortgage-backed securities and financial futures as part of a "hedging" program, a method of buying and selling in the futures market that minimizes the risk of unfavorable price changes wiping out a profit.
The program was represented as a high-yield, short-term secure investment that Wespac executives were not familiar with, the suit alleges.
Rollason, the suit claims, had discretionary control over the type, timing and amounts of investments made for the real estate investment trusts, called Wespac Investors Trust II and Wespac Investors Trust III.
Under an agreement Wespac knew about, Morgan Olmstead turned to the Chicago Corp. to handle the actual trading of futures commodities on the Chicago Board of Trade and the Chicago Mercantile Exchange.
But the two trusts lost a total of $5.98 million by the end of 1984 in what turned out to be "reckless speculation," the suit alleges. Wespac Financial reimbursed the trusts.
Lezack, now with Index Futures Group Inc. in Chicago, said in a telephone interview Monday that he warned Wespac that its position was not stable. "I said that if my computer was right, they were missing out on a good number of futures contracts," he recalled.
He said he used routine mathematical calculations to advise Wespac on its cash position and the number of futures contracts it needed.