The Three Valleys Municipal Water District has joined three cities and two redevelopment agencies in a lawsuit against two investment firms and six securities brokers involved in making investments on behalf of the public entities that lost a total of $7.9 million.
The suit, filed last week in U. S. District Court, alleges that brokers for E. F. Hutton & Co. and First Investment Securities used the public agencies' money in speculative investments, such as purchasing "zero-coupon" government bonds with borrowed money, a practice known as trading on margin.
In the case of Three Valleys, the water district's board of directors voted in November, 1986, to invest $1.5 million with Hutton broker William E. Parodi Sr. At the time, district General Manager Richard W. Hansen said he informed the broker that the district's investment policy required that safety be the top priority, followed by liquidity and yield.
The policy further states that the district "does not speculate; it does not deal in futures, options or security loan agreements."
But according to the suit, Parodi, along with his brother, Frederick, invested in long-term government bonds in violation of the district's policy.
"If held to maturity, the bonds are not liquid; if traded prior to maturity, they are not safe," the suit stated.
Spokesmen for E. F. Hutton have confirmed that the district lost money on investments in long-term bonds purchased on margin, but they have insisted that Hutton had complete authorization from the district to make the investments. In an interview with The Times, William Parodi also said he received approval from Three Valleys for all investments he made.
Because conditions in the bond market were unfavorable, the value of the district's portfolio plummeted precipitously over the course of 1987. By September, the district's entire account had to be liquidated, and Hutton billed Three Valleys for an additional $58,000 deficit in the account, according to statements made by representatives of both the district and Hutton.
Last month, Hutton refunded $102,000 in brokerage commissions to the district. However, the district received a check for only $44,000 because the firm deducted the money owed on the district's account, said attorney William Wynder.
The other plaintiffs in the suit--the cities of San Marino, Lawndale and Palmdale and redevelopment agencies in Palmdale and Maywood--also lost money made on investments with Parodi when he was with Hutton.
Some Followed Broker
But in March, when Parodi was "permitted to resign" from Hutton, the water district's account remained with Hutton, while the cities' and redevelopment agencies' accounts followed Parodi to his new firm, First Investment Securities.
The plaintiffs are seeking damages to compensate them for all losses incurred and all commissions received by the brokers, plus reimbursement for "opportunity costs" resulting from the loss of the money invested. Each of the six public agencies is also seeking punitive damages of $3 million.
Additionally, the agencies are asking that the defendants be found in violation of the federal Racketeer Influenced and Corrupt Organizations Act. If the brokers are found to be guilty of racketeering, the plaintiffs are entitled to triple the damages they would otherwise receive.
In the joint action, all the agencies are suing Hutton and the Parodi brothers. Three Valleys is also suing David J. Lane and Todd Melillo, who handled the district's account for E. F. Hutton after the Parodis left the firm.
The other plaintiffs are also suing First Investment Securities, along with William F. Smith and Ed Ortiz, who are brokers with that firm.