Court Orders Frank Haynes Trusts Audited : Fake Firm’s Assets to Be Returned to Investors
The U.S. District Court in Los Angeles has appointed Price Waterhouse & Co. to audit two Los Angeles investment trusts created by investment adviser Frank R. Haynes and to submit a plan to distribute their assets to investors.
The Securities and Exchange Commission accused Haynes of securities fraud in a suit filed last Friday simultaneously with a consent agreement settling the case.
According to the suit, Haynes, 48, is a registered broker-dealer with the National Assn. of Securities Dealers and holds a B.A. degree in public administration and an MBA degree in investment banking.
Provisions for auditing and liquidating the trusts were made under a permanent injunction against Haynes and his Cosmolite Capital Inc. and Cosmolite Securities Corp., which he controls. The defendants agreed to the injunction without admitting or denying allegations in the SEC civil complaint.
The suit accused Haynes and the firms of misrepresenting the assets of Western Guaranteed Income Trust Series 85-1 and Series 2 to persons who invested several million dollars in the trusts in 1986 and 1987.
Unlicensed Accountants
Registration statements claimed that the trusts held portfolios of variable-rate loans whose $8 million in principal, plus accrued interest, was guaranteed by the U.S. Small Business Administration, the suit said.
However, neither trust owned any loans at the time their registration statements became effective, the complaint said. Although loans were later acquired, the suit said, they were worth only a fraction of what was claimed in the trusts’ 1986 annual reports. The investors bought units representing a $100 interest in the loan portfolio.
The suit also said the defendants misrepresented the credentials of their accountants, Harper, Union & James, and a successor, Harper, Union & Hodges. Although the small Los Angeles firms were described in registration statements as “independent” and “certified,” the suit said, neither firm was legally entitled to practice.
Further, the suit said, the accountants’ reports in the registration statements and prospectuses of the two trusts falsely represented that they had examined the loan portfolios at a time when they did not exist. The accountants were not named as defendants in the SEC suit.
The complaint also alleged that the defendants misrepresented the redemption prices, fees and sales costs on the investments and kept incomplete books.
The injunction named Thomas F. Lennon of Alpine, Calif., to take charge of assets and to disburse them under court direction. The defendants are to pay fees and expenses of Price Waterhouse and Lennon, depositing $31,000 toward those costs in six semi-monthly installments.
