Technical Equities’ Stern Pleads Guilty to Federal Charges

The founder of a failed San Jose investment firm agreed Thursday to plead guilty to three federal criminal charges, the day after a jury awarded a record $147 million in punitive damages to investors in his company.

The U.S. attorney’s office in San Jose filed mail and securities fraud charges against Harry C. Stern, the founder and former chairman of Technical Equities, and John Lindberg, a former executive in the firm.

Joseph M. Burton, the assistant U.S. attorney handling the case, said Stern and Lindberg agreed to plead guilty and cooperate in a continuing investigation into one of the most extensive investment fraud cases in California history.

Burton declined to identify the targets of the investigation, but he said the scrutiny will cover “anyone involved” in the firm’s 1986 collapse.

Problems ‘Concealed’

The collapse resulted in losses of $150 million for 1,200 investors, including a host of sports figures ranging from former Dodger pitching star Don Drysdale to 19 professional football players such as Raider Fred Biletnikoff.

Lawyers close to the case said one subject of the continuing inquiry involves manipulation of the stock price of Technical Equities to conceal the company’s problems. One of the charges to which Burton said Stern will plead guilty involved the stock manipulation.

The announcement of the federal charges was withheld until a Santa Clara County Superior Court jury in San Jose finished deliberation in the civil lawsuit against Stern, Lindberg and other officers of the defunct firm.

The $147 million in damages assessed by the jury, which is believed to be the largest punitive award in California history, will be shared by the 1,200 people who lost their entire investments in the collapse of Technical Equities.

The investors included many elderly couples and about 100 athletes, including Drysdale, Angels pitcher Mike Witt, former Golden State Warriors basketball star Rick Barry, golfer Kathy Whitworth and 19 current or former members of the Los Angeles Raiders football team.

Former Raider Pete Banaszak testified during the trial that he lost nearly $500,000, including all the money he had saved for the education of his children. Drysdale and his wife filed a lawsuit over their loss of $600,000.

The investments had been turned over to Technical Equities and Stern’s financial management firm. Stern used the money for a variety of investments such as real estate limited partnerships and stocks, including holdings in Technical Equities itself.

Court documents indicated that the firm had acquired real estate and sold it at inflated prices to the investors.

A total of 600 civil lawsuits were filed on behalf of the investors. Lawyers for the investors selected the cases of six elderly couples and a Chicago company, Heller Financial, as test cases for the first trial in Santa Clara County Superior Court.

On Wednesday, the jury returned the record punitive award against Stern; Herbert Barovsky, his former chief financial officer, and Stern’s management firm, Stern Management Associates. The punitive award was the second part of the jury’s decision.

Last week, the jury found that Stern and Barovsky defrauded investors and that other former officers of the investment firm, including Lindberg, had been negligent. The jury awarded $7 million in compensatory damages to the elderly couples and Heller Financial.

Barovsky’s lawyer, John M. Kaman of San Francisco, called the $147-million punitive award “staggering and clearly excessive.” He said the judge will be asked to set aside the award and the verdict will be appealed. Stern’s attorney did not return a telephone call.

Manipulation of Stock

The previous state record for punitive damages was $125 million awarded three years ago to a group of investors who sued ComputerLand and its founder, William Millard.

In addition to the total damages of $154 million, several institutional defendants settled the lawsuit the night before the trial began by agreeing to pay a total of nearly $60 million in damages. The institutions did not admit any wrongdoing.

Security Pacific National Bank, the biggest lender to Technical Equities, was accused in the lawsuit of negligence and aiding in the fraud. The Los Angeles-based bank agreed to pay $25 million.

KMG Main Hurdman--now part of Peat Marwick Main, the world’s largest accounting firm--agreed to pay $17.9 million. The firm had provided Technical Equities with a clean bill of health on its financial condition for many years, and the lawsuits claimed the accountants should have noticed the problems.

Bear, Stearns & Co., the New York-based investment house that was the firm’s sole stock adviser, settled for $10.8 million. Even though Bear Stearns was no longer a party in the lawsuit, the jury said Wednesday that the market in Technical Equities stock had been manipulated for two decades as part of the scheme to prop up the company’s financial appearances.

The elderly couples were chosen for the first cases because California law requires civil cases brought by persons who are over 70 years old to be moved through the court system faster.

Under an agreement reached among all the investors before the trial, the punitive damages will be shared among all 1,200 of them, said Susan Illston, a Burlingame attorney who represented many investors. Illston also said the jury’s verdict in the test cases should pave the way for quick resolution of the compensatory damages in the remaining cases.

In a highly unusual legal maneuver, lawyers for the investors had a list of questions submitted to the jurors, including whether the company’s annual reports were false and misleading. The jurors found that every annual report from 1969 to 1986 was false.