Investors Sue Executive Who Faces Fraud Trial

Two years ago, FBI agents in Las Vegas arrested Michael S. Dow of Canoga Park, and two other men, for allegedly conspiring to sell $3 billion worth of phony Japanese bonds. Dow pleaded innocent and was released after he pledged $50,000 in assets as security.

His trial is set for October in U.S. District Court in Las Vegas. But Dow has other legal problems to worry about.

Seven months after his arrest, Dow became president and chief operating officer of Western Bell Communications, a tiny, publicly traded company in Los Angeles that at present has no source of income. Now some of Western Bell’s stockholders are suing Dow and other past and present Western Bell executives for allegedly defrauding investors since 1985 by artificially inflating the value of the stock before selling their shares.

In a class-action suit filed in May in federal court in Los Angeles, three Western Bell stockholders alleged that management has provided “materially false, misleading and fraudulent financial statements” to encourage other investors to buy the stock.

The suit charges that the alleged scheme enabled Western Bell executives to sell stock “for substantial profits,” but also resulted in the remaining investors’ “losing substantially all of their investments since Western Bell is now for all intents and purposes bankrupt.”

The suit does not specify how much the executives allegedly profited, and it seeks an unspecified amount of damages.

Western Bell has said that “the company and its officers and directors have vigorously denied all charges and allegations” in the suit.

Western Bell Chairman Charles M. Sailor is the company’s biggest stockholder, with a 20% stake; Dow, 35, owns about 4% of the company’s stock.

SEC Investigation

Brian L. Buckley, the lawyer representing the stockholders who filed the suit, said the Securities and Exchange Commission also is investigating Western Bell. The SEC would not comment on the matter.

Western Bell is a rather murky company. In filings with the SEC, Western Bell describes itself as an entertainment and real estate concern that had eight employees as of Dec. 31 and had no revenue last year. Dow acknowledged in a telephone interview that Western Bell still has no income. Meanwhile, Western Bell has posted losses totaling nearly $4 million over the past three years.

As of Dec. 31, Western Bell’s current assets--cash and proceeds due within a year--totaled $93,000, compared to current liabilities--bills due within the year--of $862,816. Not surprisingly, Western Bell’s outside auditor, Laventhol & Horwath, said that Western Bell “may be unable to continue to operate as a going concern.”

Dow said the company is trying to help develop some real-estate projects and a pilot show for television. He said the company also is “trying to develop a couple of motion-picture projects,” including one that would be based on a novel written by Sailor in 1979 called “The Second Son,” the story of a modern-day son of God who appears on Earth as a high-rise construction worker from the Bronx.

Western Bell has had an erratic stock history. It was first listed on NASDAQ, the principal market for trading over-the-counter stocks, in May, 1985. But between March and November, 1986, the stock was dropped from NASDAQ because Western Bell failed to file all of the necessary financial statements. It regained the listing in late 1986.

Western Bell previously was called Quantum Energy, which in 1985 had interests in plastics, farming, telephone equipment and mining. In June, 1985, Quantum was acquired by Sailor and Harvey W. Marlin III, who changed the name to Western Bell Communications.

Western Bell sold some of those assets back to their former owners. The stockholders’ suit alleged that Western Bell never intended to keep the assets, but did so only long enough to get the company’s stock listed on NASDAQ.

That listing was important to Sailor and the other executives because it helped induce other investors to buy the stock, the class-action suit alleged.

Dow was named president in September, 1986, and “everybody in the company, the board, the people here, knew of the case” in which he was arrested, Dow said. But he also confirmed that Western Bell has never told its stockholders, or disclosed in any public filings, that he is awaiting trial on fraud conspiracy charges.

Buckley, the lawyer for the stockholders, said some of his clients bought the stock in 1985 and 1986 at an average of about $2.50 a share.

By the end of 1987, it was selling for 22 cents a share bid, according to the National Assn. of Securities Dealers (NASD), which governs the over-the-counter market. It closed Monday at 13 cents bid.

Meanwhile, Western Bell recently issued an announcement saying it had received a merger proposal and that its board had agreed to negotiate with the prospective suitor, which Western Bell would identify only as a Los Angeles-based developer.

Buckley said, “I doubt they actually received an offer.”

Dow and two other men were arrested in Las Vegas after they allegedly sold one of the questioned bonds to an undercover FBI agent. The U.S. attorney’s office there said the trio had a number of phony bonds totaling more than $3 billion in face value.

Each was charged with one count of conspiracy to defraud, which carries a maximum penalty of five years, and one count of passing a forged document, for which the maximum term is three years.