Judge Decides Jury Can Hear Claim Against Hutton

A jury--not an arbitration panel--must decide whether Shearson Lehman Hutton violated federal securities laws in the way it handled investments of public funds by Lawndale and other government entities, a federal judge has ruled.

The ruling is a partial victory for Lawndale, which alleges in a lawsuit that it lost $1.6 million after its treasurer at the time, Ray Wood, placed city funds in a highly speculative investment handled by a Hutton broker.

Hutton has declined to comment, except to say that the losses were caused by a decline in the bond market in 1987.

In an effort to recover the money, the city joined with several other government entities in filing a suit alleging, among other things, that the brokerage firm put public funds in risky securities and misrepresented the nature of the investment. Both actions were violations of federal law, according to the suit.

Joining Lawndale in the suit, filed a year ago in U.S. District Court in Los Angeles, are the cities of San Marino and Palmdale, Palmdale’s redevelopment agency, and the Three Valleys Municipal Water District in the San Gabriel Valley.

Last spring, Hutton asked the court to force the case into arbitration, which is more restrictive than the court system. Hutton noted that the investment agreements call for settling disputes out of court and prevent the cities and the other agencies from suing the brokerage.

Lawndale countered that former Treasurer Wood was not authorized to sign such an agreement, and that in any case, federal law at the time allowed such suits when a violation of federal law was alleged.

In a 20-page ruling, issued Jan. 11, U.S. District Judge Pamela Ann Rymer said an arbitration panel should decide whether the agreements were void but said the court should hear the allegation that federal laws were violated.

“We’re delighted,” said William Wynder, the plaintiffs’ attorney, in an interview Wednesday. “It would be nice to have the case all in one forum so we don’t have this dog-and-pony show twice . . . but we may end up getting two bites of the apple.”

Hutton attorney Stephen Young said his client was studying the judge’s decision to determine whether it can be appealed and, if so, whether to do so. A hearing is scheduled Feb. 16 to determine how the trial should proceed.

Although a major portion of the case is now expected to be tried in court, Young did not view the ruling as a setback for Hutton. He said Hutton is convinced that it not only will win in the arbitration matter, but will prevail in federal court as well.

“I think the best analogy is that we asked for a whole loaf of bread, and we got a half loaf of bread,” Young said.

The lawsuit, which seeks $8.4 million in compensatory damages and $16 million in punitive damages, accuses two brokerage companies, Hutton and First Investment Securities Inc., and six brokers of violating federal and state securities laws. Among the brokers is William E. Parodi Sr., who worked for Hutton when he approached the plaintiffs with the investment proposals. Parodi has denied any wrongdoing.

Wood was fired from his Lawndale job after the losses were discovered. He is not involved in the lawsuit.

When told of Rymer’s ruling, Lawndale City Councilwoman Carol Norman said Wednesday that “any favorable ruling is obviously something that will thrill all of us in Lawndale.”

The $1.6 million that the city claims to have lost represented about half of its reserve fund. “Lawndale is just a small city, and that is a considerable amount of money,” Norman said.

Attorney Wynder said that turning the entire dispute over to an arbitrator could have hurt the plaintiffs. Under the arbitration system commonly used to settle disputes between brokers and clients, the case would be heard by five people: three representatives of the public and two with some connection to the brokerage community.

Unlike a court decision, the arbitration panel’s decision could not be appealed on issues of fact, and there would be no written record of the proceeding. Also, fact-finding procedures are more limited in arbitration than in a court proceeding.

Wynder and Lawndale’s city attorney, David Aleshire, say the FBI and the Securities and Exchange Commission are investigating Hutton’s handling of the investments. Those agencies have declined to comment.