U.S. Seeks $24 Million From 2 Firms in Failure of S
Federal regulators are seeking $24 million in damages from the investment firm of Kidder, Peabody & Co. and from a now defunct Riverside County firm in connection with the May, 1986, failure of a San Diego County savings and loan.
The Federal Savings & Loan Insurance Corp., which insures the nation’s thrifts, said in a lawsuit that Kidder Peabody and the Riverside County investment adviser failed to properly perform their responsibilities when they allowed Carlsbad-based Seapointe Savings & Loan Assn. to enter risky securities, futures and commodity options deals.
Officers of Strategic Investment Services (SIS), the now-defunct investment adviser based in Riverside County, “made representations and omissions to further their own interests without regard to the interest of Seapointe Savings,” according to a prepared statement released by FSLIC spokeswoman Andrea Plater. “Kidder Peabody allegedly aided and abetted SIS by failing to warn Seapointe of SIS’s fraudulent acts and practices and losses caused them.”
Although some financial institutions maintain futures and options portfolios to hedge against interest rate changes, the FSLIC complaint described Seapointe’s futures and options trading portfolio as “risky speculation.”
In addition to Kidder Peabody and SIS, the FSLIC suit named Robert Peacock, an account manager at Kidder Peabody; Dirk Rose, president of SIS, and Robert Forrest, a director of SIS. There was no spokesman available on Wednesday for the now-defunct SIS firm.
Kidder Peabody spokeswoman Maureen Bailey denied any wrongdoing by the New York-based investment firm, suggesting that the FSLIC’s claim was “based on a misunderstanding of the facts and an attempt to extend the liability of brokerage firms far beyond anything supported by existing law.”
Although Kidder Peabody conducted trades for Seapointe, the Carlsbad-based S&L; “had an independent trading adviser (SIS) who was responsible for all of its transactions,” Bailey said. “Seapointe did not rely upon us to recommend trades nor did it share with us the information we would have needed to make recommendations.”
Bailey said that shortly before the losses occurred, Kidder Peabody warned Seapointe’s board that its futures trading position had increased in “size and risk.” Kidder Peabody at that time “turned (Seapointe’s) business away,” according to Bailey. The S&L;’s losses occurred “only after (it) stopped doing business with Kidder Peabody,” Bailey said.
Seapointe, which opened its doors on April 17, 1985, generated at least $24 million in losses by the time federal regulators closed it on May 30, 1986. Most of those losses were generated by highly speculative financial options trades during a two-week period in February, 1986, state banking regulators said in 1986.
Federal regulators seized the insolvent thrift in May, 1986, and sold its insured deposits to Monterey Savings Bank of Monterey Park for $42,000.
Seapointe began “as a very traditional community-based S&L;,” according to one banking industry observer in San Diego. “But they started to take deposits and buy immense positions on margin through Kidder or whomever, expecting that swings in the market would make them rich.”
“There was a lot of deception going on,” according to Ernest Dronenburg Jr., a former Seapointe director who also serves as vice chairman of the State Board of Equalization. Prior to Seapointe’s failure, its board had intended to sue SIS and Kidder Peabody for the risky trading practices, Dronenburg said Wednesday. However, “we were preempted” when federal regulators seized the institution, Dronenburg said.
