Production Company Suit Says Stock Was Manipulated : Litigation: Ventura Entertainment contends that brokerage firms and a newsletter writer circulated false rumors about the firm while shorting its shares.

Ventura Entertainment Group Ltd., taking a swipe at naysayers of the fledgling North Hollywood movie and television company, said Monday it sued two brokerages and a stock-newsletter writer for allegedly using fraud, misinformation and illegal short sales to drive down Ventura’s stock price.

The suit, filed in federal court in Los Angeles, named as defendants Cruttenden & Co., a Newport Beach brokerage, and some of its officials; Herzog, Heine, Geduld Inc., an investment firm in New York; and Michael Murphy, whose San Francisco-based newsletters include the Overpriced Stock Service, which focuses on stocks that are candidates for selling short.

All of the defendants said they had not yet seen the suit and therefore had no comment, although Murphy said “it seems on the face of it to be pretty silly.” Murphy said his firm has never shorted the stock, but that on one day, Oct. 12, he recommended to callers of his “hot line” telephone number that the stock was a short candidate.

As recently as Oct. 29, Cruttenden’s analysts also urged customers to take any profits in Ventura by selling the stock and repurchasing it only after they “see more results” from the company.

In a short sale, a person or firm borrows stock and then sells it with the hope that the stock drops in price. If it does, the short seller then buys back the stock, returns the shares to the lender, and pockets the difference in price.

Ventura, which began operating in May, 1988, plans to produce movies and other programs for television. It has produced few shows to date and racked up $3.5 million in losses between Oct. 31, 1989, and last Sept. 30, including a $909,510 loss in the quarter that ended Sept. 30 on revenue of $7.16 million. (Ventura recently changed the end of its fiscal year to June 30 from Oct. 31.)

Nonetheless, Ventura has twice sold stock to the public since its founding, raising more than $8 million. Its subsidiary, Ventura Motion Picture Group Ltd., sold a minority stake in the company to the public in late 1989 and raised $5.6 million. Yet despite its losses, Ventura Entertainment’s stock traded above $10 a share last summer and closed Monday at $8.625, giving the company a market value of about $67 million.

The Ventura companies alleged, among other things, that the brokerage firms and other defendants circulated false rumors that were critical of Ventura while at the same time shorting the stock, in violation of U.S. securities laws and the regulations of the National Assn. of Securities Dealers, which governs the national over-the-counter market where Ventura’s stock trades.

Their alleged purpose was to “drive down the price of the companies’ shares to a point where the short sellers will make substantial profits at the expense of the companies’ current shareholders,” the suit stated.

Ventura also alleged that the brokerage firms engaged in “naked shorting,” in violation of new NASD rules that took effect Sept. 1. Naked shorting occurs when a firm sells a stock short without first making sure that it can borrow the shares that must be delivered to whoever buys the stock. The new rules say that brokerages, with the exception of firms that primarily just “make markets” in a stock by matching buyers and sellers, must ensure that the shares are available before they short the stock.

But Ventura alleged that Herzog, Heine and Cruttenden shorted the stock “without having the ability to deliver shares to cover their short positions.”

Ventura also said it hired Irving M. Einhorn to advise the company on the case; Einhorn formerly headed the Securities and Exchange Commission’s Los Angeles office.