Cruttenden Says Fraud Charges Are ‘Groundless’ : Litigation: Ventura Entertainment contends that Cruttenden, another brokerage firm and a newsletter writer circulated false rumors while shorting the company’s shares.

The chairman of the Newport Beach brokerage Cruttenden & Co. dismissed as “groundless” Tuesday allegations in a lawsuit filed by a North Hollywood entertainment company that charges Cruttenden and several other securities firms with conspiracy and fraud in the short selling of Ventura’s stock.

Ventura Entertainment Group Ltd., a fledgling North Hollywood movie and television company, has sued two brokerages, including Cruttenden & Co., and a stock-newsletter writer, alleging that they used fraud, misinformation and illegal short sales to drive down Ventura’s stock price.

“We’ve never, ever had a suit like this in our history,” Cruttenden & Co. Chairman Walter W. Cruttenden III said of his 14-year-old firm. He said there is “no merit to the complaint.”

Cruttenden, who is named in the suit along with Cruttenden & Co. director of research Mark Matheson, declined further comment, saying he had not yet reviewed the suit.

The other defendants named in the suit, filed in U.S. District Court in Los Angeles, are Herzog, Heine, Geduld Inc., a New York investment firm, an executive of that company; and Michael Murphy, editor of the Overpriced Stock Service, a San Francisco newsletter that focuses on stocks that are candidates for selling short.

Ventura is seeking $26 million in damages and restitution for losses incurred as a result of what it alleges was market manipulation, said Michael Dempsey, an attorney for Ventura.

Murphy said the Ventura suit “seems on the face of it to be pretty silly.” He said his firm has never shorted the stock, but that on one day, Oct. 12, he did recommend to callers of his “hot line” telephone number that the stock was a short candidate.

As recently as Oct. 29, Cruttenden’s analysts were also urging 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 it racked up $3.5 million in losses between Oct. 31, 1989, and last Sept. 30, including a $909,510 loss in the quarter 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 allege, 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 of the regulations of the National Assn. of Securities Dealers, which governs the national over-the-counter market, where Ventura’s stock is traded.

The suit alleges that their 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.”

Ventura also alleges that the brokerage firms engaged in “naked shorting,” in violation of 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.

Ventura alleges 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 Los Angeles office of the Securities and Exchange Commission.

Times staff writer Cristina Lee contributed to this report.