Fraud Suit Defendants Yet to See Complaints

Fraud, conspiracy, stock manipulation. Last November, Ventura Entertainment Group, a fledgling movie and television company in North Hollywood, announced publicly that it had made all of those allegations in a lawsuit it filed against two investment firms and a stock market newsletter that didn’t like Ventura’s financial prospects.

The suit charged that the defendants had manipulated Ventura Entertainment Group’s stock, trying to push it down because they were allegedly short selling the shares. In short sales, a person or firm borrows stock and then sells it, expecting that the price will drop. Later, the short seller buys back the stock (at a lower price, he or she hopes) and pockets the difference.

Ventura said it would review all available options for pursuing the suit. But three months later, Ventura seems to have overlooked one obvious legal path: notifying the defendants, who say they’ve never been served with copies of the complaint.

Ventura is not saying why, making its case something of a mystery.

Although it issued a 722-word press release in late November to announce the suit, Ventura’s response to recent inquiries was only five words. “The company has no comment,” spokeswoman Terri MacInnis said.

Likewise, Ventura’s lead attorney on the case, Michael A. Cross, declined to comment.

In its November press release, Ventura also made a point of noting that it had hired Irving Einhorn, former head of the L.A. office of the Securities and Exchange Commission, to help prepare its case. Asked why the defendants haven’t been served, Einhorn said last week, “I don’t know anything about it.” Einhorn said he was hired only for “a very limited purpose”--to help advise Ventura’s lawyers on a few legal issues--and was no longer working for Ventura.

Ventura Entertainment lost a total of $3.51 million on revenue of $10.2 million between Oct. 31, 1989, and Sept. 30, 1990. (The company recently changed the end of its fiscal year to June 30 from Oct. 31.) The company has sold or licensed only a few programs to television since it was founded in 1988--including “Golden Age of Rock ‘n’ Roll” and “The Spirit of Rock ‘n’ Roll,” according to filings with the SEC.

Along with its partly owned Ventura Motion Picture Group subsidiary, Ventura Entertainment jointly filed the lawsuit in federal court in Los Angeles on Nov. 21, 1990, against Herzog, Heine, Geduld Inc., an investment firm in New York, and John E. Herzog, its chairman; Cruttenden & Co., a Newport Beach brokerage, and one of its analysts, R. Mark Matheson, as well as its chairman, Walter W. Cruttenden III, and Michael Murphy, who puts out the Overpriced Stock Service, a San Francisco newsletter.

All the defendants denied the Ventura companies’ charges, but most declined to comment on the suit beyond saying they hadn’t yet been served. “It’s just ludicrous stuff,” Murphy said of the suit.

The Ventura companies claimed that the defendants’ tactics included spreading “malicious negative rumors, half-truths and outright falsehoods.”

The suit also claimed that the firms sold Ventura Entertainment Group’s stock short without first making sure that they could borrow an appropriate number of shares to deliver to whomever bought the stock.

Before the suit was filed, Murphy and Cruttenden had both publicly criticized Ventura Entertainment Group.

Cruttenden’s Matheson issued a research report dated Oct. 29, 1990, recommending that investors sell Ventura stock. Matheson argued that the market price of all of Ventura’s shares “is enormous compared to its pieces,” and he added that “investors have become unrealistically attached to the Ventura Group stocks and thus are not perceiving a rational value.”

Murphy said that on Oct. 12, 1990, he recommended to callers of his “hot line” that the stock was a short candidate, meaning that he expected the shares to fall in value.

As for the Ventura companies’ charges of “outright falsehoods” spread by the defendants, their suit mainly takes issue with some of Murphy’s alleged hot line comments about Ventura Entertainment Group.

Answering Murphy’s alleged claim, quoted in the suit, that Ventura Entertainment Group’s “stock is up due to hype,” the suit counters that in its most recent quarter it “reported revenues of $7 million.” The suit does not mention, however, that Ventura Entertainment Group also lost $909,510 during that period.

The suit denies alleged statements by Murphy that 10 executives at Ventura had salaries of more than $250,000. Ventura claims that only three executives of the money-losing company are paid that much.

In the suit, the Ventura companies also deny Murphy’s alleged claim that the Ventura Entertainment Group is “running out of cash.” According to the suit, “VEG is not running out of cash. As of September 30, 1990, VEG and its subsidiaries had cash and cash equivalents of $5.6 million.”

The suit does not point out that the company had $2.46 million less in cash than it did three months earlier.

The suit also objects to Murphy’s characterization of Ventura Entertainment Group as “a joke.”

The suit counters, simply: “VEG is not a joke.” But Murphy stands by the claim. In an interview, he said, “I think their company is a joke.”