$50-Million Fraud Alleged in Probe of South Bay Firm : Investment: Sources say federal investigators are looking into charges that the Wellington Group may have bilked as many as 1,500 clients.

Federal authorities have opened an investigation into a now-bankrupt South Bay investment firm amid allegations that the company bilked as much as $50 million from as many as 1,500 investors throughout California.

Although the U.S. attorney’s office and the FBI would not confirm that a probe is under way, other law enforcement sources as well as investors in the Wellington Group and its court-appointed bankruptcy trustee said both agencies opened an investigation of the company several weeks ago.

In August, the real estate loan and brokerage firm filed for Chapter 11 bankruptcy protection, which froze the assets of hundreds of investors. On Thursday, about 500 angry investors crowded into a hearing room at the Federal Building in downtown Los Angeles to ask Jeffrey Coyne, the court-appointed bankruptcy trustee, when and if they would ever see their money again.

Coyne could offer few clear answers.

“We have a very large mess here. To give an impression otherwise wouldn’t be fair to you,” said Coyne, who had to divide the hearing into three sessions to accommodate the crowd.

Coyne said his initial efforts to seize Wellington’s assets have not gone well. “We have had some very depressing results in my efforts to gain control of properties in this case,” he said.

Morris D. English Jr., Wellington’s president, could not be reached for comment Thursday. But in letters to investors, he has denied any wrongdoing by his company. He has also blamed Wellington’s financial woes on a state investigation and on an order in July that barred the company from continuing to sell securities.

English’s father, Morris D. English Sr., who is listed as president of a Wellington affiliate called TWG Services Corp., also denied that anything was wrong in a brief interview outside his Rancho Palos Verdes home Thursday.

“It is all untrue. The whole thing is untrue,” English Sr. said. “That’s all I can tell you at this point.”

Before the U.S. attorney’s office and the FBI began their investigation of Wellington, the state Department of Corporations had already accused the company of violating numerous California securities laws in the final years of its once-thriving business.

The federal investigation of Wellington, sources said, would focus on allegations that the firm defrauded investors by misrepresenting the value of real estate investments, failed to record official trust deeds, misdirected investors’ money and did not disclose Wellington’s links to borrowers.

The Wellington Group, according to documents and interviews, was started in 1977, when English Jr. launched a real estate loan and brokerage firm that would for years make good on its promise of 15% returns to investors. With several offices throughout California, Wellington by the mid-1980s had attracted thousands of investors, many of them retirees, to invest in first and second trust deeds on real estate statewide, state and federal officials said.

But the company’s fortunes began to plummet early last year when it became caught up in a wide-ranging investigation by the state Department of Corporations that began with a Beverly Hills real estate consortium called the Pentagon Investment Group. That investigation, which officials said involved hundreds of investors and $6 million in losses, has now been eclipsed by the probe of Wellington.

That probe has been complicated by the younger English’s repeated refusal to turn over the company’s records to the bankruptcy court, authorities said. On Feb. 13, two days after a U.S. Bankruptcy Court judge ordered English to turn over Wellington’s records, he reported to police that the computer containing the records had been stolen from his Torrance office. Police say they are investigating the break-in.

Two weeks ago, U.S. Bankruptcy Judge Vincent P. Zurzolo charged English with civil contempt for refusing to turn records over to Coyne. Zurzolo also fined English $1,000 a day until he releases the records and ordered him to appear in court on April 22, when possible criminal contempt charges were to have been heard.

That hearing since has been postponed, Coyne said, to allow more time for a criminal investigation by the U.S. attorney. No new date has been set.

To date, Coyne said, he has seized about 350 boxes of records from Wellington’s files. Some were found stuffed in trash bins and the backs of desk drawers, and scores of documents were found in a mini-storage warehouse.

Records of some partnership agreements, trust deeds and other crucial paperwork indicating how investments were to have been secured are still missing, he said.

The records he has reviewed show that many investments were deep in debt or never properly recorded, Coyne said.

He and other officials say they are still weeks or months away from unraveling Wellington’s rise and fall.

Anxious investors say Wellington’s fall has jeopardized their futures.

John Condon, a projects director at Apparel News, said that in 1989 and 1990 he invested nearly $76,000 in a San Ramon-area condominium project called Sandiview.

Interest payments on his 15% loan arrived regularly in his IRA account at the Bank of Beverly Hills, Condon said, and he had taken steps to retire in January.

But in September, the money stopped coming. Now his retirement is on hold.

“This money is my life savings,” Condon said. “All I wanted to do was get an income of $1,000 a month or so and still have my principal. I still hope to do that, somewhere down the road.”