First Pension Was Too Good to Be True : Scandal Again Points Out Dangers of Loose Regulation, Promises of High Yields

The First Pension Corp. scandal moved to bankruptcy court last week, but as investors left angry and frustrated with little news to comfort them, the lingering lesson, especially in view of loose regulation at state and federal levels, is "let the investor beware."

Investigators say that the company, which declared bankruptcy in late April, allegedly enticed investors to put money into mortgages that did not exist with promises of extraordinarily high annual dividends of up to 28%. The Securities and Exchange Commission says that three company principals ran a scheme that used money from later investors to pay dividends to earlier ones.

The three top officers of First Pension last week agreed to plead guilty to expected criminal charges in the case and have signed cooperation agreements, according to Leslie Swain, assistant U.S. attorney in Los Angeles.

But with federal investigators alleging that as much as $124 million of 8,000 investors' money may have been lost, and with some reduced to networking by computer to commiserate over their missing pension money, the failure of First Pension stands as a cautionary tale in the lure of trust deeds as an investment offering very high real estate returns on investment.

Promoters of such trust deeds are not required by the state to have any special expertise in mortgage lending. And regulation is shared by two state agencies that do not share information; the Department of Real Estate oversees transactions between individual borrowers and lenders, but if trust deeds are broken for sale to more than one investor, they come under the jurisdiction of the Department of Corporations.

Both departments say they lack resources for systematic review of such investment pools. This hole in the safety net in the regulatory apparatus meant, for example, that nobody was watching when owners of First Pension Corp. filed notices in 1987 contending that real estate investment pools were exempt from regulation as a public securities offering.

Moreover, as a pension administrator, First Pension was subject to auditing by the U.S. Department of Labor, but regional officials of that agency acknowledge they never got around to examining its books.

Clearly, investments in trust deeds are very risky anyway, and in need of tighter regulation. But the painful lesson of the scandal for individual investors is that if it sounds too good to be true, it probably is.

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