Fraud Charged in Suit Naming O.C. Developer : Courts: Investors who lost $15 million say former owner Magdy Hanna lied about prospects of Newport Pacific.

Investors who lost $15 million in the collapse of an Orange County real estate company in late July filed a lawsuit Tuesday charging that former owner Magdy Hanna and others lied to them about the company’s financial health and other problems.

The lawsuit, the first one filed after the fall of Newport Pacific Group and its related companies, accuses Hanna and other officers of violating federal and state securities laws in selling high-risk notes that weren’t registered with regulators.

Newport Pacific Mortgage Acceptance Corp., the key subsidiary that raised the funds for its real estate development and mortgage banking operations, was “desperate for cash” and needed the proceeds from its debt offering just to pay existing debts, the suit asserts.

The company continued to sell securities until Hanna closed the doors, even though it hadn’t paid interest to some existing noteholders for several months, according to the suit.

The class action, filed in U.S. District Court in Santa Ana on behalf of 250 investors, also names a series of broker-dealers who sold the notes to investors, allegedly through high-pressure, misleading tactics.

“They hyped it by saying that Hanna was personally guaranteeing the offering, but his whole net worth was the company. So if the company can’t repay the notes, he can’t either,” said Michael L. Kirby, attorney for the investors.

Hanna has expected that lawsuits would be filed, said Randall K. Johnson, a Newport Beach lawyer who has represented Hanna and his companies in previous litigation. “When anything crashes, everyone sues everyone else,” he said. The lawyer expects that limited partners in two separate funds that raised more than $5 million will also sue.

Though Hanna hasn’t hired him to handle the latest lawsuit, Johnson said that he talks regularly with the onetime real estate developer to help him with his financial problems.

“People are thinking he took the money and ran with it, which couldn’t be further from the truth,” Johnson said. “In this situation, Mr. Hanna and his companies have suffered enormous setbacks with their high-risk investments, which was indicated by the high interest rates paid on the notes.”

But the lawsuit alleges that the offering was an outright fraud because it lied about the company’s financial health and its ability to pay interest and to pay off the debt when due in 1997.

“The interest expense on $15 million at 10 3/8% is $1,556,000 a year,” the lawsuit states. “Thus it would take essentially all of, or in some years, more than, [Newport Pacific’s] entire pretax profit simply to pay interest expense on the 1997 notes.”

In addition, the suit contends, the company’s business plan for using the proceeds from the offering “simply did not make sense,” and broker-dealers should have realized that.

The suit also accuses Hanna of borrowing $450,000 to close the note offering so he could get his hands on the $15-million fund more quickly. Such an action is called breaking escrow and is banned by the Securities and Exchange Commission, according to the class action.