Firm Sues Goldinger, Says He Disobeyed Orders

PairGain Technologies Inc. has filed a lawsuit accusing money manager S. Jay Goldinger of making unauthorized trades that cost the company $15.8 million, concealing his moves with phony financial statements and churning the account to run up a huge commission tab.

The suit, filed Wednesday in federal court in Los Angeles, marked PairGain’s first legal strike against Goldinger since his Beverly Hills brokerage collapsed last month amid reports it had lost more than $30 million of its clients’ money.

PairGain said the loss chewed up 93% of its earnings last year, but the manufacturer of telecommunications equipment still reported a profit for its fourth quarter and year, plus a huge gain in sales.

Goldinger and his firm, Capital Insight, “knowingly, willfully or recklessly entered into transactions which were excessive and unsuitable,” the suit alleges. Neither Goldinger nor his attorney could be reached for comment.

PairGain officials said Goldinger had been instructed to follow a conservative investment plan of buying and holding Treasury securities, but ignored those instructions and made risky investments in securities tied to interest rates.

When those investments backfired, Goldinger tried to conceal losses from company officials by issuing “false and misleading” summary statements indicating the account was earning a profit, according to the suit. In fact, those statements masked deep losses that at one point reached as much as $27 million, the suit alleges.

PairGain says it ordered Goldinger to close out the account in June, after company officials became concerned by an inexplicably large volume of trades.

On June 30, Goldinger admitted making unauthorized trades and apologized, according to the suit, but explained that he was merely trying to take advantage of “favorable investment opportunities,” and assured company officials that they would not lose money.

Goldinger subsequently recovered some of the money while closing out the account, but finally admitted in November that more than $15 million could not be recovered, the suit states.

Meanwhile, Goldinger, increasingly strapped for cash, ordered thousands of unnecessary trades on PairGain’s account to amass a commission bill exceeding $500,000, according to the suit.

PairGain, which is seeking repayment of the $15.8 million plus other damages, said it is restating its 1994 and 1995 results to reflect the losses on its account with Capital Insight.

The company said a lengthy internal investigation “revealed no improper involvement by any PairGain employee in the unauthorized trading.”

But the suit raises some questions about PairGain’s decision to allow Goldinger to manage its cash. The company had closed out a previous account with the broker in 1994, after officials learned he was not pursuing the conservative investment strategy he had outlined, according to the suit.

Nevertheless, the company opened a new account with Goldinger months later, this time with explicit instructions to buy and hold Treasury securities--instructions he proceeded to ignore, the suit alleges.

Earlier this month, a shareholder filed suit accusing Chief Executive Charles Strauch and other officials of failing to prevent the loss, and then trying to conceal it from investors.

PairGain has been among the fastest growing companies in the nation in recent years, and its stock closed at $54 per share Wednesday, up $1 in Nasdaq trading.

Goldinger also advised Pier 1 Imports Inc., which claims it lost $19.3 million on its account with Capital Insight.

Goldinger and his firm are being investigated by federal regulators.

PairGain reported fourth quarter net income of $14.5 million, or 83 cents per share, compared to a profit of $14.2 million, or 91 cents per share, in the comparable quarter a year earlier.

Revenue totaled $34.6 million in the fourth quarter, up 91% from $18.1 million a year earlier.

For the year, PairGain reported a profit of $1.06 million, though officials said earnings would have topped $16 million were it not for Goldinger’s trades. The company earned $8.57 million in 1994.