$15.8-Million Loss Sparks Federal Probe of PairGain

Tustin-based PairGain Technologies Inc. and two of its top officers are the targets of a federal criminal investigation in connection with a $15.8-million investment loss that the company suffered in 1995.

The U.S. attorney’s office is looking into whether PairGain Chairman Charles Strauch and Chief Financial Officer Charles McBrayer committed any crimes with respect to the company’s investments with a Beverly Hills money management firm, according to a regulatory filing Monday.

The investigation centers on S. Jay Goldinger and Capital Insight Inc., a Beverly Hills money management team that lost about $100 million of client funds, including $15.8 million belonging to PairGain, the company said in its quarterly report filed with the Securities and Exchange Commission.

As part of their inquiry, the U.S. attorney’s office and the SEC are seeking to determine whether PairGain broke any laws in connection with its Capital Insight investments or whether it failed to promptly disclose its losses.

PairGain’s filing said that “past and present officers and employees” were being investigated, but only named Strauch and McBrayer. PairGain officials declined to say who else has been targeted, if anyone.

In a letter sent to the company May 11, the U.S. attorney said no decision will be made on whether to pursue charges until the company meets with federal officials to discuss the case.

The letter shows the investigation, which has stretched on for more than three years, is winding down, McBrayer said.

“I am so sick of it I can’t see straight,” McBrayer said in an interview, adding that neither he nor the others have broken any laws.

The U.S. attorney’s office declined to comment on the investigation, but sources confirmed the letter.

PairGain announced its losses Dec. 1, 1995, saying its broker was responsible for “substantial unauthorized trading activities in Treasury securities.”

In early 1996, the company filed a lawsuit accusing Goldinger of making unauthorized trades, concealing his moves with phony financial statements and churning the account to run up a big commission bill. The suit is pending.

Capital Insight also advised Pier 1 Imports Inc., which lost $19.3 million from the alleged unauthorized trading, and San Diego-based Triton Group, whose predecessor company Intermark lost $10 million.

The U.S. attorney says PairGain should have disclosed the losses when they occurred in August 1995, according to a statement released by the company Tuesday. PairGain contends that the company and its executives didn’t learn of the losses until late November and quickly disclosed the problem thereafter.

“There is no evidence of wrongdoing by PairGain or its officers,” PairGain said. “It is ironic that PairGain, the victim, has been subjected to this type of government investigation, while Goldinger remains free and uncharged,” the statement said.

Goldinger and Capital Insight came under criminal investigation by the U.S. attorney in Los Angeles while the SEC and the Commodity Futures Trading Commission launched a civil probe.

The company said it expects to meet with U.S. attorney representatives “in the near future.”

PairGain shares rose 75 cents to close at $14.81 on Tuesday.

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Bloomberg News contributed to this report.