State Drops Lawsuit Affecting 2,000 Investors

After filing a sweeping fraud lawsuit against a Newport Beach investment manager and forcing five of his partnerships into bankruptcy, state securities regulators dropped their case Wednesday and agreed to walk away from a legal morass that has entangled more than 2,000 California investors who are seeking to recoup $58 million.

A proposed settlement between the California Department of Corporations and Vincent Galewick, founder of Performance Capital Management, was filed Wednesday in Los Angeles Superior Court.

Galewick, who has denied any wrongdoing, said Wednesday he feels vindicated by the settlement and plans to focus his energy on regaining control of his company, which is under the supervision of a U.S. bankruptcy trustee.

“The state wreaked millions of dollars in damage and ended up walking away with nothing,” Galewick said. “I’m looking forward to focusing on running the business, rather than full-time litigation management.”

State officials stressed Wednesday they still believe Galewick broke the law, but decided it was in the best interest of investors to step aside and allow federal Bankruptcy Court to take over.

“We stand by our allegations,” said Bill McDonald, chief of enforcement at the department. “Our primary responsibility was to stop the violations of law and make sure investors were protected. We accomplished that and now [investors] . . . are under the Bankruptcy Court’s protection.”

The department filed suit against Galewick in November 1998, alleging that he defrauded about 2,000 investors in a debt-collection venture. The state accused Galewick of misleading the investors, failing to disclose conflicts of interest and overcharging on commissions and expenses.

In response, Galewick put his company and five affiliated partnerships--including about $58 million in investor funds--into Chapter 11 bankruptcy in December.

In the settlement, department officials agreed to drop their suit, withdraw from the Bankruptcy Court proceedings and cease efforts to bar Galewick from working in the securities industry, according to Mark Yocca, attorney at Irvine-based Rovens, Lamb, Patch & Yocca, who represented Galewick.

In return, Galewick agreed to withdraw any legal claims he may have against the state and pay about $650,000 in expenses incurred by a state-appointed receiver. Galewick also agreed not to seek a broker-dealer license from California for a year.

The settlement must be approved by the state and the Bankruptcy Court. An attorney for the investors said the settlement will save time and money.

“This will take away the uncertainty and reduce the administrative expenses of concluding the bankruptcy case,” said Ron Rus of Rus, Miliband, Williams & Smith, an Irvine attorney who is representing the official committee of investors.

Galewick and the investors can now concentrate on developing a reorganization plan and deciding what role, if any, Galewick will play in the future of the company. Negotiations are underway.

Galewick would like to merge the various partnerships into a single, publicly traded company. Other options include selling the debt portfolios or continuing to operate the partnerships until they become profitable.

Though investors have not yet earned a return on their money, Galewick said he is confident that the partnerships will be profitable over time.