Dean Witter, Former Execs Face Charges
Dean Witter Reynolds Inc. and two executives who worked for the investment firm in the 1990s were charged Monday with misrepresenting the risk levels of certain bond funds, leading investors to lose about $65 million.
The charges against the firm, which merged to create Morgan Stanley Dean Witter & Co. in 1997, were filed by the National Assn. of Securities Dealers.
The NASD alleges that the firm and executives John Kemp and Lawrence Solari are guilty of securities fraud related to their marketing and sale of bond funds, known as Term Trusts, in the early 1990s.
Dean Witter pulled in more than $119 million in underwriting fees and about $7 million annually in management fees from the bond funds, the complaint says.
Kemp, who was president of Dean Witter Distributors and director of sales for Dean Witter InterCapital, was charged with approving presentations for the Term Trusts, which inaccurately portrayed the investments as low-risk.
Solari was the regional director of Dean Witter’s Northeast region, which had about 1,000 salespeople. He was charged with sending interoffice correspondence to branch managers encouraging the sale of the funds through inaccurate sales presentations.
The marketing campaign for the funds inaccurately portrayed them as safe, low-risk investments, the NASD said. Dean Witter and its brokers did not disclose information about the risky borrowing strategy of the funds and their dependence on low interest rates to achieve their projected returns, the complaint says.
The funds were sold between October 1992 and September 1993 in three offerings to more than 100,000 accounts. The Term Trusts lost more than 30% of their net asset value in 1994 when interest rates rose, a drop of more than $500 million. About 30,000 investors who sold out of the funds lost some $65 million, the NASD said.
“Morgan Stanley Dean Witter is disappointed that the NASD . . . has decided to pursue this action,” said a Morgan Stanley spokesman, calling the charges “unfounded.”
He noted that a class action brought against the firm regarding Term Trusts was dismissed by a U.S. District Court. “The funds have performed consistently with their stated objective,” he added.
The NASD said more than $500 million of the funds were sold to investors who were older than 70. Possible penalties arising from the charges include fines, payment of restitution and suspension or expulsion from the NASD, it said.
