PaineWebber Agrees to $302.5 Million Settlement of Investment Fraud
Jan. 19, 1996
WASHINGTON (AP) _ Edgar A. Smith, a Florida electronics professional, was looking for a safe place to grow $20,000 into a retirement nest egg in the early 1980s. A boyhood friend and a broker at PaineWebber Group Inc. in Miami suggested investments called limited partnerships.
``I wanted as a good a return as I could without getting risk,'' Smith said in a telephone interview Thursday from his home in Pompano Beach, Fla.
PaineWebber's account statements told him he had almost doubled his money as of four years ago, until the company was told to restate how much his investment was valued. The firm then sent him a statement showing his $20,000 investment had shrunk to $8,000 in just six months.
``I was grossly misrepresented, really,'' Smith said.
The 58-year-old Smith is one of an estimated 200,000 people nationwide who were misled by PaineWebber, which agreed Thursday to a $302.5 million settlement involving sales of risky limited partnerships.
The Securities and Exchange Commission charged PaineWebber, the nation's fourth-largest brokerage firm, with breaking federal fraud and record-keeping laws and failing to properly supervise its brokers. PaineWebber agreed to the SEC censure but did not admit or deny wrongdoing. The settlement also resolves state investigations and two private class-action lawsuits.
Donald Marron, PaineWebber's chairman and chief executive, said a goal of the settlement was ``to do everything we can to ensure that similar issues do not recur.''
``We accept our full share of responsibility for the situation that arose in connection with certain limited partnerships sold in the 1980s and early 1990s ...,'' Marron said in a statement.
Many of the investors in the more than $3 billion of limited partnerships, which lost an estimated $300 million between 1986 and 1992, were retirees seeking conservative investments. PaineWebber brokers who sold the most partnerships were rewarded with fat commissions, vacations in Monte Carlo or Vail, Colo., free dinners or VCRs, the SEC said.
SEC continues to investigate individual current and former PaineWebber brokers. For example, Smith's broker, William Jay Hampton, 55, was barred from the industry in 1995 for unauthorized and unsuitable sales of limited partnerships, according to record obtained by The Associated Press.
The SEC cited PaineWebber for failing to supervise Hampton and others in the firm's Miami office, where one investigator said some of the worst abuses occurred.
The bulk of PaineWebber's settlement, $292.5 million, goes to resolve claims from investors. The settlement includes $120 million that's already been paid to investors and another $7.5 million will be paid by 1997. It also includes $125 million to resolve two private class-action lawsuits and the creation of a $40 million investor claims fund.
In addition, PaineWebber will pay a $5 million civil penalty to the Securities and Exchange Commission and pay $5 million to settle state investigations, regulators said in interviews.
The money-losing investments cited in the SEC's case are PaineWebber-Geodyne oil and gas partnerships; PaineWebber Insured Mortgage Partners; PaineWebber-Independent Living Mortgage, and the Pegasus Aircraft Partners.
Unluckily, Smith had all of his retirement money invested in the Geodyne energy partnerships, which turned out to be the biggest money losers, investigators said.
PaineWebber's brochures and other sales materials misled investors about Geodyne's safety, tax benefits, calculation of yield and value during periods of declining oil prices, the SEC said.
PaineWebber boasted that Geodyne had a ``high degree of safety of principal ... appropriate for the most conservative individual and qualified retirement plans,'' according to the SEC.
Smith found out otherwise.
``It wasn't sellable two years after I bought it,'' Smith said of Geodyne. ``So realistically what they promised _ even though they showed 10 percent on paper _ was not there.''
It was unclear how Thursday's settlement would affect Smith. He settled with PaineWebber in 1994 for $32,700.
Under the $40 million SEC claims fund, anyone who purchased PaineWebber partnerships, also known as direct investments, between 1986 and 1992 is eligible to file a claim, including interest. Claims should be filed within about six months.
Investors could be paid their original purchase price, less any cash distributions they already received and any remaining value of the partnership shares.
Investors in the private class-action case can make claims, but only if the partnerships weren't suitable considering their investing goals or sophistication, according to court papers. Any payments from the class-action case will be subtracted from the SEC claims fund.