LOS ANGELES -- California Treasurer Kathleen Brown testified on Friday that she objected to an advertisement critical of zero coupon bonds that has become a central issue in a libel suit against a bond investor newsletter.

The full-page ad, placed in the Sept. 16, 199 1, issue of Newsweek magazine by College Savings Bank of Princeton, N.J., promoted the bank's "CollegeSure" certificates of deposit product. The advertisement proclaimed that parents saving for college should "just say ~NO!'" to zero coupon bonds, which pay no interest until maturity.

Zane B. Mann, publisher of the California Municipal Bond Advisor, wrote in the Oct. 1, 1991, issue of the monthly newsletter that the bank's CollegeSure CDs were "an investment for the intellectually impaired." Mann's article prompted College Savings Bank to sue him for libel in February 1992.

In testimony Friday afternoon, Brown said a portion of the Newsweek advertisement was misleading because it gave "the suggestion that zero coupon bonds are unsafe and unsound." Mann said he had based his article, in part, on the claims the bank made in the ad.

The advertisement said federal banking authorities "deem any relatively heavy investment in long-term zero coupon bonds to be an unsafe and unsound investment practice subject to supervisory action."

"I take exception to that," said Brown, who testified that in 1991 the treasurer's office issued about $50 million of zero coupon bonds. "I do not market unsafe and unsound investments," she said.

Yesterday afternoon, attorneys were scheduled to present closing arguments to the Los Angeles County Superior Court jury that began hearing the case last Tuesday.

The morning court session provided Peter A. Roberts, chief executive of College Savings Bank, an opportunity to defend a chart in bank promotional materials. The newsletter article called the chart "cockamamie." Roberts said the chart provided a balanced analysis of Treasury bills, Treasury bonds, and municipal bonds in comparison with the CollegeSure CD.

Jurors were provided an opportunity to submit written questions. One juror asked Roberts how many savings accounts were closed because of the newsletter article.

"It's unclear to us if any were closed," Roberts said. But he said he believes new deposits were "slowed down" because of the article.

The Newsweek advertisement has been discussed frequently in the trial.

Mann testified last week that opinions in the disputed newsletter article were his own, but facts in the article were obtained from two sources -- the Newsweek advertisement and promotional materials supplied to prospective customers by the bank.

The Newsweek ad featured a Ghostbuster-style logo -- a circle with a slash through the words "Zero Coupon Bonds" -- next to the headline, "The Wrong Choice for College Savers."

Brown said the advertisement made her "very grumpy" because she viewed it as "an attack" on a then-pending $37 million issue of state zero coupon bonds that were sold on Sept. 18, 1991.

Brown said she was concerned the advertisement "could have a negative impact on the sale and raise questions about the appropriateness of" zero coupon bonds as "one of many savings vehicles" for parents worried about college.

Brown said she sent a letter of complaint on Oct. 16, 1991, to Richard M. Smith, editor-in-chief and president of Newsweek, asking the magazine to apply "a stricter ~truth in advertising' standard in the future."

Brown said she also wrote other national publications that published the College Savings Bank advertisement.

The treasurer said she first learned of attacks on zero coupon bonds by College Savings Bank when she came across an article by Roberts, the bank's chief executive, in the summer of 1991.

Roberts' article -- published in the July 1, 1991, "Open Forum" section of California Public Finance, a weekly newsletter operated by The Bond Buyer -- expressed opposition to a bill sponsored by Brown that was then pending in a state legislative committee.

The legislation was designed "to make it more attractive for families to save for college education," Brown said.

The bill, signed into law by Gov. Pete Wilson in September 1992, allows a holder of a zero coupon bond to exclude, upon maturity, up to $25,000 from income calculations used to determine a student's eligibility for state student financial aid.

"The California Public Finance article had the potential to impact, in a negative way," the proposed zero coupon bond issue, Brown testified.

Brown said she responded to Roberts' article with her own "Open Forum" rebuttal published in the Nov. 4, 1991, issue of California Public Finance.

The treasurer emphasized in her testimony that she believes zero coupon bonds should be only one of several investments that parents make to pay for their children's college costs.

Brown called the zero coupon bonds "buy and hold" investments. "The zero coupon bond is intended to be just one vehicle for a family saving for a college education," she said. "It is up to the family to identify how much they will save."

California first issued zero-coupon bonds for college savings in September 1990, when Brown's predecessor, Thomas W. Hayes, was state treasurer.

Brown said she "intended to expand the [zero coupon bonds] program in my administration."

However, Brown said, "market conditions changed" and she has not issued zero coupon bonds in the last two years.

Brown, called to the witness stand to testify on behalf of Mann, said California Municipal Bond Advisor is "an informed publication on the subject of public finance," but that she does not always agree with Mann's opinions.

"Mr. Mann can be provocative," Brown said.

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