WASHINGTON - A former PaineWebber Inc. official dealt a blow to the government's case against Lance Wilson by contradicting charges that the bond financing commitment letters Wilson wrote at PaineWebber were unauthorized and fraudulent.

In testimony before the U.S. District Court here Tuesday, Joseph T. Lhota, a former PaineWebber managing director who said he supervised Wilson's housing finance work, said that the former vice president did not need his authorization to write the letters and did not view them as legally binding on the company.

"As an investment banker, I don't believe this letter is enforceable," Lhota said. He was referring to a January 1987 letter written by Wilson that stated that PaineWebber would underwrite $7.68 million of taxable bonds for the Belle Glade apartment complex in Palm Beach County, Fla., if the project received a federal grant.

"In my opinion, this is not a contract" that would commit PaineWebber to providing capital for the project, Lhota said. This is just a letter to HUD to start the process off" of applying for a grant. "It says that the firm was going to move forward towards an underwriting. "

Arlin Adams, the independent prosecutor in the case, has contended that the Belle Glade letter and two others Wilson wrote represent key links in the alleged conspiracy to defraud the Housing and Urban Development Department. The letters, which Wilson wrote on behalf of a business partner's housing projects, were used by the two men in trying to illegally obtain Urban Development Action Grants, Adams charges.

The prosecutor contends that the letters were false and fraudulent because they did not represent a real commitment on PaineWebber's part to underwrite the project bonds. Wilson wrote them only to help his partner, co-defendant Leonard Briscoe, obtain the grants, he charges.

But Lhota, who said he was unaware Wilson wrote the letters, said that because they were not legally binding, he would not have required Wilson to get his authorization before writing them, nor would he have required review by PaineWebber's attorneys. He added that they did not appear to violate practices at PaineWebber."

Assistant prosecutor Daniel Gelber pressed Lhota to say there was something questionable about the letters. He said that in testimony before a federal grand jury in 1991, Lhota had stated that they appeared unusual and unauthorized.

But Lhota said Tuesday that he made those statements before the grand jury because he was under the impression at the time that the letters were legally binding. He has since concluded, in consultation with PaineWebber attorneys, that they were not, he said.

Lhota said he would have preferred that the letters contained more "wiggle-out words" making it clear that PaineWebber's commitment to underwrite the bonds was contingent upon more than just being awarded grants. The commitment should also have been based on other factors, such as market conditions at the time of offering, he said.

"I would have wanted some words that would have given us latitude as we moved forward with the transaction, so that if the project size went up or interest rates went up, the government wouldn't hold us" to the exact offering size or terms stated in the letters, he said.

But the letters contained sufficient "caveats" that it was clear that the financing commitments were not legally binding on the firm, he said.

Lhota confirmed that after Wilson joined PaineWebber in late 1986, he tried to obtain underwriting business with the Palm Beach County Housing Finance Authority. The agency sponsored the bonds for an apartment complex in Riviera Beach, one of the Florida projects at issue in the case.

Lhota said he joked with Wilson about how it would be difficult for him to divert the authority's business away from its usual underwriters. "I told him good luck,' since there was an individual in West Palm Beach who had the HFA locked up, " he said, referring to Marianne Edmonds, senior vice president of William R. Hough & Co.

Edmonds testified later in the day that her firm was designated the lead underwriter of a $15.8 million authority bond issue for the Wedgewood Plaza apartment project in Riviera Beach, which was built by Briscoe.

She said she was instructed by Briscoe and the housing authority to add PaineWebber as co-manager of the offering because Wilson had been "helpful" to Briscoe.

Edmonds testified that the underwriters had to take the unusual step of disclosing Wilson's 15% ownership in the Riviera Beach project in the bonds' offering documents - a move that Briscoe initially protested because he felt it would force up the interest rates on the bonds.

She added that at Wilson's and Briscoe's behest, PaineWebber, as co-manager, got an unusually large share of the fees - 33%, or about $120,000. Edmonds said she originally offered the firm a 20% share.

But Lhota testified that Edmonds herself got "more than her fair share of the market" for the housing authority's bonds. He said when Edmonds changed jobs in the middle of the Riviera Beach transaction and joined Smith Barney, Harris Upham & Co., the authority's business went with her.

"PaineWebber and other firms had tried to enter this market" with little success before Wilson, he said. Lhota added that Wilson was hired to be a "rainmaker" for PaineWebber.

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