WASHINGTON -- Adding further controversy to mutual thrifts' stock conversions, a federal court on Wednesday ordered a hedge fund to give up profits that regulators said it "illegally obtained" in a string of deals.

The U.S. District Court for the Northern District of Illinois ordered New York-based Generation Capital Associates to pay $620,817 to the Office of Thrift Supervision and the Securities and Exchange Commission, which brought the case.

Generation Capital neither admitted nor denied guilt in agreeing to disgorge its profits. Its Atlanta-based general partner, Frank E. Hart, referred calls to his lawyer, Warren L. Dennis, a Washington-based partner at Proskauer Rose Goetz & Mendelsohn.

Subscribers Seen 'Cheated'

"The regulation was never intended to prevent this," Mr. Dennis said. In fact, the OTS prohibition on the transfer or sale of subscription rights, "cheat the subscriber out of one of the benefits of being a subscriber," he said, by not allowing those who can't afford to buy the stock to profit from their status as depositors.

The Federal Deposit Insurance Corp. is considering allowing mutual depositors to sell their rights to subscribe to thrift stock, an approach the OTS rejected earlier this summer for fear it would create large fluctuations in mutual institutions' deposit levels.

The OTS said that Generation Capital, "sought out and made unlawful agreements with account holders in converting institutions to use their nontransferable conversion subscription rights to acquire stock."

The institutions involved, which regulators said were not parties to the illegal transactions, were Chicago's Cragin Federal Bank for Savings; First Federal Savings Bank of Iowa in Davenport; Amerifed Federal Savings Bank in Joliet, Ill.; Calumet Federal Savings and Loan Association of Chicago; Albank Financial Corp. in Albany, N.Y.; Anchor Bancorp Wisconsin in Madison; and Provident Bancorp in Cincinnati.

Mr. Dennis said the investigation of his client was "instigated by the management of the institutions because these speculative investors are messing up their game," and cutting into insider profits in the deals.

Congressional critics sparked regulatory reform of thrift conversion rules by charging that mutual thrift directors and officers benefited by taking their institutions public in a wave of conversions over the past several years.

Mr. Dennis said fewer than two dozen depositors hooked up with Generation Capital Associates to buy thrift stock. They were not named as defendants in the lawsuit. "This was not a big-time scheme -- these were people who knew people," Mr. Dennis said.

The SEC said in a statement that Mr. Hart and his hedge fund "caused the account holders to misrepresent to the savings and loans that the account holders were purchasing the stock for their own accounts."

The OTS said that while the depositors were listed as the stock purchasers, money to buy the stock was supplied by Generation Capital. "The stockholders were paid a percentage of the profits after the stock was sold," the OTS said.

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