Massachusetts Alleges First Investors Tricked Elderly Investors on Junk Bonds
Charging that the firm duped elderly investors into believing junk bonds were as safe as certificates of deposit, Massachusetts has filed a multimillion-dollar lawsuit against First Investors Corp.
"This action is aimed at protecting Massachusetts investors, many of whom are elderly and were allegedly misled into losing their precious life savings in junk bond mutual funds," Massachusetts Attorney General Scott Harshbarger said in a printed statement.
Mr. Harshbarger and Secretary of State Michael J. Connolly filed suit in Suffolk Superior Court last Wednesday claiming the Wall Street firm, some related companies, and individuals violated the Massachusetts Consumer Protection Act and the state Securities Act.
In addition to three times the estimated $15 million in losses to Massachusetts investors - a total of $45 million - the state is seeking $20 million it claims First Investors' parent company improperly paid out in 1990.
The complaint charges First Investors misled clients into believing two mutual funds, First Investors Fund for Income and First Investors High Yield Fund, were as safe as certificates of deposit.
"In reality, these funds allegedly consisted of highly speculative and volatile junk bonds," the statement from Mr. Harshbarger's office said.
First Investors recruited largely inexperienced sales people, improperly trained and supervised them, and targeted unsophisticated investors, according to the complaint.
The company used scripts, which sales people memorized and repeated verbatim, it said. Some 14,000 allegedly wronged investors have been identified so far, but more may come forward later, Tom Samoluk, a spokesman for Mr. Harshbarger's office, said.
Michael Miller, First Investors chief executive officer, admits his company could have performed better in some instances, but admits no wrongdoing.
When Massachusetts rejected the company's $1.2 million settlement offer, it usurped investors' choices, he said. Now lawyers, not investors, will pocket the money, Mr. Miller said.
"I'd much rather pay the investors," Mr. Miller said, "Massachusetts is never going to win this lawsuit because I don't think the suit has any merit." First Investors, which is also in litigation with New York, has settled disputes with seven other states. Mr. Miller emphasized, however, that these were not court settlements. Under those settlements, Delaware got $34,000, Rhode Island $158,000, Connecticut almost $1 million, Texas $1.1 million, Oklahoma $350,000, Oregon $317,000, and Michigan approximately $770,000.
"[Massachusetts] relatively abruptly broke off talks and shortly afterwards got the headlines," Mr. Miller said. "They got the headlines but they got investors nothing."
Elsewhere in the high-yield market, Viacom Inc. has offered to redeem all of its remaining $150 million of outstanding 15.5% junior subordinated exchange debentures due 2006.
The offer came less than a month after the company redeemed $250 million of those same securities Aug. 30.
Redemption will occur Oct. 31 at a price equal to the bonds' face amount plus accrued and unpaid interest to the redemption date.
The high-yield market overall was flat but weaker in some sectors such as retail. High-grade corporates were unchanged to up 1/8 point, traders said.
As for European markets, Pennsylvania-based Centocor Inc. yesterday priced a $125 million Euro-convertible subordinated debentures offering.
The debentures, offered only in Europe, were priced at par to yield 6 3/4% and will convert into the company's common stock at $61 a share.
The company offering allows the company to diversify its investor base and reach a market it had not tapped.
"We have a lot of U.S. investors," Charles C. Cabot III, a spokesman for the company, said. "Europe represents somewhat of an untapped market and the success of this deal I think reflects the fact that we reached some people that hadn't been familiar with our story," he said.
Centocor expects the offering to close on Oct. 16. Credit Suisse First Boston Ltd., J.P. Morgan Securities Ltd., and PaineWebber International (U.K.) Ltd. are lead managers for the offering.
Except for rare instances, the debentures may not be sold in the United States or purchased by U.S. citizens. The securities are not registered under the Securities Act of 1933.