A Long Island banking company and a realty trust firm are suing Donaldson, Lufkin & Jenrette Securities Corp. for $175 million for allegedly deceiving them into investing millions in faulty mortgage-backed securities.
North Fork Bancorp and BRT Realty Trust are accusing Donaldson Lufkin of racketeering, mail and wire fraud, and securities law violations in connection with two issues of mortgage-backed securities in 1991 and 1993.
The 19-count lawsuit, filed in U.S. district court in New York, also accuses the firm of breach of contract, breach of fiduciary duty, negligence, and unjust enrichment.
The suit called the Donaldson Lufkin offerings a "pervasive scheme" to profit from millions of dollars in investment fees generated by artificially inflated sales.
The suit also names General Electric Capital Corp. and several other companies controlled and used by New York-based Donaldson Lufkin to manage the securities and properties.
Donaldson Lufkin spokeswoman Catherine M. Conroy called the allegations "ridiculous."
"We consider that suit to be frivolous and without merit," she said.
The securities were originally purchased by Great Neck, N.Y.-based BRT Realty and Bayside Federal Savings and Loan Association in 1991, with additional purchases by BRT in the 1993 offering. The companies spent $8.6 million to acquire the mortgage-backed securities.
Mattituck, N.Y.-based North Fork acquired Bayside in November 1994 and inherited the securities. But financial and maintenance problems with the properties only came to light in the spring and summer of 1994, after BRT and $2.7 billion-asset North Fork obtained accurate financial and property reports from new management.
Other investors have settled with Donaldson Lufkin for more than $250 million, but "we were not offered anywhere near what the others were offered," said plaintiffs' attorney Thomas J. Hall of Chadbourne & Parke in New York.
"North Fork is attempting to get back what it believes it rightly deserves," said John Adam Kanas, president and chief executive of North Fork.
The securities issues, worth more than $289 million, were backed by mortgages on dilapidated apartment buildings in New York, New Jersey, and Pennsylvania. The buildings were owned by the same landlord, Morton L. Ginsberg of New York, whose management company is also a defendant in the case.
According to the suit, Donaldson Lufkin deceived investors by "leading them to believe they were investing in legitimate, viable, profit-oriented commercial properties."
The plaintiffs were presented with revenue projections for the properties, showing "a nice cash flow and a nice return on their investment," Mr. Hall said.
And the bonds received an AA rating from Moody's Investors Service. Moody's has since downgraded the securities to junk-bond status, claiming in published reports that they, too, were a victim of misrepresentation.
But, the suit continues, Donaldson Lufkin concealed the need for millions of dollars of maintenance work in the buildings, delinquent tax and bill payments, building code violations with millions of dollars in unpaid fines, declining occupancy, unpaid rents, and missing tenant security deposits.
As a result of these problems, the properties "were incapable of ever producing any return on plaintiffs' investment or the return of the principal amounts invested, and were never expected by the participants of the Donaldson Lufkin scheme to do so," the suit claims.
Donaldson Lufkin allegedly allowed the mismanagement of the properties to continue, even assisting with management to conceal the scheme and enable defendants to "continue milking the pools of mortgages properties for additional fees."