WASHINGTON -- The Securities and Exchange Commission is pulling out all its enforcement guns in the agency's case against FSG Financial Services Inc., the Beverly Hills, Calif., securities firm it shut down last week for allegedly selling nonexistent municipal bonds, SEC officials said yesterday.

Lori Richards, assistant administrator of the SEC's Los Angeles regional office, said the agency will use a new federal law that gives the SEC authority to seek monetary penalties -- amounting to as much as three times investors' total losses -- against a firm and its officers for violations of the federal securities laws.

Until Congress enacted the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, the SEC only had authority to fine violators in insider trading cases. But Congress said the agency's enforcement tools were too limited, and it approved a three-tiered system of penalties that allows the SEC to fine corporations up to $500,000 and individuals up to $100,000 for each violation.

Just what size fines the SEC will seek will not be known until agency staff and a temporary receiver appointed by a federal judge last week sift through documents involved in the case. They will determine how many investors were involved and how much money was raised in what the agency says may be a "Ponzi scheme" involving municipal bonds, Ms. Richards said. A Ponzi scheme, sometimes described as "robbing Peter to pay Paul," involves collecting funds from the latest investors and using them to pay earlier investors.

The judge also issued a preliminary restraining order barring the firm from violating federal securities laws and freezing the bank accounts of the firm and its president, Joan S. Kantor. Ms. Richards said the SEC will seek permanent injunctions.

The SEC presented the federal court with documents alleging that FSG used sophisticated documents -- although there were no official statements -- to sell roughly $250,000 in nonexistent bonds. But Ms. Richards said that probably "the scheme is much larger than that. I can tell you so far it's much larger than $125,000. We think it will be well over $1 million and [will involve] hundreds of investors," she said.

"It's the first action in our region" that seeks to use the penalities provided under the new remedies act which "allow us to recover up to three times the amount of money raised" in a fraudulent scheme that occurred on or after mid-October 1990, she said. FSG attorney Michael Donahue, a partner with Donahue, Weagant & Loo in Los Angeles, was unavailable for comment.

In its filing with the U.S. District Court for the Central District of California, the SEC alleges that from at least January 1990 through the present, FSG raised at least $250,000 from public investors through the sale of such securities as Los Angeles Industrial Development Revenue bonds and California Health Facilities revenue bonds bonds that do not exist.

The SEC charged that FSG and its brokers not only misrepresented to investors that they were buying municipal bonds, but the firm and its staff contended it was a member of the Securities Investor Protection Corp.

They also failed to disclose that FSG is the successor to First Securities Group of California Inc., which was expelled by the National Association of Securities Dealers Inc. in 1989 for selling interests in limited partnerships that were misrepresented to be municipal bonds, the SEC charged.

"FSG has held itself out to customers as the successor to First Securities Group through the use of promotional materials and confirmations that are virtually identical to those used by First Securities Group," said the complaint. "In short, FSG is currently engaged in the same fraudulent activity for which First Securities Group was expelled by the NASD."

The agency said it is aware of at least eight investors who invested a total of more than $300,000 with FSG, but "it is likely that the number of investors and amount raised is significantly higher." Moreover, "these figures do not include the reputational harm to legitimate municipal bond brokerages or damage to the ability of state and local governments to raise funds through municipal bond offerings," the SEC said.

The filing said FSG ad Ms. Kantor were unregistered with the SEC and were unlicensed in California.

The complaint says FSG, for instance, sold several series of Los Angeles Industrial Development Revenue bonds, including bonds identified as the 8.25% series and 9% zero coupon bonds. But the city and county of Los Angeles told the SEC the bonds do not exist, the agency said. Moreover, the CUSIP number on the confirmation for the 8.25% series, for instance, was assigned to a Treasury bond, not a municipal bond, the SEC said.

"The security description for the 8.25% series bond identifies the issue as 'Los Angeles Industrial Development, Series A (private placement, book entry),' " said the SEC. "Although the word 'bond' is absent from the description, other references to bonds, including a quoted price 'per bond'" appear. FSG represents in its security description that the investment is "secured and backed by U.S. Government Bonds escrowed to maturity" and that " the interest income is both state and federal tax free and not subject to alternative minimum tax," the SEC said.

FSG said its investments are rated AAA, but the major rating services declared they had not assigned ratings, the agency said. Also, a member of the Municipal Securities Rulemaking Board said in a letter forwarded to the NASD that he had information verifying that FSG sold bonds that do not exist, the SEC said.

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