Co. and a Houston investment management firm over soured investments in risky securities. The $6.6 million Graphic Arts Credit Union claims that Kidder and Investment Advisors Inc. of Houston improperly teamed up in July 1993 to sell it about $600,000 of inverse collateralized mortgage obligations underwritten by Kidder. The credit union said it did not understand the risks of these investments, "was not specifically asked to approve any of them, and did not approve any of them." The defendants "fraudulently concealed the fact that the investments were unsuitable, inappropriate, and not in the best interests of the credit union," the credit union said. State credit union regulators have said the losses have not put Graphic Arts in jeopardy, but investments in collateralized mortgage obligations have led to the failure of one corporate credit union. A spokesman with the National Credit Union Administration said the collapse of Capital Corporate Credit Union of Maryland earlier this year has led to a decline in the use of these investments by other credit unions. In its case, Graphic Arts accused the two firms of breach of contract, breach of fiduciary duty, violations under Texas' Deceptive Trade Practices Act, securities fraud, and common-law fraud. Under the Deceptive Trade Practices Act, the credit union could collect treble damages of as much as $990,000 from the two firms. The suit says the credit union gave discretionary control of its investment portfolio to Investment Advisors after being introduced by Kidder Peabody and its employee, Alan Lindsay. State regulators deemed the mortgage-backed securities unsuitable for the credit union because of their volatility, the lawsuit states. Losses on the investments totaled $330,000 as of April 30. The credit union said it gave control of the investments to Investment Advisors because the investment firm claimed it had experience in managing the investments of San Antonio Federal Credit Union. This claim was false, the lawsuit says. In addition, the suit contends that Investment Advisors was unaware of restrictions on the kinds of investments allowed for a credit union. The credit union did not respond to a request for comment. Nicholas Wentworth, a principal at Investment Advisors, said he thinks the matter will be resolved out of court. But he called the allegations "outrageous." He added that, despite the volatility of the investments, the credit union had already gotten back 10% of its principal. "I believe these are acceptable investments," he said. An attorney handling the case for Kidder Peabody also declined to comment. But in its answer to the charges, the firm denied all the charges made against it by Graphic Arts. The firm "exercised reasonable care and due diligence" in connection with the credit union and was unaware of any untruths or omissions that the credit union alleges, Kidder said in its reply. Kidder also disputed the credit union's claims under Texas' deceptive- practices law. The former investment banking firm said Graphic Arts did not qualify under the law, because it was not a consumer seeking to buy goods or services. Kidder is seeking dismissal of the case. Earlier this year, PaineWebber Inc. acquired certain assets of Kidder Peabody, but did not assume its liabilities.
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