Bondholders claim Wedbush misled them on Vacaville project.

A group of bondholders claims that Wedbush Morgan Securities Inc. failed to disclose accurate information about a 1999 municipal bond offering to finance an ice skating rink in Vacaville that went bankrupt three years ago, leaving investors with bonds worth just 20 cents on the dollar.

The bondholders filed an arbitration claim against Los Angeles-based Wedbush Morgan with the National Association of Securities Dealers in October alleging negligence, breach of contract and breach of fiduciary duty. The tax-exempt bonds, originally priced at an attractive 6.5 percent yield, ultimately were restructured when the facility went bankrupt in 2001.

According to the NASD complaint, Wedbush Morgan sold up to $7 million of municipal bonds to finance what had been billed as a 33-acre redevelopment project in Vacaville that included a 16-screen movie theater and two restaurants near Interstate 80, the road connecting San Francisco to Sacramento.

Investors claim they discovered in August that the bonds they purchased had financed only an ice skating rink on six acres of city property. The rink was the only source of operating revenue to repay bondholders.

"The description of the bonds was grossly inaccurate and significantly exaggerated the bonds' strength, desirability and true value," said Scott Regberg, a municipal bond investor who owns Regberg & Associate Inc., a public relations firm. "We believe that Wedbush sold the bonds to us in the beginning knowing that their description of the project was inaccurate."

Ed Wedbush, who founded the firm, said he could not comment specifically about the arbitration case because he didn't have enough information. He did note that the bondholders who filed the NASD claim held just $564,000 in bonds. "It's not like our firm to be misrepresenting merchandise to our clients," said Wedbush.

In 1998, Wedbush distributed a one-page circular to prospective investors that described the high-yield bonds as a "great value" because they were secured by lease payments and a first mortgage on the city property. The description also stated that the bonds were backed by several reserve funds. But those were found to be non-existent, according to the NASD complaint.

Investors are required to litigate complaints against securities firms through an NASD arbitration panel. Last year, NASD arbitration cases against advisors and brokerage firms involving bond sales jumped sharply.

The Vacaville bonds were approved by the Vacaville City Council and issued by the Vacaville Public Financing Authority, although the city itself had no obligation to repay the bonds. The original underwriter, Greenwich Partners LLC, had been unable to sell the bonds in a private offering in 1997. Most of the original $7.9 million was later purchased in the secondary market by Wedbush Morgan.

Though the ice skating rink was built in 1999 and still operates, it has faced a series of financial and legal troubles. U.S. Bank, which financed construction of the facility, foreclosed on the property in 2001. The Vacaville City Council then approved a bankruptcy reorganization in late 2002 that lowered the interest rate on the bonds to 5 percent from 6.5 percent and deferred several bond payments. Bondholders also agreed to a drastic reduction in income, with only one-third of the dividend paid in cash and the remaining two-thirds paid in additional bonds.