FRAUD LAWSUIT SETTLES NOTHING; ELDERLY INVESTORS' $1.1 MILLION SPENT.

Byline: Deborah Adamson Daily News Staff Writer

Two local businessmen took $1.1 million from 75 mostly elderly investors and spent the money on salary bonuses, costly trips to Las Vegas and Disneyland and a failed effort to keep the business going, authorities said.

And they're likely to walk away scot-free from prosecution, leaving investors little hope of recovering their money.

Fredrick J. Rice of Simi Valley and Salvatore A. Vecchio of Los Angeles, principals of Gray Hawk Fund Co. in Woodland Hills, defrauded investors in an oil and gas limited partnership scheme, according to the Securities and Exchange Commission.

Since the defendants spent all the money and have virtually no assets, the SEC has decided to waive any civil fines and other financial penalties. No criminal charges have been filed.

And despite the SEC's allegations and a settlement with the two defendants, Rice and Vecchio are not barred from working in the securities field.

The fraud occurred between August 1994 and January 1996, the SEC alleged.

Gray Hawk raised $1.1 million by selling interest in Kentucky oil and gas wells. Out of the $1.1 million, the defendants allegedly misused $474,500 - of which $180,000 went to wage bonuses and personal expenses such as stays at the Disneyland Hotel in Anaheim and MGM Grand in Las Vegas.

From May to December of 1995 alone, they racked up $18,500 in credit card charges, federal regulators said.

This week, the SEC charged Rice and Vecchio with selling interest in wells that they fraudulently claimed produced oil. While one well eventually did produce, none was producing at the time they were selling the investments, regulators said.

Telling customers they are investing in an oil-producing well is tantamount to guaranteeing future profits, according to the SEC.

``Drilling for oil is risky,'' said Cliff Hyatt, branch chief for the SEC in Los Angeles. Telling investors they will buy interest in oil-producing wells is like saying, ``it's a sure thing,'' he said.

Gray Hawk told investors that 60 percent of their money would be invested in the wells when only 15 percent went in, regulators said. Almost half of the funds were misused while the rest went to overhead and salaries of about 19 workers.

The two defendants settled with the SEC by agreeing not to violate securities laws again. They neither admitted to nor denied any wrongdoing.

Their names will be placed in SEC files and the database of the National Association of Securities Dealers - a regulator of brokerage firms - to show the public that the two have been sued by the commission.

``It will be hard for them to get a job in the financial services industry,'' said Hyatt.

But Michael Perlis, attorney for Vecchio, pointed out that his client is not barred from working in the financial services industry.

He added that his client settled because he didn't have a lot of money for a legal defense. ``He felt this was the best thing to do,'' Perlis said.

Rice's attorney declined to comment.

In the SEC settlement, the two defendants don't have to repay the victims or pay any civil fines because they have no money, real estate or other substantial assets which regulators could seize to pay back investors, Hyatt said.

``We've gone through their bank accounts,'' said Hyatt, whose agency can pursue only civil litigation, not criminal. ``They spent it all.''

The two don't face any criminal charges until the agencies that would police this kind of crime - such as the U.S. attorney or state attorney general's office - decide to investigate, the agencies and the SEC said.

Barbara Scheper, an attorney with the U.S. Attorney's Office, said her office looks at cases referred by the SEC but she refused to say whether the Gray Hawk file had been passed to her office.

Hyatt refused to say whether Gray Hawk was referred, but said that less than 50 percent of the SEC's cases are passed on. Investigations involving large dollar amounts, big companies or high-profile people tend to get referred, he added, but it's also possible for small cases to be prosecuted.

Cases that receive complaints from citizens or attention from the media also get scrutinized, Scheper said.

Perlis said there are no criminal charges pending against his client.

If the 75 investors want restitution, they'll have to file their own lawsuits.

``They have to pursue their own remedy,'' said SEC attorney Patricia Gomez.