First Executive fiasco prompts Bass brothers suit.

First Executive fiasco prompts Bass brothers suit

Billionaires sank $52 million into West L.A. company

Kidder, Peabody & Co. Inc. mendacity and greed cost the Bass family empire the better part of $52 million, the Basses have alleged in a Texas federal courthouse.

The Bass brothers of Texas, Sid and Lee, filed suit May 2 against Kidder Peabody, alleging that the brokerage house intentionally lied about the financial condition of Los Angeles-based life insurer First Executive Corp. in a prospectus for $284 million worth of securities sold in September 1989.

Kidder Peabody, as co-underwriter, earned $5 million in fees from the unusual offering of securities "units," which entitled buyers to purchase common stock and convertible stock at prescribed prices in certain time frames in the future.

The Basses and co-plaintiffs bought more than $52 million of the rights shortly before First Executive took its big plummet on Wall Street.

First Executive stock has been hammered because of the life insurer's $7.2 billion portfolio of high-yield "junk" bonds, which make up 58 percent of the insurer's invested assets. Junk bonds have been falling in value, reducing the worth of First Executive's portfolio -- and raising questions whether the insurer can honor claims and withdrawals.

Last September, First Executive common stock sold for $13.50 a share; last week it traded in the $3-a-share range, proof that even the high-powered Basses can take a tumble in the stock markets.

First Executive, founded by Fred Carr, chairman and president, operates two main life insurance subsidiaries, Executive Life Insurance Company in California and Executive Life Insurance Company of New York.

Kidder Peabody failed to make the following disclosures in the Sept. 1989 prospectus, or made the following misleading statements, allege the Basses:

* Kidder Peabody disclosed that First Executive had a substantial surplus, which would allow the insurer to embark on an expansion program. "In fact, First Executive faced a liquidity crisis, and the life insurance subsidiaries should have reported unusually high ratios of liabilities to surplus as determined by controlling regulatory authorities," alleged the Basses.

* Kidder Peabody "omitted the material fact that the high-yield bond portfolio held by (First Executive) had a market value substantially less than previously reported, and that such values were declining further. Kidder had an internal marketing group for such bonds...and had a high-yield bond portfolio of it own...."

* Kidder Peabody presented an impending, $460 million sale of Executive Life of New York as if had already occurred, when in fact the putative buyer of Executive Life of New York had no financing and the proposed transaction violated New York state law. The sale never occured.

* Kidder Peabody did not disclose in the prospectus that First Executive transferred a portion of its huge junk bond portfolio to "six California shell entities in a scheme to manufacture meaningless, paper values for the sole purpose of improving" the appearance of First Executive's finances. The state Insurance Department later disallowed the First Executive transaction, wiping up $109 million of First Executive's surplus.

* Kidder Peabody organized a "road show" in 1989 in which Carr espoused the virtues of First Executive, but did not reveal the his company's good financial picture depended upon the sale of junk bonds to the California shell companies and the sale of the New York subsidiary, both of which transactions collapsed.

The Basses allege that Kidder Peabody committed fraud, was negligent. The Basses are seeking to be compensated for damages, and are seeking interest, punitive damages and attorney fees.

A spokeswoman for Kidder, Peabody said the company, as a matter of policy, does not comment on pending lawsuits.

The Basses' co-plaintiffs include Dort Cameron, a former protege of deposed Drexel Burnham Lambert kingpin Michael Milken, the virtual creator the junk bond market who recently pled guilty to felony securities law violations. Cameron once described Milken as "the most important individual to live in this century."

Defunct investment banker Drexel Burnham Lambert co-underwrote the First Executive offering with Kidder Peabody. Drexel was not named in the Bass suit, presumably because it no longer exists.