Griping investors finger local Pru Securities office; Prudential denies charges that investors were misled.

At least seven local investors in a busted Prudential Securities real estate limited partnership have told the Securities and Exchange Commission that a local Prudential branch manager -- John Eisele in the downtown Los Angeles office -- misled them about ways to get their money back.

A spokesman for Prudential Securities in New York denied the investor allegations, which were made in letters written to the SEC earlier this month. Eisele declined to comment last week.

The ill-fated partnership, the $395.6 million VMS Mortgage Investment Fund, was touted by Prudential brokers in 1988 as a safe investment with "guaranteed" annual returns of 12 percent. Sales literature suggested the fund was suitable for retirees.

Instead, the fund went seriously south within a year, as second, or "junior," mortgages it bought on commercial office buildings soured. Investors now have about seven cents on the dollar invested.

Angered, investors have sought recourse from Prudential Securities, but have been rebuffed -- the brokerage contends that risks were detailed in the fund's prospectus.

"Prudential-Bache (now Prudential Securities) cannot be held responsible for fluctuations of investments due to market conditions," said the brokerage house in an April 19, 1991, letter to a Hollywood investor.

Last week, a Prudential spokesman said the big brokerage, owned by the Newark, N.J.-based Prudential Insurance empire, is sticking to its guns.

"Did the partnership turn out the way everybody wanted? No. But does that constitute fraud? No. You have to remember, when the partnership was put together, real estate looked different than it does now," said William Ahearn, Prudential spokesman.

According to copies of four letters obtained by the Los Angeles Business Journal, Prudential's Eisele informed investors that to have a chance to recoup their VMS investments, they must join a class-action suit wending its way through a Chicago federal courthouse.

But, in fact, they could have gone into arbitration proceedings under the auspices of the National Association of Securities Dealers -- and probably have gotten better compensation than the class-action settlement, they claim.

In a Jan. 6 letter to SEC enforcement chief William McLucas in Washington, D.C., Sylmar resident Robert Blondeel-Timmerman wrote, "I asked John Eisele what options were available to my mother (the investor). His response was that the only option was to join a class action suit that was being brought against VMS."

His comments were echoed in a Jan. 19 letter, also written to the SEC, by Pacific Palisades resident Mary Lee Griswold. According to Griswold, "(Eisele) replied that the only option available was to join a class action suit. ... Mr. Eisele further told me that all VMS customers were doing this. ... My conclusion is that Mr. John Eisele not only lied to me and deliberately misled me, but that he did this with the specific intent to injure me financially."

Nationwide, about 14,000 investors bought into the Prudential-VMS fund, and many have participated in the VMS class action suit.

That suit resulted in a settlement that awarded investors seven cents on the dollar.

But what irks the local investors is that, in fact, they could have "opted out" of the VMS class-action suit -- or never joined it -- and fought for compensation in NASD proceedings.

NASD arbitrations have resulted in far better settlements for investors, said Woodland Hills lawyer Joseph Lovretovich, of the firm Lovretovich & Karen, who is representing several Southland investors in the VMS matter.

"In negotiations, we are getting offers of much better settlements," he said. "The class-action settlement is very weak."

Lovretovich's key contentions are that Prudential sales literature represented the VMS fund as secure, and that compensation for investors should be decided on a case-by-case basis.

"Prudential represented the VMS fund as a safe investment, and it wasn't. A class-action suit is not a good way for investors to solve their problems with Prudential -- VMS is not a defective record or pair of jeans, where everybody lost a few dollars," said Lovretovich "We are talking about unsophisticated investors and their life savings in some cases -- where in other cases, there were sophisticated investors who did know of the risk they were taking. To lump them all together in a class-action suit is not right."

Last week, Prudential spokesman Ahearn was adamant that Eisele had not misled investors, and furthermore, he said, NASD arbitration proceedings do not always result in richer settlements than class-action suits anyway.

"Eisele said it is patently false (that he said investors' only recourse was the class-action suit)," said Ahearn. "And, in arbitration, it can go either way. Lawyers always talk about the big settlements they get, not the cases they lose."

But clouding matters for Prudential, one former local Prudential broker, William Creeden, who worked for Eisele when Prudential was selling the VMS partnership, said he was told by Eisele not to tell his clients of their arbitration option, and to only tell them about the class-action suit.

Creeden, now with Kemper Securities in Pasadena, said he believed his fiduciary obligations to his clients required him to reveal the option of going into arbitration -- but when he told Eisele of his intentions, he was terminated. Creeden is pursuing Prudential in his own NASD arbitration. (Brokers who have employment disputes are required to enter binding NASD arbitration.)

The VMS partnership collapse, as well as crashes of Prudential oil and gas partnerships, has led to SEC and National Association of Securities Dealers investigations into Prudential Securities.

Meanwhile, the state Department of Corporations has been conducting a months-long investigation into Prudential Securities sales practices in the Southland, but to date no action has resulted.

According to a recent Business Week article, six states are conducting investigations into Prudential sales practices.