Investors in Prudential real estate deal blast depth of NASD inquiry.

Several Southland investors in a Prudential Securities real estate deal in the 1980s that went sour now say they cannot get help from the National Association of Securities Dealers in the 1990s.

The NASD, an industry and regulatory body, is generally charged with settling ordinary investors' complaints against securities brokerage firms.

Most investors, when airing charges against a brokerage, are compelled into NASD proceedings through binding arbitration agreements they sign upon hiring a broker. They do not have the right to go into the civil court system.

The NASD is supported by dues imposed upon brokerage firms -- it is industry-, not tax-, financed. Disciplinary actions against brokerages or brokers must be approved by regional district business conduct committees.

In Southern California, the chairman of the conduct committee is George Casey, partner and over-the counter trader at Crowell, Weedon, a brokerage based in downtown Los Angeles.

The investors, including Charles Limmer, Charles Valles, Robert Timmerman and David Hendry, bought shares in the ill-fated VMS Mortgage Investment Fund in 1988, an investment Prudential sales literature touted as having "guaranteed" returns and as being suitable for retirees. The $395.6 million fund went bust soon after going public, losing $109.2 million in its first year of operation.

A class-action suit was filed in Chicago against Prudential Securities on behalf of 14,000 investors nationwide who bought into VMS, and the settlement from that litigation resulted in investors winning seven cents on the dollar in 1991. But to date, no payments have been made from the settlement. The four local investors and others have hired Joseph Lovretovich, of the Woodland Hills law firm Lovretovich & Karen, to press their claims against Prudential in arbitration proceedings.

The local investors in the VMS fund have sated in letters to the NASD, written in January, that they were misinformed as to their options in the wake of the fund's collapse. They claim that the manager of the downtown Los Angeles office of Prudential Securities, John Eisele, informed them that their only option was to join the class-action suit.

In fact, the investors could have also sought redress through the NASD arbitration process. The thrust of their claims is that Prudential determined it would be cheaper to settle through the class-action suit than in arbitration proceedings, and thus misled investors as to their options. But brokers have fiduciary obligations to their clients, and should have informed them of all options, state the investors.

Another broker, Barry Litzer, formerly of the Prudential Woodland Hill office, has also told the Business Journal that he was instructed to encourage investors to join the class-action suit.

Prudential manager Eisele has consistently declined comment on the VMS matter. But in arbitration proceedings, he has denied giving investors the advice to go into the class-action suit.

Officially, Prudential has maintained the position that the collapse of the fund is not the responsibility of the brokerage. "Prudential-Bache (predecessor firm to Prudential Securities) cannot be held responsible for fluctuations of investments due to market conditions. ... You were provided with a prospectus regarding your VMS investment which disclosed the risks involved with the product," said one letter Prudential sent to a Hollywood investor.

Interviewed by the Business Journal, the investors said they fell the NASD has been uninspired in its investigation of Prudential manager Eisele. One investor, Hendry, said that an NASD investigator, Larry Lippold, visited him at his Altadena home and appeared diligent, but indicated disciplinary actions are difficult to bring. Hendry said, "If nothing comes of the investigation, it will look like a whitewash to me."

Another investor, Limmer said the NASD unilaterally transferred his complaint to the New York Stock Exchange, as VMS Fund stock was traded on the Big Board. But other investors were not transferred to the NYSE, leaving Limmer mystified. The NYSE did not take action on the matter, said Limmer.

NASD District Manager Lonnie Woltman, in downtown L.A., said the Eisele matter is under investigation, and "we don't comment on open investigations."

At the conclusion of the investigation, she would forward recommendations, if any, to the product committee chaired by Casey, the partner at the Crowell, Weedon brokerage, said Woltman.

Investors' lawyer Lovretovich questioned the fairness of the NASD, both in its investigation of Prudential and Eisele, and of its arbitration proceedings.

"This is a stacked deck," he said. "The NASD is an industry body. It doesn't really seem interested in aggressive enforcement against the hand that feeds it."

Lovretovich said he offered to give NASD investigator Lippold the names of brokers and other Prudential clients who could offer corroborating testimony to that of his clients, but the investigator declined to accept the names.