Investors reeling after Pru-Bache 'guaranteed' investment goes bust: retirement money is lost in VMS real estate fund.

Investors reeling after Pru-Bache |guaranteed' investment goes bust

Retirement money is lost in VMS real estate fund

Prudential Securities stockbrokers in 1988 told Southland investors that a new real estate investment, named VMS Mortgage Investment Fund, offered a "guaranteed" annual return of 12 percent through 1990, and rock-solid preservation of capital. The fund would largely invest in junior commercial property mortgages, but also first property mortgages and real estate.

Underwritten by new York-based Prudential-Bache Capital Funding, the fund was touted as "suitable" for retirement and pension plans, in sales literature given to brokers and customers.

Under the symbol "VMG," the fund went public at $10-a-share in April 1989, after $395.6 million was raised from Prudential clients. Prudential Securities, until recently named Prudential Bache and part of the Newark, N.J.-based Prudential Insurance financial empire, earned $33.4 million in commissions on sale of the fund shares.

Today the Prudential-VMS Investment Fund trades on the Big Board for about 62 cents a share -- off 94 percent from the initial offering price -- and shareholders haven't earned a dime in distributions since 1989.

The fund reported losses of $109.2 million in its first year of operation and $60.1 million last year.

Basically, the Chicago-based VMS management made property loans that went sour -- and short order. Foreclosure, an expensive process, is netting back far less value than the loan amounts outstanding, in part because many of the loans are "junior" to other senior liens.

Southland investors are stunned.

"I was led by Pru-Bache to believe this was a safe investment, that it was supposed to be so secure I could trust my retirement to it. And so I put a substantial fraction of my retirement money in VMS," said Chuck Limmer last week, a 58-year-old Inland Empire resident and former credit manager. "Instead it turned out to be a lousy investment. I thought the Rock of Gibraltar was solid, that they would take care of their people. I learned otherwise." Limmer said he is out $60,000, an amount confirmed by his stockbroker.

Said Sal Russo, 63, sales manager at a Pacoima packaging company, "The VMS was portrayed as an absolute, safe investment with no risk. I transferred money from my IRA (retirement) account, everything I had, a little better than $25,000. I was not looking for something speculative. I feel it was an absolute scam."

Prudential spokeswoman Eleanor Mascheroni, in New York, said the financial giant had no comment on the VMS matter, because it was in litigation.

Adding salt to their wounds, said local investors, are letters that Prudential Securities sent to investors following the 94 percent price plunge.

"Prudential-Bache cannot be held responsible for fluctuations of investments due to market conditions," said the brokerage house in an April 19 letter to a Hollywood investor. "You were provided with a prospectus regarding your VMS investment which disclosed the risks involved with the product."

The prospectus, 138 pages of small-print legalese, contains declarations that "there can be no assurance" the stated investment goals will be attained and revealed conflicts of interest among VMS fund managers.

Too, Prudential told the investors they could join a consolidated class-action suit filed in Chicago, in which many investors in various VMS partnerships and funds are suing VMS. About 19 class-action suits have been filed against the VMS Mortgage Investment Fund, according to disclosure documents.

Angered by the VMS financial debacle and Prudential's stance that it will not make investors whole, 20 Southland investors have hired attorney Joseph Lovretovich, of the Century City-based firm Lovretovich & Karen.

The attorney said last week he is seeking repayment of principal and the "guaranteed" 12 percent returns his clients were promised, but Prudential in-house lawyers, to date, have offered less than 30 cents on the dollar.

Lovretovich said his clients are not going to join the consolidated class-action suit in Chicago, in part because the suit promises to be a lengthy process, and many of the 20 investors he represents are elderly. "These people aren't going to be around in 20 years. Most are over 60, and several are in their 70s and 80s," said Lovretovich.

Prudential, for its part, in April hired John Case, top-gun lawyer in the Los Angeles offices of Skadden Arps Slate Meagher & Flom, to negotiate with Lovretovich. Case declined comment last week.

Some former Prudential brokers last week said they are as angry as investors, in that they were encouraged, even "pushed" to sell the VMS Mortgage Investment Fund, as a safe investment.

"Look, I am not an underwriter. I am a salesman," said one broker, who is still employed in the industry and requested anonymity. "I have to trust what the sales literature and the branch managers tell me. The VMS was really pushed hard in our office."

However the 20 clients of Lovretovich make out, the Prudential-VMS fund is a lesson in how even seemingly rock-solid investments, offered by frontline brokerage houses, can go sour virtually overnight, they said.

The VMS fund, after raising the $395.6 million from Southland investors and more than 14,000 other investors nationwide, lent money on various commercial properties owned largely by the fund managers and affiliated entities.

The original managers, named VMS Realty Partners, operated a large number of real estate partnerships and mortgage funds, the troubles of which has been a topic of national attention.

This built-in conflict of interest was disclosed to investors, who nevertheless were told returns were guaranteed and the VMS fund was suitable for retirement nest eggs.

A major weakness of the fund was that it lent so much money in "junior" or "wraparound" mortgages -- loans that had second claim in foreclosure proceedings. Thus when a property or partnership defaulted, and the first mortgage was paid off, there wasn't enough money left to satisfy VMS' junior and wraparound mortgages.

In February of last year the original managers of the VMS fund were ousted and new managers brought in. The new managers are working their way through the financial carnage, and developing a plan to liquidate assets over the next five years.

Even yet, after more than $160 million of reported losses, a recent report by Shrewsbury, N.J.-based Robert A. Stanger & Co., a consulting concern, noted that VMS Mortgage Fund still had large exposure to junior mortgages -- in a tough real estate market. More reserves may have to be set aside for losses, warned Stanger.

The upshot? "Never, never put all your eggs in one basket," said attorney Lovretovich last week. "VMS was advertised as an extremely safe investment, by stock-brokers who confirmed their sales with branch managers. If that's not safe, nothing is."