Top brokers defy Morgan Olmstead boss.

Top brokers defy Morgan Olmstead boss BY KATHY M. KRISTOF

Eleven top-producing stock brokers at the venerable Los Angeles investment house of Morgan, Olmstead, Kennedy & Gardner Inc. are demanding management changes in the wake of the recent resignation of Michael H. Fusco, Morgan Olmstead's former president, several brokers say.

"We wanted to have confrontation and hear what the real problem was (pertaining to Fusco's resignation)," says one ranking insider who asked not to be named. "Tilt (G. Tilton Gardner, company chairman, chief executive and president) is supposed to come back to us and tell us what he plans to do - the changes he plans to effect."

The confrontation between Gardner and the brokers was sparked by what one industry insider calls the "messy divorce" between Gardner, who has been the Los Angeles investment company's top officer since 1965, and Fusco, a former executive vice president of the PaineWebber stock brokerage who briefly served as Morgan Olmstead's president. The company also apparently has been grappling with dessention between top management and one of its largest shareholders for some time.

Rockwell A. Schnabel, the U. S. Ambassador to Finland and the owner of some 15 percent of Morgan Olmstead's shares, sent a two-page letter to Gardner in January outlining a 10-point plan to improve the company's operations.

Schnabel, who once served as the president of the Los Angeles brokerage Bateman Eichler, Hill Richards Inc. and as vice chairman of Morgan Olmstead, told Gardner that the company needed a written set of goals and objectives to which corporate offices would strictly adhere, a "niche" that would differentiate Morgan Olmstead from its competitors, and needed to cut out well as a number of other operating changes.

"Tilt, as we discussed, the firm's book value has gone from $2.51 in 1981 to $4.80 today," Schnabel wrote. "This is during one of the strongest markets we've ever experienced in America. The firm clearly needs to make some changes."

(By comparison, the per share book value of Jefferies Group Inc., another Los Angeles investment house, jumped from $2.82 in 1981 to $10.68 at year-end 1986.)

Gardner refuses to discuss the content of shareholder correspondence, which he says is confidential, but notes that his current business plan allows for creating a specific "niche" for Morgan Olmstead.

Meanwhile, the firm's operations have been suffering. After going public in summer 1986 at $7.50 per share, Morgan Olmstead's stock was trading for $3 per share last week.

The company's first-quarter report notes that operating results "reflect a period of adjustment" in which investment banking revenues were declining as was institutional business. The second-quarter report says financial results "did not meet our projected goals."

Ultimately, the firm lost $526,000 in the first nine months of 1987.

The biggest loss came in the second quarter when the company booked a $770,000 reserve for "certain unsecured accounts" and $900,000 as a reserve for "anticipated legal fees expected to be incurred in connection with our efforts to recover unsecured accounts and to pursue claims against others," according to the company's quarterly report. It was also in the second quarter that Gardner hired Fusco, who directed the consumer products and marketing group for PaineWebber.

"Fusco, was going to take care of the bear market, slay all the dragons and make everything right," says George Froley, the managing director of Froley Revy Investment Co. Inc., which owns and manages a fund with Morgan Olmstead.

Something went wrong, although no one seems sure exactly what it was.

Some industry insiders allege there was a power play between Fusco and Gardner caused by Fusco's insistence on top-level management changes. Indeed, in October - before Black Monday - Gardner threatened to call for Fusco's resignation, top-level insiders say.

However, a number of the company's more powerful executives asked Gardner to more powerful executives asked Gardner to reconsider because they believed Fusco was bringing a sense of direction to Morgan Olmstead.

"To my knowledge it is the first time Tilt has ever backed down. I can only imagine that it was because so many of us asked him to change his mind," another corporate insider says.

The truce between the two did not last long, however. At the end of October, Fusco sold his 6.2 percent stake, and he resigned earlier this month.

Fusco has said that Morgan Olmstead's financial condition was misrepresented to him when he was wooed away from PaineWebber, according to a number of sources close to the proceedings. Moreover, Fusco contended the company has refused to follow a business plan agreed to when he was hired.

Fusco would not comment on his firm because Gardner has sent him two letters reminding him of his "fiduciary obligation not to disclose any non-public information" and warning that he would he held "legally responsible for any actions you may take."

Brokers saw Fusco as a leader who understood

Some corporate insiders believe the dispute between Fusco and Gardner came to a head over yet another letter from Schnabel that was sent to Gardner in August.

Schnabel, who failed to return a reporter's phone calls, asked that the letter be read to Morgan Olmstead's board of directors at the company's third-quarter meeting, according to several executives who know the Finnish Ambassador. But the letter was never read to the group, and two directors contacted last week said they had no knowledge of the correspondence.

Gardner, however, says that there was no letter directed to the company's board, and will not talk about any letters he has personally received.

Moreover, he says that Morgan Olmstead's operations are in good shape and it is "business as usual" at the Los Angeles investment house.

"Our firm is really carrying on business as usual as much as you can do that in the kind of market we've had," Gardner says. "In the critical days of the stock market plunge, we operated with no serious problems. Our capital is not only intact, we have been profitable in both October and November," he says.

But corporate insiders say Fusco's departure is distressing to the company's most successful stock brokers.

"A lot of the retail and institutional force looked to (Fusco) as being a leader that truly understood the sales organization," says one insider. "The fact that he is not here is troubling to some people."

Adds another ranking insider: "I don't think Tilt realizes how serious this is. Almost every one of those eleven brokers was doing at least $500,000 in gross commissions, some significantly more. If some changes aren't made, some people are going to walk and take their book and business with them."