Two L.A. lawsuits raise concerns about banks' selling of securities.

Lawsuits filed against two well-known Los Angeles commercial banks are again raising concerns within the banking industry about the questionable ways some banks market and sell mutual funds and other uninsured investments to individual investors.

The two suits were filed separately by unrelated bank customers, but both make similar charges. The defendant of one of the lawsuits is Northridge-based Great Western Bank. The other suit is against Glendale-based Glendale Federal Bank.

Both lenders are among more than 80 banks throughout California and some 3,500 banks throughout the United States that sell stock and bond mutual funds and other securities to individual investors.

Together, the cases are helping to fuel a nationwide debate that has been ongoing for several years over banks allegedly misleading investors by failing to provide full disclosure about investment risk and the lack of protection against losses. Suits similar to the Los Angeles cases have been filed in Florida and Texas.

The controversy has led some banks to tighten policies governing the sale of securities to the public. But the reforms haven't gone far enough to satisfy all investors.

Abuses by some banks in selling mutual funds to the public "are commonly known to exist. What's going to be done about them is what's unclear," said Michael Linfield, a Pasadena attorney representing the plaintiff in one of the Los Angeles lawsuits.

Linfield is representing a 94-year-old Santa Monica woman who filed suit in a Los Angeles Superior Court last month against Great Western.

Customers allege fraud

The suit claims the woman, Ruby Rosenthal, lost $8,000 in a mutual fund investment after being told by a salesperson at a Great Western branch that her original $60,000 investment was fully insured by the federal government.

In the case against Glendale Federal, Mark Fenning, a 44-year-old retired Culver City aerospace worker, invested his retirement nest egg, $120,000, in a mutual fund sold to him by a subsidiary of Glendale Federal. After six months, the investment had lost $16,000 of its original investment value, the suit alleges.

Both lawsuits claim the banks failed to disclose that the investments carry risks that could result in a loss of principal. The banks also allegedly failed to explain that the investments would be unprotected and uninsured against such losses.

According to both suits, the plaintiffs were led to believe by posted signs and other physical evidence at the banks that their investments would receive the same protection as bank savings accounts and certificates of deposit.

Such deposits are federally insured for up to $100,000 per account by the Federal Deposit Insurance Corp., a government agency. But investments in corporate stocks and bonds, such as mutual funds, aren't protected against fluctuations in financial markets.

Banks deny wrongdoing 

Officials at both banks said their salespeople did nothing wrong and insisted that full disclosure statements were signed by the investors at the time the transactions were completed.

Attorneys for the plaintiffs confirmed that both their clients had signed disclosure statements.

"But I argue that the banks make customers sign these things without telling them what they're signing," said Patrick Grannan, Fenning's attorney in the suit against Glendale Federal.

Both cases are awaiting trial.

Ever since banks were permitted by the federal government, beginning in the late 1980s, to market and sell stocks, bonds and other investment vehicles through a third-party subsidiary, a growing number of lawsuits and complaints have been filed against banks for allegedly unlawful sales tactics.

The issue has led to congressional hearings and calls from lawmakers in both the House and Senate for tougher federal legislative oversight.

The sale by banks of mutual funds falls under the authority of at least three federal agencies: the Securities and Exchange Commission, the Comptroller of the Currency and the Office of Thrift Supervision.

But despite past attempts by the banking industry itself to issue rules, banks are not required to follow specific government policies regarding the way they sell securities, according to Dominick Albano, a spokesman for the California Bankers Association, a San Francisco-based trade group.

High yields alluring

With interest rates still low by historical standards, stock and bond mutual funds have lured thousands of small investors away from bank deposits and toward the higher yields offered by mutual funds.

Stock funds, in particular, have seen enormous growth. In the first nine months of 1994, investors poured $104 billion into long-term stock funds. The total for the like period of 1993 was $93.2 billion, according to the Investment Company Institute, a Washington, D.C. mutual funds trade group.

Concerns about misleading the public have led some lenders locally, including San Francisco-based Bank of America, to institute tighter internal sales policies at bank branches.

In June, executives of BA Investment Services, BofA's investment subsidiary, implemented regular audits of investment transactions completed by the bank's 450 salespeople to check for questionable sales.

In addition to the audits, BA Investment salespeople are required to conduct a detailed customer profile to determine an investment's suitability to a particular investor prior to suggesting a certain investment vehicle.

Errors or disgruntled investors can cost the salesperson 20 percent of his or her commission, as well as additional penalties, according to Robert Flowers, senior vice president of BA Investment Services.

The bank subsidiary also provides customers with a disclosure check list, which investors are required to sign. The list outlines items discussed by the salesperson before closing a sale, including information rendered about investment risk and protection.