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Hughes Capital's Deals Reap Only SEC Allegations

December 29, 1987|GREGORY CROUCH | Times Staff Writer

Howard E. Blumenthal, a new executive with Hughes Capital Corp., said his latest idea is to market a biodegradable process that converts everyday trash into something valuable such as energy. Blumenthal said it's a way of "turning garbage into gold."

If only it had worked for his company's shareholders.

Hughes Capital, with headquarters in Valencia, went public in August, 1986, and eventually raised more than $650,000 from investors.

A year and a half later, all they have to show for it is ownership in a company that has a small office in Valencia with a bookkeeper and a secretary, a stock with no value at the moment, and a string of allegations by the Securities and Exchange Commission.

Blind Pools Risky

If nothing else, the murky story of Hughes Capital is yet another example of how investors can go wrong. Hughes Capital is one of about 200 blind pools in the United States. In a blind pool, companies take investors' money without specifying how it will be spent. Usually blind pools are risky.

Blind pools "are run by people with no business experience looking to sell cheap stock to the public," said Irving Einhorn, regional administrator for the SEC in Los Angeles. "If they're really unscrupulous, they just form a shell company that they intend to merge with some other company in which they have some kind of interest. But they don't disclose any of that."

Hughes Capital's game plan was to buy existing companies, let current management keep running them and, thanks to Hughes' shrewd eye for bargains, spread the resulting wealth to its shareholders.

Hughes Capital did manage to buy one company. In January, Hughes Capital paid $3.5 million in stock to acquire Conserdyne, a solar energy firm in Valencia that was losing money.

According to the SEC, John Knoblauch, Hughes Capital's chief executive at the time of the deal, owned 55% of Conserdyne. Five months later, Hughes Capital decided the solar energy business wasn't that hot after all and closed Conserdyne's operation.

Shortly before the deal, however, Hughes Capital's stock scooted from $6.50 a share to $15.50, the SEC said, for no apparent reason. In February, the SEC suspended trading in the company's stock for 10 days.

In July, after an investigation, the SEC charged Knoblauch, Hughes Capital's director Gilbert Beall, and a Hughes Capital promoter, Lionel Reifler, of making false statements in the company's stock offering, of manipulating its stock price and of planning acquisitions by Hughes Capital in companies in which the three had financial interests.

Hughes Capital's public offering, the SEC concluded, was "a sham."

Because of the investigation, the SEC ordered the company to file new registration documents and prohibited it from issuing any more stock. Hughes Capital still has not filed the amended papers, a delay Blumenthal blames on "internal problems, management difficulties, a whole series of problems."

Hughes Capital neither admitted nor denied the SEC's allegations in the July report. No disciplinary action has been taken against company insiders, or its underwriter, F. D. Roberts Securities in Paramus, N.J. The SEC alleges that Roberts played a part in the stock manipulation scheme. Blumenthal said the SEC investigation is continuing.

Since last summer's investigation, Hughes Capital's president, Bruce Raiman, along with chief executive Knoblauch and director Beall, have left the company. Blumenthal, 42, a lawyer, was brought into Hughes Capital's operation last winter and is part of a four-man team (without specific titles) running the firm.

Not that there is much to run.

Hughes Capital is essentially a shell company, with no continuing business and revenue that is "down to virtually nothing now," Blumenthal said. The company has about $2 million in assets, primarily from long-term notes owed by former Conserdyne customers, he said.

Understandably, Blumenthal would rather focus on the future than the past. Blumenthal, who owns 55,000 shares of Hughes Capital's now worthless stock, said he feels an obligation to its investors to try and build the company into something. Blumenthal also said he is afraid the company may be the target of shareholder lawsuits.

Blumenthal is busy trying to raise funds so the company can start work on some alternative energy project ideas. Last spring, Hughes Capital signed a $12-million deal to build an alternative energy plant for a hospital in San Bernardino. So far Blumenthal has not raised the necessary money, although he said last week he had an oral commitment from a bank to finance the plant.

Just a few weeks ago Blumenthal was optimistic about getting a line of credit with two banks. But one of them, the Bank of Los Angeles, decided Hughes Capital was not worth the risk. "It was a credit request that was denied," said Burt Griffin, the bank's senior loan and credit officer.

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