Brokers Investment Corp. in Woodland Hills was terrific at raising money. What the Securities and Exchange Commission would like to know is what happened to it all.
From 1989 to mid-1992, high-pressured salesmen at Brokers Investment raised $109 million by reading scripts on cold-calls made to thousands of investors from coast to coast, the SEC said. Brokers Investment lured investors by talking about potential profits of up to 32% a year from deals in telecommunications, fiber optics and automated bank teller machines.
Some 6,000 people nationwide put up their money, and it was supposed to go into deals set up by an obscure telecommunications outfit in San Diego called U.S. Fiberline Communications that was linked with Brokers Investment.
But if the SEC's allegations are right, at least $40 million was either pocketed for personal use by top officers of Brokers Investment and Fiberline, diverted for unrelated businesses, or used as part of a fraudulent Ponzi scheme--in which money raised from new investors is used to pay off previous investors.
This happened after a hefty 30% of the $109 million was taken out for commissions and fees to Brokers Investment and its principal executives, most of them legal. But some of the fees were not disclosed to investors, the SEC said, and that violates securities laws.
In total, SEC examiners said that no more than $15.3 million was actually invested by Fiberline into projects such as telephone switching centers, computers and other telecommunications equipment. Where the rest of the money went is unclear, the SEC said.
"It was one of the state's biggest boiler-room operations in recent years," said Stan Maekawa, an assistant regional administrator at the SEC, which filed a civil complaint on April 30 in federal court in Los Angeles against Brokers Investment and Fiberline.
The complaint forced Brokers Investment, which had been in business since 1985, to shut down this spring. The co-owners of Brokers Investment, Norman Shubert and Daniel Steinberg, signed a consent order in May, without admitting or denying guilt, which prohibited them from selling unregistered securities and committing securities fraud. Martin W. May, a third defendant who the SEC says ran Brokers Investment's sales operation in Woodland Hills, refused to sign the order and is negotiating a separate settlement.
Meanwhile, three principal officers of Fiberline--William Grant, Scott Nauert and L. Scott Noreuil--resigned from the company, and each signed a similar consent order. They, and Shubert and Steinberg, declined to comment for this story. But their attorneys maintained that their clients would be vindicated once a thorough investigation into the businesses is completed.
One man looking for the missing $40 million is a court-appointed receiver, accountant Robert Baker of Los Angeles, who is running what is left of Fiberline. Depending on Baker's findings, the defendants in this case could be ordered to make restitution, and they could also face criminal prosecution. Regulators and lawyers say Baker is examining more than 50 bank accounts and thousands of transactions. He is expected to file a report by this fall.
In the meantime, Fiberline investors are anxious. Once hopeful of making big profits, investors now just want their money back.
Pat Nottingham, a retired nurse in Florida, remembers when she first got the call from a Brokers Investment salesman in July, 1991. The pitch was simple and alluring: invest $24,000 in a limited partnership, and get back monthly payments totaling $35,000 over two years.
Nottingham agreed, but was nonetheless shocked when a messenger came to her door the next day to pick up the check. "I called and asked, 'What's the hurry?' He said, 'You can't start getting any interest until we get your money."'
She gave in, and the messenger walked away with Nottingham's check.
As with many other Brokers Investment customers, at first Nottingham got steady dividend checks for a few months. Encouraged, she put an additional $50,000 in other Fiberline partnerships. But nearly two years later, Nottingham has received less than $2,000 from her investment, and not a penny in months. So Nottingham faces a total loss of $72,000. "This literally wipes me out," she said.
Nottingham's first investment was in a project called Harmony Systems, in which Fiberline was supposed to buy personal computers and voice mail telecommunication equipment. Brokers Investment's brochures and letters said these systems would be leased to hotels, hospitals and other businesses that would bring a 27% annual return on her limited partnership investments.
