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Suit Accuses Oil and Gas Firm of Fraud

Investors: Judge freezes owner's, company's assets. Two operations linked to Mustang Development deny wrongdoing.


Investors in a Beverly Hills oil and gas company filed a lawsuit Thursday accusing the company and its operators of swindling them out of millions of dollars through fraud, conspiracy and racketeering.

The class-action suit, filed in federal court in Los Angeles, accuses Mustang Development Co. and others of siphoning investment money to support lavish lifestyles and of operating a pyramid scheme that paid off earlier investors with money raised from later investments.

Investors, many of them elderly Southern Californians, poured $150 million into the company, the lawsuit contends, and have not received back any of their principal.

In an emergency hearing late Thursday, U.S. District Judge William D. Keller froze the assets of Mustang and its owner, Neal Stein, and set a hearing for Feb. 12 to decide if a receiver should be appointed to take control of the company.

Neither Stein nor lawyers for him and Mustang could be reached for comment.

The lawsuit also links Mustang to the operation of two Beverly Hills companies that federal authorities raided just before Christmas. The Securities and Exchange Commission is suing those firms, KS Resources and Lazar, Frederick & Co., to recoup $35 million allegedly taken from investors in a similar Ponzi scheme. Both firms denied any wrongdoing.

Fraudulent investment scams, especially those involving oil and gas leases, have been on the rise in Southern California in recent years, said SEC officials in Los Angeles.

The schemes prey on the elderly in affluent areas such as Woodland Hills, Sherman Oaks and the Leisure World retirement community in Laguna Hills.

"We've made a number of referrals to criminal authorities for investigation," said Rosalind Tyson, the agency's associate regional director for regulation. She pointed out, though, that many investments in oil and gas operations are legitimate.

She would not comment on whether the SEC is investigating Mustang. The investor lawsuit filed Thursday states that the agency, along with the Justice Department, the Internal Revenue Service and the postal inspector, is investigating the company.

Besides suing Mustang and Stein, the investors named Alex L. Kahan and brothers Mark and Andrew Seigel among 81 defendants. Kahan and the Seigels allegedly left Mustang to form KS Resources and Lazar Frederick in the early 1990s. They also are defendants in the SEC's action.

H. Thomas Fehn, a lawyer for Kahan and the Seigels, said it was "unimaginable" that his clients helped Stein in any alleged wrongdoing. He said his clients once "did business together" with Stein, but stopped.

Mustang, through several brokers also named as defendants, has sold partnership interests to about 6,000 investors since 1987, and KS Resources, through Lazar Frederick, sold similar investments to more than 2,000 people, according to the lawsuits.

Thursday's lawsuit asserts that "very little" of the $150 million raised by Mustang was ever invested in gas and oil properties. Instead, the suit contends, Stein and others took the money for themselves and for earlier investors who were owed interest.

"Mustang has some assets," said Evan Smiley of Costa Mesa, a lawyer for the investors. "It has 300 oil wells in Louisiana, Texas and, I believe, Central America. But there should be thousands of oil wells, based on the investments made."

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