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Lawsuit by SEC Accuses Irvine Firm of Fraud

Courts: MicroWest Industries allegedly raised $4.25 million through Ponzi scheme. Company officials deny the charges.

September 18, 1997|P.J. HUFFSTUTTER | TIMES STAFF WRITER

Federal regulators Wednesday accused MicroWest Industries Inc. of fraud, saying the Irvine-based company raised more than $4.25 million from unsuspecting investors through glittering promises of high returns in a telemedicine project.

The Securities and Exchange Commission, in a lawsuit filed Wednesday in federal court in Los Angeles, said MicroWest had promised investors their money would be used to make and market computer equipment to transmit medical images, among other things.

But instead the company engaged in a Ponzi scheme, using most of the money to pay off previous investors and to cover company expenses, the suit alleged.

Attorneys' for the company and its staff Wednesday denied SEC charges that the firm engaged in fraud.

The SEC complaint named company founders Steven P. Hevell, Joseph G. Obey, Allan T. Matzat and Ellsworth L. Brouillette, as well as independent sales agents Neal C. Harper, Dwight H. Stephens, Jim D. James, Blake T. Ward, Thomas J. Perkins and Anthony F. Moss.

The SEC charged that MicroWest and its subsidiaries--MicroWest Microsystems Inc. in Irvine and MicroWest Income Fund in Las Vegas--raised more than $4.25 million from at least 190 investors nationwide--most of them Californians--from 1993 to 1996.

MicroWest, a privately held company, and its subsidiaries reportedly sold securities but failed to register as broker-dealers.

Investors were promised returns as high as 25% in less than two months, SEC officials said Wednesday.

"High tech is really suitable for this kind of fraud, because there's a history in the computer industry of high returns," said James Hunt, national leader of investigative services for Price Waterhouse. "People are willing to invest their money, even if the company is promising things that seem too good to be true."

According to the complaint, the Irvine firm told investors it would use their money to build the MicroWest Image Telestar, a computer system to be used by doctors that would transmit medical images over telephone lines.

But MicroWest, which has about 12 employees, didn't actually manufacture anything, SEC officials allege. Instead, the staff spent a fraction of the money to buy assembled prepackaged computer products and bundle them with computerized imaging software, SEC officials said.

MicroWest only sold one completed unit--in March 1995 to a Santa Ana firm that offers imaging services to medical radiation facilities, according to SEC officials.

The name of the Orange County buyer, and how much it spent on the computer system, was not released Wednesday.

In March or April, a MicroWest investor received a written update on company projects from the Irvine firm, according to the complaint. The document allegedly said that "since July 1995, sales of the Image Telestar System have exceeded $6 million."

Defense attorneys said the company knew about the SEC investigation when it began 18 months ago and had provided all the information federal officials requested.

Hevell's attorney, Dennis Perluss, insist there is no fraud and no Ponzi scheme.

"This comes as a little bit of a surprise," said Richard Paul, who represents all the defendants except Hevell. "However, my clients are confident they will be vindicated."

In addition to paying off previous investors, the complaint accuses staff of using money to cover Hevell's entertainment expenses and buy a 1992 Range Rover.

Last February, five MicroWest investors filed fraud charges against the Irvine firm. The civil case, which does not list specific financial damages, is pending in the Orange County Superior Court.

The plaintiffs and their attorney declined to comment.

Dow Jones news service contributed to this report.

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