SEC Investigating Brokers Investment Corp. : Securities: At least $40 million was allegedly pocketed or diverted by the Woodland Hills firm and a San Diego company.

By DON LEE

June 22, 1993 12 AM PT

TIMES STAFF WRITER

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.

Overall, Brokers Investment raised $34.6 million for Harmony Systems. After paying fees and commissions, there was $23.5 million left, regulators said. But no more than $5 million was actually invested on any electronics systems, the SEC said, and the project was abandoned in February, 1991. That was five months before Nottingham got her first call from Brokers Investment.

Gerald Boltz, an attorney for Fiberline’s principals, acknowledged that there were “operational problems” with the company. But he insisted that Fiberline was a legitimate business and that his clients did not misappropriate investors’ funds. Boltz blamed investors’ losses on the recession, competition and problems with a joint venture with a Mississippi company whom Fiberline has sued.

But investors are convinced they were defrauded. Licia DeCamillis, who lives on Park Avenue in New York, was probably the single largest investor to Fiberline’s projects. She put $725,000 in four partnerships, but has only received about $10,000 back. Her last monthly dividend arrived in August; it was for $600.

DeCamillis, who is in her 60s, says she has other real estate property and will be able to bear the loss. But it has been painful nonetheless, and she has flown across the country over and over to try to talk to Shubert and Steinberg in an attempt to get some answers. “They’re a bunch of thieves,” she shrieked.

Many investors also blame regulators for not noticing warning signs earlier.

Brokers Investment was licensed by the SEC in 1985, but it wasn’t until early last year that SEC examiners visited the firm for a routine inspection. By then two other regulators--the California Department of Corporations and the National Assn. of Securities Dealers, a Washington-based group that licenses brokerages--had inspected Brokers Investment, or reviewed their operations, during the period of the alleged scam. But neither agency found anything seriously amiss.

If they had looked hard, they might have found that in the mid-1980s Steinberg of Brokers Investment, and Grant of Fiberline, were censured for selling unregistered oil and gas securities in separate cases. Steinberg was disciplined by regulators in Wisconsin and California, while Grant was censured in Alabama and Wisconsin.

Grant, 70, shifted from the oil business to become Fiberline’s chief executive in 1989, two years after the company was incorporated. Fiberline’s corporate profile said it was formed to take advantage of opportunities in deregulation of the telecommunications industry. Fiberline was licensed by the state as a long-distance carrier in 1988, and said it specialized in marketing pay phone and long-distance services to hotels, hospitals, condominiums and other businesses.

Shubert, 61, founded Brokers Investment, and in 1987 the company was merged with a brokerage that Steinberg, 36, operated in Canoga Park. Brokers Investment described itself as a discount brokerage house that also sold options and limited partnerships. In 1991, Brokers Investment said that it had four offices in Southern California with more than 100 employees.

Grant was introduced to Shubert and Steinberg in late 1988, regulators said, and in February, 1989, Brokers Investment began selling the first of what would be 18 limited partnerships for Fiberline. Its brokers were paid a hefty 8.5% sales commission, and they were furnished with carefully worded scripts that told them what to say to potential investors.

If a potential buyer said he wanted to run the investment by his attorney, brokers were to respond: “Is he a securities attorney? Then he would not have the ability to pass judgment on the legality of this investment . . . So take out the subscription documents and let’s get started making 24% on a secured basis.”

Brokers Investment’s sales pitch included magazine articles about the high-growth telecommunications industry and other “safe limited partnerships.” For extra measure, the brokerage threw in reprints of a positive article about Fiberline that ran in 1990 in The Los Angeles Times, plus an interview of Shubert and Steinberg that was featured in the Valley Industry and Commerce Assn.’s monthly magazine in 1991. “Serving our clients is the bottom line; it’s the key to our success,” Shubert said in the VICA interview.

Brokers Investment also got Stanford football coach Bill Walsh to do a print and cable television ad for the brokerage firm. “If your goal is financial security, consider the Brokers Investment Team for all your investment needs,” Walsh said in the ad. In a recent interview, Walsh said he was unaware of the recent allegations against Brokers Investment.

Fred Levy, a retired Hughes engineer who lives in North Hills, said he gave Brokers Investment money because he was drawn in by their package of information on the telecommunications industry. “I guess I was too enamored with the technology,” he said.

In 100-plus page prospectuses, investors were told in small type that they could lose everything. But Levy said he was told by salesmen that these caveats “were just boilerplate.” Even after delays in getting dividend checks, Levy and other investors said they were repeatedly given assurances over the phone and in letters that their money was safe.

If investors were gulled, so were former salesmen at Brokers Investment. A half-dozen salesmen at Brokers Investment, who agreed to talk with The Times if they remained anonymous, said they invested tens of thousands of their own money into the partnerships.

These brokers provided copies of company memos, scripts and other financial documents. And they spoke of how they were taken by bus to Fiberline’s offices in San Diego where they were shown copies of many purported long-distance telephone service contracts with hotels and other businesses. “We came out of that trip so fired up,” said one broker.

But by 1992, these former employees said, things began to crumble at the brokerage firm. Calls from angry clients who had not received their monthly checks mounted, and some clients were preparing lawsuits. Unable to get any answers from co-owners Shubert and Steinberg, who brokers said erupted in anger and told them to mind their own business, many salesmen left by fall that year.

By chance, SEC regulators in Los Angeles visited Brokers Investment in early 1992, as part of a routine inspection.

Regulators became immediately suspicious when they looked through the limited partnership offerings. Because Fiberline claimed it was doing a private placement of securities, it did not have to register the offerings with SEC, which would have meant a scrutiny of the prospectuses by regulators. Under law, brokerages can sell unregistered securities, but only if they are not sold to more than 35 “unaccredited,” or ordinary investors.

But regulators found that in the Fiberline partnerships, although each raised no more than several million dollars, there were far more than 35 unaccredited investors in each offering, and that the securities should have been registered.

“Accredited investors can fend for themselves” because they’re wealthy, said the SEC’s Maekawa. “But the average person who gets a call over the phone needs protection.”