By Dave Pettit
Special to The Wall Street Journal
New York – Prudential Securities Inc. and three employees last month were ordered to pay a group of investors $2.7 Million in damages and costs, partly tied to bets on a failed 1987 takeover.
The award, made by a New York Stock exchange arbitration panel, centered on stock trades linked to CS First Boston Corp.'s never-completed offer to buy Allegheny International Inc., as well as investments in government agency bonds. The arbitration award is unrelated to Prudential’s recent problems involving sales of limited partnerships that later soured. Prudential has paid nearly $765 million to reimburse investors who claimed they were defrauded into buying the partnerships. Nearly half of that, $330 million, has gone to a reparation fund.
Prior Trading Experience
In the arbitration case, a group of Mexico City investors claimed the investments were unsuitably risky, said their Miami attorney, Andrew C. Hall. Prudential maintains the investors were sophisticated and had previous experience trading takeover stocks, a spokesman said. The Prudential spokesman said the New York securities concern, a unit of Prudential Insurance Co. of America, of Newark, N.J., is considering a court appeal. The award is the largest arbitration award made to a customer against Prudential since such data became publicly available in 1989, according to statistics compiled by the Securities Arbitration Commentator, a Maplewood N.J., newsletter.
Broker Recommendation.
The investments were recommended by Fred Berens, a top-producing broker at Prudential, who heads a seven-person group in the firm’s Miami branch. Claudia Solorgano and Marisela Blandon, two other brokers who work with Mr. Berens, were also found by the arbitrators to be liable for the award. None of the individuals could be reached for comment. Mr. Hall, the investors’ attorney, said Mr. Berens, the Prudential broker, had recommended that the investors buy shares of Allegheny after a unit of First Boston offered to acquire it for $500 million in a so-called risk arbitrage play.
The risk in such an investment is that an acquisition will fall through, as happened to the deal for the Pittsburgh appliance maker. Allegheny’s stock collapsed, and the company later filed for Chapter 11 bankruptcy-law protection. Prudential, though claimed that the investors understood the risks. “We are talking about very wealthy, very sophisticated, very experienced traders,” said William Ahearn, the spokesman. He said they had made profitable bets through Prudential on about 10 other takeover stocks.
“They understood fully the program they were involved in. It worked in every instance but one. It had nothing to do with the broker involved,” Mr. Ahearn said.
Tumble in Bonds
The other investment involved short term bets on bonds issued by Government National Mortgage Association, or Ginnie Maes. Mr. Hall said the bonds tumbled in value over a two-week period in April 1987, along with the overall bond market.
The Investors included Alberto Dana, Jamie Dana, Marcos Dana, Salvador Roffe, Alfredo Roffe, Eldon Chomer, Bella Chomer, Jacobo Cohen, Jamie Cohen and Sarah Cohen. Mr. Hall described them as wealthy entrepreneurs but denied they had the training necessary for risky stock trading. He said the investors hadn’t traded as a group. Meanwhile, another case involving Prudential, Mr. Berena and a wealthy Latin American investor is pending in U.S. District Court for the Southern District of New York. Bolivian investor Max Salzmann and his family are seeking more than $15 million for trades in Ginnie Maes, Allegheny International stock and shares of another 1980’s takeover play, Fruehauf Corp.
David Bamberger, a New York attorney for Mr. Salzmann, said Judge Kevin T. Duffy is to consider a motion for dismissal from Prudential. He expects a ruling from the judge within the next several months.
A Prudential spokesperson had no immediate comment on the Salzmann case.
Source: The Wall Street Journal,
Monday, March 21, 1994
