Md. settles charges against N.Y. 'junk' bond fund First Investors offers to pay $300,000

February 15, 1992|By Timothy J. Mullaney | Timothy J. Mullaney,Staff Writer

The state attorney general's office has settled charges against a New York mutual fund over its sales of high-risk "junk" bond mutual funds to Maryland investors.

First Investors Corp., has agreed to offer $300,000 to 1,400 investors but did not admit any wrongdoing in the settlement.

The state contended that First Investors, which has a branch office in Columbia, ignored laws requiring securities dealers to make sure that the investments they sell are appropriate for clients, said Assistant Attorney General Melanie Senter Lubin, chief of the Investment Adviser/Broker-Dealer Unit in the attorney general's office.

For example, the law prohibits selling high-risk investments to people who should invest conservatively because they can't afford to lose any money.

"Brokers have an obligation to follow a 'know your customer' rule," Ms. Lubin said. "They took people who were right out of school, gave them scripts, and had them sell junk bond mutual funds to people who couldn't afford to take that kind of risks with their money."

Ann Reed, a Baltimore nurse who has invested about $8,000 with First Investors, said the risks of junk bond funds were never explained to her. "I didn't even know they were junk bonds," she said. "He presented it as a safe, legitimate way of saving money for retirement."

Ms. Lubin said the company has settled similar charges with regulators in 10 other states.

Maryland's settlement gives investors from the state the choice of accepting compensation from the $300,000 pool or joining in class action suits filed against the company in New York in hopes of winning more money. Investors known to be eligible for reimbursement will be contacted by mail, she said.

Ms. Lubin said Maryland regulators began investigating First Investors in 1990. Many Maryland investors came forward after New York's attorney general sued the company.

During the investigation, the company gave Maryland officials the list of 1,400 Maryland investors known to have bought shares in the funds, Ms. Lubin said.

She said many of them were friends and relatives of First Investors Corp.'s sales people.

The company's chief executive stopped short of admitting guilt yesterday, but said the company has agreed to change its sales training and compliance procedures to avoid future problems.

"We're aggressively trying to put the state of Maryland's concerns behind us by taking all actions possible," said Michael Miller, First Investors' CEO. "This settlement is a strong indication of our seriousness in moving forward and building for the future."

Ms. Lubin said the value of First Investors' mutual funds plunged when the junk bond market did in 1990 and have recovered along with the stock and bond markets more recently. The people who took the biggest losses were the ones who sold their mutual funds when the junk bond market was depressed.

She said the settlement allows the company's Maryland office to stay in business. "This is a legitimate company that crossed the line," she said.

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