Rocky Mountain News

Rocky Mountain News
KIDDER, PEABODY SETTLES SUIT BY VICTIMS OF PONZI SCHEME
By John Accola, Rocky Mountain News
January 8, 2000

Determined to conclude the last lawsuit arising from one of Colorado's largest securities scams, a national brokerage has agreed to settle with 143 mostly elderly investors bilked by convicted Denver money manager James Douglas Donahue 10 years ago.

Kidder, Peabody & Co. — sued by the victims of a Ponzi scheme that snared former Interior Secretary James Watt, former Olympic ski coach Robert Beattie and scores of prominent Denver residents — announced the settlement Friday, days before the case was scheduled to go to trial in federal court in Denver.

Although the agreement is confidential, plaintiffs' lawyers who sought more than $40 million in economic damages — $20 million in investor losses plus 10 percent interest annually since 1990 — said they were pleased with the terms.

``Let me put it this way,'' said a beaming Laurence Jackson, a Los Angeles lawyer representing the plaintiffs, as he left the courtroom. ``Some of us are smiling.''

With no wrongdoing admitted by his client, Kidder, Peabody's lead defense attorney, James Lyons, said the settlement offered a ``reasonable'' alternative to the uncertainty of a jury trial that was expected to last five months.

``I'm somewhat disappointed the case is settling as any trial lawyer would be,'' Lyons told U.S. District Judge Daniel Sparr.
The judge imposed a three-week deadline to work out the details, keeping a group of prospective jurors on call until at least Feb. 1 should negotiations fall apart.

The 1993 case is the last of a several civil lawsuits filed against as many as a dozen brokerages and trading houses that did business with Donahue, whose pyramid scheme lured more than 1,500 investors with promises of double-digit profits.

The Denver lawsuit alleges that several Kidder, Peabody brokers at a Washington, D.C., branch office conspired with Donahue, an independent money manager, to keep his trading losses secret, and that Donahue paid them handsomely to keep the scam alive from 1985 to 1990.

One brokerage officer, David Pulzone, received between $600,000 and $1.5 million in annual commissions from the Donahue accounts, the lawsuit alleged.

In 1994, Kidder Peabody and two other brokerages — Morgan Stanley & Co. and Prudential Securities Inc. — agreed to pay a total of $45 million to settle similar claims brought by other Donahue investors. Jackson said another $20 million in out of court settlements has been paid by several other brokerages with which Donahue had standing accounts.

Donahue, a math whiz with a graduate degree in statistics from Stanford University, pleaded guilty in 1992 to charges of violating securities laws, including issuing ficticious returns and bogus profit statements of investors' accounts. He served five years in federal prison.

By his own admission, his company, Hedged Investments Associates of Englewood, lost $135 million in a computerized stock analysis program that traded options. The U.S. attorney's office estimated total losses were closer to $200 million, making the case one of the 25 largest securities frauds in the nation.

Laurence W. DeMuth Jr., former general counsel for U S West, lost $200,000 he invested on the advice of his financial counselor.

``I spent a long time checking (Donahue) out and he seemed a very good Christian gentleman,'' DeMuth said.