Two of the men through whom Atty. Gen. Edwin Meese invested his personal savings were previously associated with a Bay Area investment partnership charged with fraud by some of its own clients, public records here show.
One man, Wayne Franklyn Chinn, currently is a subject of federal and state investigations in New York, where prosecutors are looking into his role as a consultant to and director of a Bronx military contractor.
Four former executives of the contractor, a company known as Wedtech Corp., have admitted bribing government officials to secure hundreds of millions of dollars worth of no-bid Pentagon contracts.
The second man, David H. Meid, now is a stockbroker with the San Francisco office of Bear, Stearns & Co., the firm that earned several million dollars in fees for helping to underwrite public offerings of $130 million in Wedtech securities.
In 1970, while he was serving as president of a now-defunct brokerage firm in San Francisco, Meid was suspended from trading by the Securities and Exchange Commission after its staff accused him of violating federal securities laws.
Sources familiar with the Wedtech investigation said it was Meid, acting as Chinn`s broker, who purchased some of the stocks that made up a $60,000 trust controlled by Chinn on behalf of the attorney general.
Meese had told Congress it was a blind trust in which he had no direct control. But later, government ethics officials said it did not meet the standards of a blind trust.
Former White House aide Lyn Nofziger and Meese also are subjects of a separate influence-peddling investigation by Independent Counsel John McKay.
The accusations of wrongdoing against Meid and Chinn, contained in a civil lawsuit filed in San Francisco Superior Court eight years ago, were directed at a small investment consortium known as Hillsborough Partners.
Hillsborough, which was managed by Meid, employed Chinn as a trader and portfolio consultant. Meid is married to Chinn`s first wife, an Egyptian-born woman named Shahdan el Shazly, a former stock analyst who operates a company in San Francisco called American Mid-East Research.
Eugene Robert Wallach, a San Francisco lawyer who attended law school with Meese and who has maintained a relationship with the attorney general over the years, has said he recommended Chinn to Meese as an investment adviser and to Wedtech as a consultant.
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Wallach, who serves as a member of the U.S. Advisory Commission on Public Diplomacy, acknowledged in a government-required financial disclosure statement filed at the end of 1985 that he, too, had a trading account at Bear, Stearns, with a year-end balance of $14,570.
Although the Wallach account was listed in the name of ERW Partners, the statement does not name any of Wallach`s fellow investors. Nor does it reveal which stocks Wallach bought and sold through Bear, Stearns during 1985.
Wallach has said that he invested some of his own money with Chinn before recommending him to Meese, and one source familiar with Wedtech`s finances said it was his impression that Wallach had been instrumental in bringing Bear, Stearns into the Wedtech picture.
But Paul Hallingby Jr., a managing partner of Bear, Stearns in New York and a Wedtech director until January, 1987, said he didn`t think Wallach had played a role in helping the securities firm win the underwriting deal.
”We don`t really know him,” Hallingby said.
During Meese`s confirmation hearings in January, 1985, members of the Senate Judiciary Committee expressed concern that his private investments included stock in a number of energy and utility companies that were subject to government regulation.
The trust managed by Chinn was created in May, 1985, when the new attorney general liquidated his existing securities and invested the $60,000 in profits with one of Chinn`s companies.
Wallach, who like Chinn and Meese, is under investigation in the Wedtech matter, did not return telephone messages asking for comment on whether he had known of Chinn`s association with Hillsborough, or of his relationship with Meid before recommending him to the attorney general.
Meese has admitted that while serving as White House counselor in 1982, he told aides to be sure that Wedtech got a ”fair hearing” from Pentagon purchasing agents. His then-deputy, James E. Jenkins, later convened a meeting of officials from the Army, the Small Business Administration and Wedtech that resulted in a $32 million Wedtech contract for small gasoline engines.
James Rocap, a Washington attorney representing Meese in the Wedtech investigation, declined to comment on whether the attorney general had known of Chinn`s background before choosing him to manage his investments.
Earlier this year, after it became known that Chinn was under investigation, Meese instructed him to end the trust as of next Tuesday.
Chinn`s lawyer, Cristina Arguedas, said she had told her client ”that he`s not allowed to talk to anybody until this whole Wedtech investigation is concluded.”
Financial records kept by Chinn suggest that none of the attorney general`s funds were used to purchase Wedtech stock, which underwent a meteoric rise after it began to acquire the lucrative Pentagon contracts. But investigators say they are examining the possibility that Chinn kept two sets of records.
Financial disclosure forms filed by the attorney general show that during 1985, Meese earned between $5,000 and $15,000 in interest on his investments with Chinn. One source said other records indicated that the actual amount was near the top of that range, an impressive return of 20 percent for the last 7 months of 1985–or about 35 percent a year.
Although Chinn did buy Wedtech stock for himself–a Wedtech proxy statement at one point indicated that he owned about 75,000 shares–there is no evidence in SEC records that Chinn filed statements indicating how much stock he owned in the company. Corporate directors are required by federal law to file such statements.
In a suit filed by the new management of Wedtech, which has declared bankruptcy and is reorganizing, Chinn is accused of having illegally shared in a $1.14 million consulting fee paid by the former company managers to Chinn`s business partner, R. Kent London, who was also a Wedtech consultant.
In assessing Wedtech for the disputed fee, London claimed the money was
”promotion compensation for services rendered in connection with the company`s registration and sale of 1,750,000 shares of common stock”–the January, 1986, offering partly underwritten by Bear, Stearns.
According to the suit, Chinn flew to Zurich on April 14, 1986, ”in furtherance of the illegal scheme to divide the funds.”
According to a Diner`s Club credit card receipt submitted by Chinn to Wedtech for reimbursement, he entertained Meid and el Shazly in New York the day before.
The receipt, for a $264 meal at the posh Hotel Plaza Athenee on Manhattan`s Upper East Side, lists as Chinn`s guests ”David Meid of Bear, Stearns and S. El Shazly of American Mid-East Research.”
Neither Meid nor el Shazly could be reached for comment on whether Wedtech business was discussed at the lunch. Meid did not respond to a request for comment delivered to him by his secretary, and el Shazly`s secretary said she was out of the country.
Nina Z. Chinn, Chinn`s daughter, who lives in a basement apartment of the Presidio Avenue duplex where Meid and her mother reside, declined to discuss any aspect of the Wedtech scandal.
According to records filed with the California Department of Corporations, Nina Chinn is chief financial officer of Financial Management International Inc., the Chinn-operated investment concern with which Meese placed his funds.
Sources said Wedtech reimbursed Chinn $831 for the Plaza Athenee lunch and for six other meals listed on expense accounts attached to the lawsuit brought by Wedtech`s new management. But at least two of the meals apparently never took place, and one did not involve a business discussion.
Of the five stockbrokers listed on copies of Chinn`s expense accounts filed with the suit, one denied ever having eaten with Chinn. A second broker could not recall having shared one meal in question and said that no Wedtech business was discussed at a second meal.
A third broker said Chinn`s investments in other stocks had been as much a topic of conversation as Wedtech. Chinn, the third broker said, ”seemed pretty successful. He knew the ins and outs. He was a player. He knew the game.”
The broker recalled that Chinn made substantial stock purchases on behalf of at least one offshore investment trust and bragged that many of his clients were wealthy residents of the Middle East who had been friends of his first wife.
Although he is not prominent in San Francisco financial circles, those who know Chinn describe him as somewhat flamboyant, with long, straight hair and a taste for gold neck chains and expensive automobiles. They also say he is very bright.
”He remembers everything he`s seen or read,” one San Francisco broker said. A local lawyer added: ”He`s very quick. He goes from point A to point B faster than lightning.”
According to his attorney, it was ”Rusty” London who introduced Wallach to Frank Chinn. Precisely how and when Chinn met David Meid remains a mystery, but by 1977 they had gone into the investment business together.
In June of that year, and again in September, 1978, the Internal Revenue Service assessed something called the ”Meid Foundation” for $2,672.89 in back taxes. When the taxes went unpaid, the IRS slapped the foundation with a lien.
The address given by the foundation to the IRS was an office at 44 Montgomery St., in the heart of San Francisco`s financial district.
When Chinn was sued by a San Francisco collection agency for $1,200 on behalf of a contractor who had remodeled Chinn`s office in 1977, the address of his office also was given as 44 Montgomery St.
In the spring of 1978, a Santa Barbara, Calif., woman named Jacqueline Quackenbush was introduced to Chinn and Meid by her then brother-in-law.
As Quackenbush later would recount in a lawsuit: ”The introductory meeting was brief. Mr. Meid and I merely exchanged social courtesies, and Mr. Chinn generally described the partnership as `successful` and a `sound and secure investment.` ”
On Sept. 1, 1978, Quackenbush invested $50,000 in the new Meid-Chinn consortium, a Hillsborough Capital affiliate known as Hillsborough Partners.
Quick losses in the value of their investments prompted Quackenbush and another investor to begin a three-year legal battle to recover their funds.
According to the Hillsborough prospectus, Meid was ”responsible for the investment decisions of the Partnership,” while Chinn took an ”active part in management of the investment portfolio.”
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Quackenbush said the pair worked out of what she described as a ”real elegant office with floor-to-ceiling windows.” Meid, she said, ”made the decisions on how the accounts would be handled and Frank (Chinn) gave the technical advice on which stocks to pick.”
The prospectus noted that Meid began his investment career in New York in 1961 as a portfolio manager with Smith, Barney & Co. In 1965, he joined the San Francisco-based Winfield & Co., becoming president in 1966.
”During the next four years,” the prospectus said, ”Mr. Meid was responsible for managing over $400,000,000 in institutional and individual accounts.”
The prospectus did not mention Meid`s SEC suspension, or the charges by the SEC staff that he and others at Winfield, which managed several ”high performance” mutual funds, had violated federal securities laws by overstating their investment record and improperly benefiting from their brokerage business.
Less than a month after she had written Hillsborough Partners a check for $50,000, Quackenbush asked for her money back. Far from the sound and secure investment she had believed Hillsborough to be, Quackenbush said, she had discovered that Meid and Chinn were leveraging their trades–buying stocks with borrowed money–and occasionally selling borrowed stock, two of the riskiest forms of investment.
Although the partnership agreement she had signed gave her no right to withdraw her money for more than a year or to borrow against it for at least three months, Quackenbush maintained that she was entitled to the money because ”the nature of the partnership`s investments policies” had been misrepresented to her.
Meid disagreed. In a cross-complaint, Meid maintained that while Hillsborough`s investments were leveraged, the policy of using borrowed money to buy stocks had been made known to Quackenbush from the outset. And he refused to return her $50,000.
Hillsborough, Meid said, had suffered large losses during September, 1978, and Quackenbush`s $50,000 had shrunk–in the space of just four weeks
–to $35,000. Quackenbush recalled in a recent interview that the losses had been recorded while Meid, who was in Europe, had left Chinn in charge.
When Quackenbush asked for an accounting of what had happened to her money, she said, she was given only a hastily handwritten balance sheet that contained a $25,000 error in the size of her contribution. When Meid offered her the $35,000 plus $2,000 in interest, Quackenbush reluctantly agreed.
Quackenbush said she recalled Chinn saying, ” `Hey, if you give me the $35,000 back I can make it $50,000 in a week.` I just thought he was a high-powered gambler.”
Quackenbush wrote to Meid, telling him of her ”serious doubts about your veracity and propriety in these matters,” and declaring that she was ”not willing to simply forget about $15,000 without being satisfied that the situation is indeed as you say it is.”
In November, 1979, while she still was trying to recover the $15,000, Quackenbush learned to her astonishment that she was among those being sued by another disgruntled Hillsborough investor, San Francisco appliance dealer Leon Irving Bloomberg.
Quackenbush had been mistakenly named as a defendant by Bloomberg, whose attorneys had assumed from public records that she was a general, rather than a limited, partner of the enterprise. As it turned out, neither Quackenbush nor Bloomberg ever were recorded as limited partners by Hillsborough.
The distinction is important, for under California law a general partner has unlimited liability for the acts of the partnership, while the liability of the limited partners is held to the amount of their investment.
As reflected in court records, Bloomberg`s story is similar to the one told by Quackenbush. According to Bloomberg, Meid told him ”that the record of Hillsborough Partners was sensational in increasing the value of the investor`s capital tenfold,” that Hillsborough had taken $100,000 and turned it into $1 million.
In August, 1978, Bloomberg put $100,000 into Hillsborough Partners. In a deposition, Bloomberg recalled that, when he asked to examine the
partnership`s books, he was shown ”some worksheets and a scratch sheet. I saw a lot of dollars going in and out, and I saw loans to the individual partners. I saw money withdrawn. I felt that something was wrong.
”It was shortly after I put my money in that the people took out their money. It seemed like kind of a weird deal, like if the man really was interested in making investments, why would he let his money go out?”
When Bloomberg learned that some of the other partners had withdrawn their funds from the enterprise he, too, asked for his money back. As he had to Quackenbush, Meid said ”no” to Bloomberg.
When Bloomberg threatened to sue, Meid warned him him that he would use the remaining Hillsborough funds to defend himself in court. Bloomberg sued anyway.
”Meid thought he was going to walk away with everything till I got mad,” he said in a recent interview.
Quackenbush joined in the Bloomberg suit, alleging in a cross-complaint that she, too, had been defrauded by Meid, whom her lawsuit characterized as
”guilty of unclean hands.”
Meid denied most of the allegations against him, including assertions by Quackenbush and Bloomberg that the partnerships he offered were securities that should have been registered with and approved by the California Corporations Commissioner.
But Meid did acknowledge that Hillsborough`s federal tax returns had not shown the enterprise to be the limited partnership that it was, or that Quackenbush and Bloomberg were among the limited partners.
Meid also admitted that he had failed to record ammendments to Hillsborough`s certificate of limited partnership containing the names of Quackenbush and Bloomberg as required by California law.
He described both failures as ”inadvertent,” but he also conceded that some of the other limited partners, including his mother, his ex-wife and his former mother-in-law, had been allowed to borrow more money than they were permitted under the partnership agreement.
Lawyers for Quackenbush and Bloomberg said they had not brought the Hillsborough matter to the attention of California authorities or the Securities and Exchange Commission because they feared criminal investigations might have complicated their chances of recovering money on behalf of their clients.
Bloomberg said he finally settled out of court for a fraction of his $100,000 investment, most of which went toward attorney`s fees. Quackenbush never got the rest of her $50,000 back.