At The End of Milken's Junk-Food Chain

By RICHARD BEHAR

Meet Philip Ruckdeschel, 68, a disabled mechanic who lives with his wife, his 78-year-old mother-in-law and three children in Sloansville, N.Y. (pop. 200). In 1986, Ruckdeschel handed his family's savings, roughly $150,000, to Joseph Ventura, a sales rep from First Investors Corp., one of the country's largest managers of junk-bond mutual funds. Four years later, Ruckdeschel estimates his total losses at $75,000 but doesn't know the exact figure because at each sales call, Ventura would toss out the old records. "He never said anything about any risk -- just that if we needed retirement income, this was the way to do it," says Ruckdeschel. "Now I know why people jump out of windows."

Salesman Ventura refuses to comment, but others who hawked junk for First Investors are less reticent about the company's high-pressure tactics. "I feel like a prostitute," confesses one of them, Mark Loncar, 27, of Aurora, Ill. "But I didn't know any better."

Ruckdeschel, Ventura and Loncar inhabit the lower end of the food chain that fed Michael Milken and a handful of others hundreds of millions of dollars in personal profits during the leveraged-buyout binge of the '80s. Now the continuing collapse of the junk-bond market is starving more than 270,000 First Investors clients, many of whom were lured in by deceptive tactics like those used by Ventura and Loncar. Customer losses nationwide could top $500 million.

Three weeks ago, in one of the largest claims ever against a mutual fund operator, officials in New York and Massachusetts filed fraud charges against First Investors (assets: $3.5 billion) and a total of seven of its top executives. At least five other states may follow suit. "These were the junkiest of the junk bonds, yet investors who asked specific questions about them were lied to," says New York Attorney General Robert Abrams. "We've handled many fraud cases before, but nothing approaches the scale of what we see here. This is heartrending."

First Investors was one of the first mutuals to buy junk in quantity from Milken. The high-flying paper helped two of the firm's 25 funds (the Fund for Income and the High Yield Fund) grow to more than $2.4 billion in assets. At its peak, First Investors commanded an army of 5,000 sales agents spread throughout 285 offices in 49 states -- most of them inexperienced, ill trained and often crammed like cattle into boiler-room offices. The agents memorized scripted pitches that they parroted to customers, usually over the phone. The firm also uses a pyramid-style structure, similar to Amway's, in which agents recruit others in return for a cut of new revenues.

Within a year of his hiring in 1986, Loncar had dumped enough high-risk junk, most of it on unsophisticated buyers and senior citizens with fixed incomes, to become one of First Investors' "Top 100" salesmen. "When clients asked if these investments were safe, we were taught to mislead them," says Loncar. "I didn't even know these were junk bonds. I learned more about those funds after I left the company three years later."

"It was like telemarketing," recalls a former top salesman, Michael Rukujzo, who quit last year. According to Rukujzo and other agents, prospective purchasers were hooked by the high yields -- 12% to 13%, versus 5% to 6% offered by most banks -- and were falsely told that the bonds were safe and that potential losses were government insured. First Investors is also charged by New York and Massachusetts with distributing misleading prospectuses.

The ride down has been almost as steep as the climb up. In 1990 alone, share prices in both funds have dropped more than 30% (see graph). Even on a long- term basis, the Fund for Income and the High Yield Fund are among the industry's worst performers. Benalder Bayse Jr., who from 1985 to 1989 ran both funds, testified with immunity at Milken's presentencing hearing that a Milken crony, Roy Johnson, helped him land what he described as a "lucrative job" at First Investors. Thereafter, according to Bayse, Johnson funneled junk bonds to him, both for the mutual funds and, in some cases, for Bayse's personal account.

Neither Glenn Head nor David Grayson, First Investors' chairman and president respectively, is talking publicly about his role. Both are named in the states' lawsuits and will "vigorously" contest them, says their lawyer. Like Milken, they too will have their day in court.

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