Mustang May Have Taken Investors For A Ride

Regulators have seized its books-and the founder is in hiding

In December, 1994, a crowd of 150 gathered at the Four Seasons Hotel in Beverly Hills, Calif., to celebrate the holidays and another successful year for their employer, Mustang Development Corp., and its brokerage affiliate, Columbus Financial Inc. With five open bars and a 25-piece band, the mood was joyful. That year, Columbus brokers had sold $30 million worth of Mustang's limited partnerships in oil and gas leases. The company was apparently so flush that its founder, Neal B. Stein, gave away a new BMW in the evening's raffle.

Stein, jovial in an expensive suit with cigar in hand, gave no hint then that questions were beginning to be asked about his activities. Those queries would lead to accusations that Stein had been perpetrating one of the largest financial frauds in the state's history.

The Securities & Exchange Commission and other regulators began to subpoena documents in January, 1995. Stein smilingly continued to assure brokers and investors that everything would be fine. But in October, 1995, the company's books were seized by the U.S. Postal Inspector and the California Corporations Dept. In February, 1996, the U.S. District Court for the Central District of California appointed a temporary receiver to determine how much of the $150 million investors had entrusted to Mustang might be left. The SEC, the Justice Dept., and the Internal Revenue Service are also said to be looking into Mustang. Regulators decline to confirm or deny any investigation.

HOLED UP. Thousands of investors, many of them elderly, who bought Mustang partnership interests were assured by brokers that their investments were safe, that they were backed by zero-coupon Treasury bonds, and that they had had uninterrupted annual payouts of 8% to 12%. But some evidence suggests Stein may have been operating a classic Ponzi scheme--paying early investors off with new investors' dollars.

Top Columbus salesmen and other former Stein employees claim that by 1994 assets in the accounts of all the limited partnerships were commingled. Of the $30 million raised in 1994 by Mustang, less than 10% is now believed to have gone into the oil and gas investments outlined in the partnerships' prospectuses. According to the sworn statement of John Klingenmeier, former chief financial officer of Columbus Financial and controller of Mustang, the Treasury bills were sold in 1994 and 1995. Investor funds, the evidence indicates, were used not only to pay off old investors but to support a lavish lifestyle for Neal Stein and his partner, Cary Greene. Greene could not be reached for comment. According to sources, Stein was paying his own expenses--right down to the rent on his Malibu retreat--directly out of Mustang funds.

Stein is doing little to clarify things. Holed up in Malibu before the receiver was named, Stein told associates he was chanting Buddhist prayers for hours on end. Says one source who spoke on the condition of anonymity: "I still get the same answer--that everything's going to be all right." Two civil suits have been filed against Stein, one demanding an accounting of funds and another alleging fraud, but the government hasn't charged him with wrongdoing. Through his lawyer, G. Richard Green, Stein declined to comment for this article.

Mustang's troubles may very well go back to its foundation in 1987. After eight years of working for small West Coast brokerage houses, Stein joined Mark D. Seigel, who had relatives in the oil business, and Alexander L. Kahan. They began marketing oil-and-gas-lease limited partnerships.

HIGH LIVING. By all accounts, the charismatic Stein, who ran Mustang, had a knack for firing up salesmen and luring investors. "These people put on a good front," says 70-year-old Willie Bullock, a retiree who invested $25,000 with Mustang. Stein lived in a $2.3 million house and drove a fleet of expensive cars including a Bentley convertible.

Mustang's and Stein's fortunes began to turn in 1992. Kahan and Seigel departed. According to the sworn testimony of a former Columbus sales executive, they "converted a substantial amount of Mustang's assets." Oil and gas experts say many of the remaining properties are in areas that generally tend to have poor returns. Kahan and Seigel have had run-ins with regulators in the past. In December, 1995, the two were charged by the SEC with defrauding investors in the oil-and-gas-lease limited partnerships they sold after leaving Stein. H. Thomas Fehn, a lawyer for Seigel and Kahan, insists that his clients have nothing to do with Mustang's problems and that they are "hotly contesting" the SEC allegations.

By its final year of operation, it was clear that Mustang's 200 oil and gas properties were not producing enough money to support payments to investors. In court papers, former Mustang controller Klingenmeier swore that Mustang received average monthly royalties of $100,000 from the properties but distributed up to 10 times that amount to investors each month. To save himself from this downward spiral, associates say, Stein pursued far-out investments--including a complex offshore arbitrage scheme that he promised associates would produce a 40-to-1 return. "I held Neal in high regard," says a broker from Columbus' Orange County office. "But he would spend a lot of money on this stuff and seemed to get nothing back."

That, unfortunately, may well be the fate of many of Stein's investors as well.

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