Judge refuses to excuse state in Nu West suit

The state Division of Financial Services (DFI) will find its actions — or lack thereof — under scrutiny in the legal wrangling over failed mortgage broker Nu West, after a judge yesterday turned down the agency's request to be dropped from the Nu West litigation.

Several investors in Nu West, which sold promissory notes supposedly backed by mortgages, have sued the estate of Nu West founder Georg Frey, Pacific West Securities and Dorsey Rowan, a Pacific West broker, seeking to recover the money they lost when Nu West collapsed late last year.

State regulators say more than 250 Nu West investors could be out more than $50 million.

Frey shot himself to death last year as Nu West, which state investigators have described as a massive Ponzi scheme, unraveled.

Rowan was sued because he sold Nu West securities to a dozen people, although he says he lost more than $128,000 of his own money in the scheme; Pacific West is alleged to have not supervised Rowan properly.

However, Rowan countersued DFI and its Securities Division, claiming they knew Frey was violating state securities law but did nothing to stop him, and thus bore some responsibility for the investors' losses.

For the purpose of yesterday's hearing, both sides agreed that for at least six years the agency had received evidence that Nu West was breaking the law, but that aggressive investigation and enforcement didn't start until summer 2000.

Assistant Attorney General Robert Lundgaard argued that state statutes, backed by legal precedent, give agencies like DFI broad discretion in how they enforce the law.

Until last year, he said, the Nu West was a low priority for DFI, because it had never missed any payments to investors and there was no indication anyone had been harmed.

"To say there has to be a criminal action brought for every violation is beyond the capacity of any organization," he said.

But King County Superior Court Judge Catherine Shaffer concluded that because Nu West's fraud constituted an "inherently dangerous and hazardous condition," the agency's duty to protect the public overrode its normal discretion.

"I cannot, as a matter of law, absolve the state of any statutory duties, and I will not," Shaffer said.

However, she cautioned Rowan — as well as the more than two dozen Nu West investors who attended the hearing — that her ruling didn't mean the state would ultimately share in any liability.

The actions DFI did take before last year, including interviewing Frey and sending him warning letters, may have met its responsibility, she said. But that issue now will be decided as part of the broader case.

Drew DeSilver can be reached at 206-464-3145 or at ddesilver@seattletimes.com.