Virtual Mortgage Sues Over Failed IPO

A Newport Beach mortgage company that attempted to go public two years ago has filed a lawsuit accusing an accounting firm and a law firm of torpedoing the offer by withdrawing their services.

The suit, filed in Orange County Superior Court by Virtual Mortgage Network Inc., alleges that Arthur Andersen LLP failed to complete audits that would have allowed the company to go public.

Andersen’s decision to withdraw its services 19 days before the scheduled stock offering forced the company into insolvency, costing investors more than $21 million, the suit contends.

The accounting firm’s move “was the death knell for the company, and [was] without any justification,” Virtual Mortgage’s attorney, Patrick E. Catalano, said.

The suit said the law firm O’Melveny & Myers LLP failed to advise Virtual Mortgage after Arthur Andersen withdrew its services.

Andersen managing partner Dick Poladian said there is no basis for the suit. He defended the firm’s decision but would not elaborate.

Andersen had questioned whether Virtual Mortgage could “continue as a going concern” in the months preceding the planned offering. The company had lost $9.8 million from March 1995, when it opened, to May 1998, Catalano said.

Ralph Shapira, a partner at O’Melveny, called the suit frivolous.

Virtual Mortgage, which arranged home loans through a videoconferencing system, had hoped to raise $40 million by going public June 30, 1998.

The suit seeks to recover $500,000 in fees paid to Arthur Andersen, $800,000 in fees to O’Melveny, investor losses, attorney costs and unspecified damages for alleged professional neglect and fraud.

The suit seeks class-action status for about 140 shareholders, lenders and investors.