Lynch faces $85,000 fine in N.H.

Penalty stems from his stake in troubled Mass. mortgage lender

Peter Lynch owned 25 percent of First Call Mortgage.

Peter S. Lynch, the former Fidelity Investments money manager who was once America's most famous investor, faces an $85,000 fine from New Hampshire after regulators shut down a loan company he partially owns.

Two weeks ago, the firm, First Call Mortgage Co., was ordered by Massachusetts and New Hampshire bank regulators to stop making loans in their states because of improperly selling mortgages. Regulators said the Andover, Mass., company inflated borrowers' incomes on loan applications, was lax with security surrounding customers' personal information, made inaccurate disclosures to regulators, and sold so-called reverse mortgages, which are targeted to seniors, without a Massachusetts license.

Lynch and George Vanderheiden, another former star manager for Fidelity, each bought a 25 percent stake in First Call Mortgage in August 2007 from sole owner Carl McFadden, said David Cotney, chief operating officer for the Massachusetts Division of Banks, yesterday.

New Hampshire bank regulators are also seeking an $85,000 fine from Vanderheiden, as well as $767,500 in fines from McFadden. A spokesman for the New Hampshire Banking Department declined to comment further.

Cotney said when Lynch and Vanderheiden became partial owners, First Call did not report the company's ownership change or their personal financial information, as required under Massachusetts law. Massachusetts regulators are not seeking penalties.

McFadden, First Call's president, said he is working with regulators to address their concerns. He also blamed the firm's lawyers for failing to report the ownership change, and portrayed Lynch and Vanderheiden as distant investors who were uninvolved in First Call.

"Peter and George were not involved in any day-to-day activities," McFadden said. "I talked to Peter once every two to three weeks about where interest rates were."

McFadden said he did not meet Lynch prior to his making the investment but has known Vanderheiden for more than two decades. McFadden said Vanderheiden used to live next door to his in-laws.

Lynch, who retired from fund management in 1990, is the vice chairman of Fidelity Management & Research Co., the investment advisory arm of Fidelity Investments. Vanderheiden, who left Fidelity in 2000, was also a star fund manager at the Boston firm: His Destiny I mutual fund earned an average 19 percent annually between 1980 and 1995. He remains an adviser to Fidelity.

Fidelity spokesman Vincent Loporchio said both men were "passive investors" in First Call, and their private holdings were "unrelated to Fidelity."

Lynch became a household name during the 1980s when he managed Fidelity's Magellan fund, where his extraordinary returns attracted so many investors that it became the nation's largest mutual fund. While at Fidelity, Lynch built a sizable personal fortune: Boston Magazine in 2006 estimated it at $352 million, making him the 40th wealthiest Bostonian. After retiring from fund managing, Lynch apparently dabbled in investments, including a small high-technology firm, Apogee Technology Inc., which was very successful earlier in this decade.

First Call isn't Lynch's only brush with regulators. Seven months ago, Lynch agreed to pay the value of theater tickets that were a gift as part of an $8 million settlement between Fidelity and the Securities and Exchange Commission. Fidelity agreed to settle charges that its stock traders allegedly received free gifts from brokers, including $3,600 in tickets for Lynch to the play "Hairspray." The company said Lynch has not been involved in trading activities for years.

While they were stars at Fidelity, Lynch and Vanderheiden's First Call investments soured. McFadden said he sold the firm's assets on Monday to Direct Finance Corp. in Hanover, Mass., in the wake of the state orders to stop doing business.

Direct Finance hired First Call's employees and purchased some assets, such as office furniture, he said.

First Call was among four reverse mortgage lenders that regulators ordered in September to stop doing business in Massachusetts. Reverse mortgages, which are targeted to seniors with large amounts of equity in their homes, allow them to extract money every month to meet their household expenses. The senior owns the home until his death, when the property is transferred to the lender.

The Massachusetts Division of Banks said First Call processed three loan applications that overstated borrowers' incomes. In one case, an Air Force officer who earned about $57,270 a year reported $138,000 annually on a March 2006 application, the state said.

Although First Call had a Massachusetts license to sell mortgages, it did not obtain special approval to sell reverse mortgages, said Cotney, the Massachusetts banking regulator.

Kimberly Blanton can be reached at blanton@globe.com.