Fidelity Investments' so-called vulture investing practices in the early 1990s are under attack in a Texas state court.

A trust established to pay asbestos victims has sued Fidelity Research & Management Corp. for fraud, saying the firm and others improperly earned millions by deliberately keeping secret key information in the bankruptcy reorganization of the National Gypsum Co. in the early 1990s. The NGC Asbestos Disease & Property Damage Settlement Trust contends that Fidelity participated in the bankruptcy reorganization of National Gypsum in 1992 and 1993 but failed to disclose crucial facts it knew which could have tripled the value placed on National Gypsum.

The NGC Asbestos Trust alleged that Fidelity and others benefited from a run-up in National Gypsum stock from $12.50 per share when the reorganization was effective in July, 1993 to at least $54 in April, 1995, when National Gypsum was bought out.

Fidelity Magellan, the nation's largest mutual fund, owned nearly 10 percent of National Gypsum stock as of May 31, 1994, according to SEC filings. The complaint did not identify specific holdings or alleged profits of Fidelity and others accused in the case. The Trust Company of the West, a mutual fund and money management firm, also was named as a defendant in the case, along with former National Gypsum officials, financial advisers and others.

The NGC Asbestos Trust contends that those who were injured from exposure to asbestos in National Gypsum products and property owners who had to remove National Gypsum products received less money than they should have. The NGC Asbestos Trust received a settlement for asbestos victims based in part on a $350 million valuation of National Gypsum, the compliant alleged. The NGC Asbestos Trust said that the accurate valuation of National Gypsum should have been as high as $950 million, a fact the trust alleged was known by a group of National Gypsum bond holders which included Fidelity and TCW.

"The end result is that while those who have been hurt . . . have received or will receive pennies on the dollar for their claims, (the defendants) collectively received hundreds of million of dollars in ill-gotten profit as a reward for their misrepresentations," NGC Asbestos Trust alleged. Defendants in the case improperly received millions in profits "which should have been distributed to asbestos creditors," the NGC Asbestos Trust alleged.

The NGC Asbestos trust did not identify a specific amount of damages it seeks. The trust is seeking punitive damages in addition to out-of-pocket losses.

The allegations are without merit and Fidelity will defend against them "vigorously," said Scott Beyerl, a Fidelity spokesperson, last week. Beyerl said that in addition to Magellan, Fidelity's Capital and Income fund had also invested in National Gypsum. The investments proved "profitable," Beyerl said. He was not able to identify particular amounts invested or earned. Beyerl noted that the bankruptcy reorganization was conducted under the auspices of and approved by a bankruptcy court.

A spokesperson for TCW was not available for comment, nor was the attorney for NGC Asbestos Trust. The allegations were included in court documents filed in August. Fidelity revealed the existence of the suit in a regulatory filing earlier this month.

Vulture investing involves taking positions in troubled or bankrupt companies at prices far below the face value of securities in the hope that, as a result of the reorganization, the vulture investor's stake will appreciate considerably. Fidelity got out of that business in 1996.

In the late 1980s and early 1990s, however, Fidelity played an active role in bankruptcy reorganizations, a fact recounted in detail in "Fidelity's World," a 1995 book by Diana B. Henriques. The book said that Fidelity and TCW together had played a role in the bankruptcy reorganization of the Resorts International.

Fidelity officials who were key in vulture investing, David Breazzano and Daniel Harmetz, left Fidelity and formed their own firm, DDJ Capital Management of Wellesley, Mass., in 1996. Breazzano and Harmetz managed the Capital and Income Fund. Beyerl declined to comment on whether they played a role in the National Gypsum reorganization. A call to DDJ for comment was not returned.

William Schorling, a bankruptcy lawyer in Philadelphia and chairman of an American Bar Association committee on business bankruptcies, said that challenges to valuations arising out of bankruptcy typically are difficult cases to prove.

Lawyers speaking on a background basis said that the lawsuit was rare both for a mutual fund company and for bankruptcy creditors' groups generally.

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