Investors are being threatened by a growing pattern of abuses involving real estate limited partnership "roll ups," according to expert witnesses at a congressional subcommittee hearing, who this week urged tighter regulation of the new investment strategy.

Several of the panelists urged that roll ups be outlawed, saying that they amount to "decriminalized fraud" and "legitimized theft."

Others, including people within the limited partnership industry, acknowledged that there have been abuses and recommended that roll ups be regulated to provide better disclosure to investors. They added, however, that in a time of great upheaval within the real estate industry, roll ups may be the best course of action for partnerships struggling to survive.

Roll ups refer to a process in which existing limited partnerships are merged into larger, publicly traded partnerships or real estate investment trusts. The practice is an issue of growing concern to the estimated 8 million investors in limited partnerships, including about 340,000 in the Washington metropolitan area.

Many of these people invested in limited partnerships, where groups pool their money to invest in assets that are then controlled by a general partner, during the heyday of real estate syndication in the 1980s.

The roll-up plans at first appear attractive to investors because they believe it will allow them to cash out of long-held investments. Investors are also sometimes misled into believing the roll up is in their best interest: It has been a common procedure for the people supporting the roll up to pay brokers a 2 percent commission for endorsing the roll ups. Brokers who don't endorse the roll up receive no commission.

The roll-up practice is being scrutinized because may investors whose partnerships have been rolled up have subsequently watched the value of their investment plummet -- at the same time the organizers of the transactions have earned large fees for their role in the process.

Rep. Edward Markey (D-Mass.), who chairs the subcommittee on telecommunications and finance, said he would hold additional hearings on the subject and that legislative or regulatory action is likely to be initiated early next year. "We're going to move," he said. "You can detect an enormous amount of interest here."

Action is also underway elsewhere: The Senate securities subcommittee is considering holding hearings on the topic early next year, and the Securities and Exchange Commission is conducting a probe of it, with its findings expected to be made public soon.

"With estimates of more than $1.5 billion worth of real estate partnerships having been 'rolled up' in the last seven years, and with over $3 billion in real estate limited partnership roll ups pending, these transactions certainly warrant greater SEC and congressional scrutiny," Sens. Christopher J. Dodd (D-Conn.), the subcommittee chairman, and John Heinz (R-Pa.) wrote in a letter to SEC Chairman Richard C. Breeden.

A study of 17 partnerships showed that the average value of the shares fell 51 percent after being rolled up, according to Richard F. Wollack, chairman of Liquidity Fund, an advocate of roll-up reform. The general partners in the transactions, however, paid themselves from $175 million to $250 million in cash and shares for their roles in putting the new deals together, Wollack said.

"The basic problem is that this is legitimized theft," said economist Benjamin Stein. "These are more like embezzlement than mergers."

Another industry critic said that roll ups were a predictable next phase for promoters of limited partnerships, also called syndicators, who enjoyed big profits in the 1980s and are scrambling to find ways to keep cash flowing in -- even if it means their investors will take an additional loss. Syndication, said Scott G. Miller of Houston-based Miller Reports Inc. and an expert in the field, is "decriminalized fraud" against millions of American investors.

"Where else but in the {limited partnership} world can promoters rob millions with impunity?," Miller asked in written testimony to the subcommittee. "Then, a few years later, they return to the same victims and rob them again. That is the story of partnerships and roll ups."

Spokesmen for the industry said those charges were unfair because some limited partnerships have done well for their investors. They admitted, however, that there have been numerous instances where investors lost substantial sums of money through roll ups of what little value was left in 1980s-era real estate investments.

"I have a major problem" with Miller's characterization of the industry, said Mark Sletton, president of the Real Estate Investment Association in Chicago. He said there is a need to distinguish between "investments done with care and those that are not."

One such well-executed roll up was represented by William B. Dockser, chairman of Bethesda-based investment sponsor CRI Inc., who completed the transaction last year. Dockser said roll ups provide a survival option for an industry struggling with the downturn in the real estate market. A "wise businessman" needs "as many choices as possible," he said.

"In some cases, a roll up is pursued to avoid bankruptcy proceedings against the partnership or some of its activities," said Christopher L. Davis, president of the Investment Partnership Association. "In fact, a roll up may be the only practical procedure for a responsible general partner who seeks to protect the fund's assets and preserve the investment of the limited partners."

All of the congressional witnesses agreed that some action on roll ups -- whether regulatory or legislative -- needs to be considered.

Among the suggested revisions was a ban on roll ups, recommended by two of the panelists, which was strongly opposed by industry spokesmen. Another suggestion would require disclosure that some brokers are paid to endorse roll ups while others are not, or banning the practice of paying only for one and not the other.

Better monitoring and review of documents by state securities agencies also was suggested.