In June 1967, rock fans were obsessed with two albums: Sgt. Pepper, by the Beatles, and Moby Grape, by the San Francisco band of the same name. Considered one of rock's all-time hottest prospects, the group was courted by at least 14 labels before Columbia signed them. The resulting debut, a psychedelic blend of folk and soul, was filled with the bluesy idealism of that Summer of Love. To guitarist Peter Lewis, that year seems a lifetime away. ''We should have been huge,'' says Lewis, 48, the son of actress Loretta Young, ''but whatever could go wrong did.'' That includes legal nightmares, drug abuse, and mental illness. The worst casualties of the group: Guitarist Robert Mosley, diagnosed as schizophrenic in 1970, is currently homeless in San Diego; and guitarist Skip Spence, also diagnosed as schizophrenic, is now living in a residential care facility in Northern California. But the band is hoping for some late retribution. In January, all five original members (including Jerry Miller and Don Stevenson) filed a lawsuit against Sony Music Entertainment, CBS Records, and their former manager, claiming that the rights to their songs and even their name were signed away in a 1973 settlement agreement without the band's knowledge. Glendon Miskel, their attorney, says Mosley and Spence were already ''acutely disabled'' and weren't competent to sign away anything. Sony, which refused to comment on the lawsuit, released The Very Best of Moby Grape last year; under the terms of the 20-year-old settlement, none of Grape's members will receive any royalties. ''We're not seeking damages,'' says Miskel. ''All we're asking is that the agreement be set aside, which might give these guys back some hope and dignity.'' Adds Spence, ''We gotta get Mosley and bring him in. What's happened is not right.''