Arkansas State Treasurer Martha Shoffner Targeted in Criminal Probe

Legislative grilling of State Treasurer Martha Shoffner over her management of a $1 billion-plus bond portfolio and calls for law enforcement agencies to dig deeper are more than mean-spirited partisan bluster.

Sources have confirmed to Arkansas Business that Shoffner, a Democrat, had been under criminal investigation for more than a year when, on Dec. 14, the Republican-led Legislative Joint Auditing Committee voted to refer an audit of her office to state and federal authorities.

(Update: A state auditor now confirms the criminal investigation to the Arkansas News Bureau.)

Some believe her testimony under oath before the committee, compelled by a rare legislative subpoena, is an extension of that probe, which now includes the FBI.

Shoffner, whose second and final term as state treasurer ends Dec. 31, 2014, couldn’t be reached for comment. The FBI has a policy of neither confirming nor denying investigations.

Investigators are examining more than Shoffner’s financial dealings with bond brokers doing business with the State Treasurer’s Office, according to sources interviewed by the FBI. They also are delving into allegations she converted political campaign funds to personal income.

“She has a history of not handling her campaign money right,” said a veteran bond dealer of Shoffner’s multi-amended campaign reports. “She’s put herself in a position to have her motives questioned.”

Properly accounting for money that flowed through her campaign coffers has been problematic. Questions by the Arkansas Democrat-Gazette in late 2011 led to the apparent discovery of a $50,000 discrepancy in carryover funds Shoffner reported to the state.

At the heart of the bond controversy is the relationship between Shoffner and two traders: Steve Stephens and his son, Steele.

The Division of Legislative Audit analyzed bond trades conducted for the State Treasurer during a 45-month per-iod. Shoffner’s office bought and sold bonds totaling $1.69 billion through the father-son team between July 1, 2008, and March 31, 2012.

The business was conducted first through Apple Tree Investments Inc. of Little Rock, where they worked for a year (with owner Steve Keifer, who was fined $50,000 by state regulators in 2009 for fraudulent sales tactics), and through St. Bernard Financial Services Inc. of Russellville, their employer since June 2009.

The tiny firms handled nearly twice as much bond business for the State Treasurer as the closest competitor, Morgan Keegan & Co. of Memphis. Morgan Keegan is now called Raymond James Morgan Keegan since its sale last April to Raymond James Financial of St. Petersburg, Fla.

Between July 22, 2009, and Oct. 5, 2011, bond trades for the State Treasurer generated commissions totaling more than $2.3 million for Apple Tree and St. Bernard, thanks to Steve and Steele Stephens.

Committee members were perplexed by the inordinate volume of business and a series of transactions where bonds were sold early and replaced with lower yielding bonds.

The decision to deviate from past Treasury practice of holding bonds to maturity cost the state $783,835 in reduced profits in eight transactions involving St. Bernard, according to the Legislative Audit Division.

Shoffner couldn’t explain why the trades that produced less money for the state and more commissions for St. Bernard made economic sense or why her office did so much more business with the company.

The Legislative Audit Division concluded that the “concentrated use of this one broker offered no apparent advantage to the State.”

Conflicting testimony before the legislative committee that Shoffner did/didn’t direct her staff to do more bond business with St. Bernard only raised more questions.

Shoffner acknowledged that the elder Stephens is a good friend but told legislators last month that he and his son didn’t receive preferential treatment in dealing with her office.

She also told the committee she received no financial benefit from St. Bernard or others doing business with her office.

Investigators are following the money and cross-checking testimony given to the Legislative Joint Auditing Committee.