by Gwen Moritz
Posted 12/2/2013 12:00 am
Updated 11 months ago
Stephens Inc. of Little Rock has accused Arkansas Securities Commissioner Heath Abshure of illegally steering more than $170,000 to his “favorite charities” and of retaliating when Stephens refused to make such a donation while negotiating a recent settlement.
“That’s absolutely insane,” Abshure said of the allegations included in a complaint Stephens filed last month with the Arkansas Ethics Commission.
Abshure denied, sometimes in salty language, any ethical or legal breach. Instead, he questioned the motives of executives at the state’s dominant investment firm, which agreed in August to pay a $25,000 fine for failing to supervise agents who sold certain exchange-traded funds in 2008-09.
“I don’t think Stephens gives a rat’s ass where I send money from my other settlements,” Abshure said in an interview with Arkansas Business. “They’ve decided to attack me personally because we came after them.”
Abshure also suggested that Stephens might be trying to punish him for being “so vocal in my critique” of the investment industry’s self-regulating organization, FINRA, during his recent term as president of the North American Securities Administrators Association. (See sidebar here.)
But David Knight, the Stephens Inc. general counsel who filed the ethics complaint, said his issues with Abshure were strictly professional.
“Here he was exhibiting the same conflicts of interest that he’s supposed to be protecting the public against,” Knight said. “Nothing personal.”
Pending complaints filed with the Ethics Commission are not subject to the state’s Freedom of Information Act, and the commission could not confirm that Stephens’ complaint had been filed.
However, Stephens Inc. provided Arkansas Business a copy of the complaint, in part because it mentions this news organization. The Arkansas Securities Department released its signed settlement with Stephens Inc. to Arkansas Business minutes before a copy of the document was emailed to Stephens, and Stephens Inc. called that timing “evidence of the direct retaliatory actions” taken by Abshure and the ASD.
In a letter that Stephens also provided to Arkansas Business, Ethics Commission Director Graham F. Sloan said the commission had no authority to investigate alleged violations of state securities law but would investigate whether Abshure had violated ethics laws by using his official position to secure special privileges for himself.
The Ethics Commission said it had no closed cases in which Abshure had been a respondent.
Signed by Knight on Nov. 15, the 15-page complaint alleges that “Commissioner Abshure is not allowed to donate funds due to the State to his favorite charities,” although he did so in a $150,000 settlement with Little Rock bond house Crews & Associates in July and in two much smaller orders that were part of multi-state settlements.
In all three cases, contributions in lieu of fines were paid to NASAA, the national association of which Abshure was president from September 2012 to October 2013.
Stephens suggested that bringing money into NASAA’s coffers “strengthened the Securities Commissioner’s professional resume and will almost certainly make him a more attractive candidate for future jobs in the public or private sectors of the securities industry.”
Abshure, in defending his actions, pointed to the penalties section of the Arkansas Securities Act, which says that “[n]othing in this section shall prohibit or restrict the informal disposition of a proceeding or allegations … in lieu of a formal or informal hearing … or in lieu of the sanctions authorized by this section.”
Abshure said settlements involving third-party contributions are just the sort of “informal disposition … in lieu of the sanctions authorized” that sentence contemplates.
But Knight, in the complaint and in an interview, pointed to another section of the Securities Act that says “all fines … or moneys collected in lieu of a fine… shall be deposited as special revenues into the State Treasury” and credited to a special fund for investor education.
“If you accept [Abshure’s] position, then he would be entitled to take all of the money that he collects on behalf of the state as settlements and do anything he wants with it,” Knight said last week. “He could put it in his pocket; he could give it to his friends. That just can’t be the law.”
Abshure said he offered to allow Stephens Inc. to make a contribution in lieu of a fine because other regulated entities have preferred such a remedy.
“Some companies want the ability to say, ‘Yeah, we have this consent order, we got a cease-and-desist, they had an expert come in, but we didn’t get fined,” Abshure said.
Crews & Associates, he said, was in that category when it worked with the department to settle the problem-plagued bonds issued by Bamco Gas LLC.
“Crews negotiated to recognize a charitable contribution and maybe not levy a fine,” Abshure said. “I said, ‘If you want to do that, you can.’”
Rush Harding, CEO of Crews & Associates, declined to comment for this article.
In the other two examples cited by Stephens — a $14,150 contribution by Uvest Financial Services Group in December 2012 and $8,200 by ProEquities Inc. in November 2012 — Abshure said Arkansas was merely the beneficiary of a multi-state settlement that NASAA helped negotiate. Because his staff did little work on those cases, he said, he forwarded the state’s part of the settlement to NASAA, which provides training to his securities examiners at no direct cost to the state.
“NASAA is not a pet project and it certainly is not my favorite charity,” Abshure said. “The truth of the matter is, without NASAA there, we wouldn’t be able to do what we do. We’d just be one state acting alone.”
In no case, Abshure said, was any individual or firm allowed to make a charitable contribution in lieu of being cited in a consent order available to the public and to FINRA. And if any regulated entity requests a formal hearing — Stephens Inc. and Crews & Associates both waived that right — such an “informal” remedy is not available by law, he said.
What’s more, he said, settlements calling for payments to nonprofit organizations are not unique to his tenure as securities commissioner, to his department or even to the state of Arkansas. For example, in 2006, Abshure’s predecessor, Michael Johnson, and Mike Beebe, then attorney general, jointly signed an order paying $62,500 of Arkansas’ share of a multi-state settlement with Ameriquest Mortgage Co. to the Conference of State Bank Supervisors, a national organization similar to NASAA.
A memo in the ASD’s file says directing the Ameriquest settlement to the CSBS was approved by then-Gov. Mike Huckabee’s office and by the state Department of Finance & Administration.
Abshure, now 40, was a partner at the Williams & Anderson law firm in Little Rock specializing in corporate securities when Gov. Mike Beebe chose him as securities commissioner in November 2007. He had previously spent two years as a staff attorney for the Securities & Exchange Commission in Washington, D.C.
During his tenure, Abshure has intensified the Arkansas Securities Department’s examinations of broker-dealers, which also answer to FINRA and the SEC, in addition to its traditional oversight of investment advisers, who have little other regulation.
According to Stephens’ complaint, the firm was notified in May that the ASD intended to file a complaint against Stephens and a former employee, Wayne LaRue. (LaRue was later fined individually, and his name does not appear in the order that was negotiated with Stephens Inc.)
After responding to the notice from the ASD, Knight and two other Stephens attorneys, Kim Fowler and Kevin Burns, met with Abshure and two of his employees, staff attorney Scott Freydl and investigator Scott Fowler, on Aug. 8. (The Fowlers are not related.)
At that meeting, Stephens alleges, Abshure suggested a $30,000 fine for Stephens’ failure to have written policies in place regarding the sale of inverse and leveraged exchange-traded funds. (See sidebar here.) The Stephens representatives countered with an offer of $15,000, the amount that Abshure had fined Morgan Keegan & Co. in October 2012 because one of its employees sold inverse and leveraged ETFs to a customer for whom they were inappropriate investments.
In its ethics complaint, Stephens described its case and that of Morgan Keegan as “similar circumstances,” a comparison Abshure says was so disingenuous as to be a lie.
Stephens says Abshure then suggested a $20,000 figure and “offered to allow Stephens to make a $20,000 charitable contribution to NASAA in lieu of paying the fine to the Arkansas Securities Department.”
Stephens declined to make a contribution “because of Commissioner Abshure’s service as a board member and President of NASAA,” according to the complaint.
At that point, Abshure offered to let Stephens instead make a charitable contribution to Economics Arkansas, a Little Rock nonprofit that trains teachers to teach economic concepts. Abshure is also on its board of directors.
The Stephens representatives again declined to make a contribution and said the firm would prefer to pay a fine. (Stephens cited no cases in which contributions were actually made to Economics Arkansas in lieu of an ASD fine.)
At the end of the meeting, Stephens asserts, the parties were in agreement that Stephens would pay a fine but “remained in disagreement as to whether the amount of the fine should be $20,000 or $15,000.”
The following week, when staff attorney Freydl sent over a draft consent order, the ASD “had unilaterally increased the amount of the fine to $25,000,” according to Stephens.
When Stephens objected, Freydl eventually made what Stephens interpreted as a threat — “a full examination of all agents of Stephens” who had sold the nontraditional exchange-traded funds. “It is likely that after such examination, the Staff would request a substantially higher amount,” Freydl said in an email quoted by Stephens in its ethics complaint.
On Aug. 22, Stephens signed the consent order containing the $25,000 fine. The signed copy was delivered to the ASD at 3:25 p.m. At 4 p.m., Freydl emailed a scanned copy of the signed agreement to Arkansas Business — which Stephens learned about when Arkansas Business called spokesman Frank Thomas for comment. A similar copy was not emailed to Stephens until 4:07 p.m.
Sending the order to the press even before sending it to Stephens was “further evidence of the direct retaliatory actions taken by the Commissioner and the Arkansas Securities Department for Stephens’ refusal to make a charitable contribution to either NASAA or Economics Arkansas,” Stephens wrote. It was also, the company complained to the Ethics Commission, “an effort to seek accolades and publicity for Commissioner Abshure.”
Abshure had not seen Stephens’ complaint before it was delivered to Arkansas Business on Nov. 21 and had not formally responded to it. But he addressed many of the points in an interview on Nov. 22.
He denied strenuously that any of his actions were taken in retaliation for Stephens’ unwillingness to make a contribution to either NASAA or Economics Arkansas.
“What they called retaliation is not retaliation,” Abshure said. “It’s a recognition that Stephens lied to me.”
Nor, he said, was there an agreement as to the maximum size of the fine at the end of the Aug. 8 meeting.
“We didn’t have an agreement. There was absolutely no agreement. So when I went back and looked, I said, No. 1, they lied to me — these aren’t the same facts as Morgan Keegan. And, two, we’re giving them a whale of a deal.”
Morgan Keegan, he said, had one rogue financial adviser who was selling the problematic ETFs in violation of written guidance provided by his supervisors. Stephens, he said, gave its advisers “absolutely nothing” to guide them in appropriate selling of the ETFs.
Eventually, Abshure said, Stephens established a written compliance policy and set up a computer program to enforce the policy. Unfortunately, he said, the program “didn’t work. And they knew it didn’t work. But rather than suspend [sales], they just kept going. These two are totally different.”
Although this email isn’t quoted in Stephens’ written complaint, the ASD provided Arkansas Business with a copy of Freydl’s Aug. 16 email that accompanied the proposed consent order. In it, Freydl explained why the commissioner had set the fine amount at $25,000:
“1. The Morgan Keegan order, which you referred to during our meeting, required Morgan Keegan to pay a fine of $15,000 and restitution of over $44,000.
“2. The Morgan Keegan order only covered the failure of Morgan Keegan to supervise one agent’s handling of one client’s account. The Stephens order is not as narrowly worded.
“Hopefully, the fine amount will not prevent this settlement. Nevertheless, the Staff cannot agree to a lesser amount. I look forward to discussing this matter further.”
Knight, however, said he couldn’t accept Freydl’s explanation for the larger fine at face value.
“I’m sorry, I just don’t believe that,” Knight told Arkansas Business. “I think it was retaliation, and I’ll always think it was retaliation.”
When Stephens resisted, Freydl began playing hardball, suggesting that the only alternative to a $25,000 settlement was a full-blown investigation of all sales of inverse and leveraged ETFs.
The threat, Knight said, “was inappropriate, in our opinion. We were being threatened, and that certainly made it feel even more like retaliation.”
Yet Knight agreed to the terms, including the $25,000 fine.
“I could have turned him down, and I would have had to have gone through a very expensive, time-consuming investigation over $5,000,” Knight said. “From a practical standpoint, it wasn’t worth it.”
Abshure said the settlement, even with the larger fine, was still advantageous to Stephens because the firm was not required to admit wrongdoing and because it would forestall any additional investigation into its sales of inverse and leveraged ETFs.
Abshure scoffed at the idea that extracting a donation to NASAA would burnish his resume, which he pointed out already included partnership in a law firm, service in the federal government and an almost-completed presidency of his national organization.
“Getting $25,000 out of Stephens is not going on the top of the CV,” he said.
And he dismissed completely Stephens’ suggestion that sending the signed order to Arkansas Business before sending a copy to Stephens was a form of retaliation.
“We sent it to you because we send all of them to you,” he said.
(This is not literally true. Not every order posted on the ASD’s website has been sent to Arkansas Business, although many of them have been — including the orders against Morgan Keegan, Crews & Associates and LaRue.)
What’s more, he said, Stephens should have made its own copy before sending the signed original to Abshure’s office.
“That’s the dumbest bunch of shit I’ve ever heard,” Abshure said. “They signed it. It would have been an order that they had signed.”