Stephens Inc. Asks Legislators to Consider Changes to Securities Law

(A correction has been made to this article. See end for details.)

Stephens Inc. of Little Rock, in pursuing its grievance against state Securities Commissioner Heath Abshure, on Wednesday suggested changes to state law that would, among other things, move all enforcement actions into the court system.

Also on Wednesday, a lawyer representing Crews & Associates of Little Rock disputed Abshure's repeated claim that he allowed the Little Rock bond house to make a $150,000 contribution to a national organization that Abshure led only after Crews asked if there was some way to avoid paying a fine.

Crews' donation to the North American Securities Administrators Association was part of a consent order — a settlement agreed to by both parties — issued last July.

Stephens Inc. filed a complaint against Abshure in November, accusing him of illegally steering donations from Crews and others to NASAA, of which Abshure was president in 2012-13. Stephens has also accused the commissioner of retaliating when Stephens refused in August to make such a donation while negotiating a settlement over its failure to properly supervise the sale of certain exchange-traded funds in 2009.

While the state Ethics Commission conducts its investigations in secret, the Legislature's Joint Performance Review Committee on Wednesday continued a hearing on the allegations that began on Jan. 8.

As he did two weeks ago, Abshure answered questions from committee members and other legislators for more than an hour. But this time, Rep. Mark Lowery asked that Abshure be put under oath, suggesting that the commissioner had been "less than forthcoming" the last time.

Under oath, Abshure again disputed the version of the settlement negotiations that Stephens representatives have included in sworn affidavits. In the Stephens version, Abshure offered to settle the case of the exchange-traded funds in exchange for a $20,000 donation to NASAA or to Economic Arkansas, another nonprofit on whose board Abshure sits. Stephens said that after it opted to pay a fine rather than make a donation, Abshure unilaterally raised the dollar amount to $25,000 and, in an email from staff attorney Scott Freydl, threatened to expand the investigation if Stephens didn't agree to the terms.

"To me, this is a threat," Sen. Bill Sample, R-Hot Springs, said of Freydl's email. "Would you not feel like there's a little bit of extortion there?"

"Not at all," Abshure responded. The department, he said, had offered a settlement that included stopping its investigation. If Stephens rejected the settlement, the process would restart.

"Making a final offer happens in every negotiation," Abshure said.

In Abshure's version, his opening offer was $30,000, which Stephens countered with $15,000 because that was the amount paid in 2012 by Morgan Keegan & Co. in another case involving exchange-traded funds. Abshure says a $20,000 donation was discussed, but, as he told Lowery, "there was no deal."

Speaking under oath after Abshure, Stephens General Counsel David Knight said Abshure's statements to the commission had been "inconsistent." Of the email from Freydl, Knight said, "Well, you know, I know when I've been threatened."

"One thing that was clear to me" at the meeting with Abshure, Knight said, was that if Stephens had agreed to donate $20,000 to NASAA, "we would have been done."

When Lowery asked Abshure whether it would have been better for Abshure to suggest a donation to an organization of which Abshure was not president, Abshure responded: "As to appearance, absolutely. As to benefit to the state, I don't think that at all."

After the hearing, Abshure said he would no longer allow any violator to make a payment to a third party in lieu of a fine or any other creative settlement.

"At this point, all I feel comfortable doing is levying a fine or taking someone's license away."

Crews Settlement

Abshure again told legislators that Crews & Associates asked to avoid paying a fine when the ASD investigated its role in the sale of problem-plagued bonds issued by Bamco Gas LLC. Because Crews had cooperated with the investigation and had voluntarily repaid all investors, Abshure said he thought Crews had "earned the right to have that amount treated as a contribution rather than a fine."

Crews President Jim Jones and outside counsel Mike Miller were available for questioning by the committee, but they were not sworn in and they were not asked about their experience in negotiating with Abshure.

After the meeting, however, Arkansas Business asked Miller, who said he was present for the negotiations, whether Crews had in fact asked for a way to avoid paying a fine.

"No," Miller responded.

Told that Miller disputed his version, Abshure reiterated his previous statements.

"Crews asked me if there's a way we can avoid a fine," he said.

Suggested Reforms

In a document distributed at the hearing, Stephens Inc. recommended four "legislative reforms," starting with making it clear that the Securities Commissioner does not have the ability to "direct enforcement related contributions to third parties instead of the state treasury."

Stephens asserts that the practice is already forbidden by law, but Abshure has argued that the securities act gives him broad latitude to craft appropriate penalties. Requiring all monetary penalties to flow into the state treasury, Abshure has said, would not only forbid donations like the one Crews made but would also prevent him from ordering brokers or advisers to pay restitution to their victims.

Stephens also recommended that no fines or other payments flow directly to the Securities Department, which it says "creates a conflict of interest" for employees of the department. The law currently sends the first $150,000 in fines levied each year to a special fund for investor education; all fines collected in excess of $150,000 are forwarded to the state treasury.

Stephens also suggested that a provision be added to the law allowing judicial relief "in the event that a Securities Department investigative efforts appears to be undertaken in bad faith or for harassment purposes."

But the most far-reaching suggestion would require the commissioner "to bring enforcement actions in court before an impartial judge."

Under existing law, the securities commissioner serves as the hearing officer on cases investigated and documented by his staff. Although the same system was in place long before Abshure became commissioner in 2009, many of the legislators appeared surprised that the commissioner was also the hearing officer (although Abshure said he did not hear cases if he had been involved in the investigation or settlement negotiations).

After the hearing, Abshure said changing the law to limit his authority to deal with securities violations would be up to legislators. But he encouraged them to consider broader input when deciding whether to take "the benefits of the administrative process and throw it out the door."

"Right now," Abshure said, "they are only considering one investment bank and [their recommendations are] better for them."

Much smaller operations, including investment advisers, might prefer to continue working through violations directly with the regulator's office rather than in circuit court, Abshure said.

"Most IAs are one-man shops, so if every time we file it's in court, that's going to be very tough," he said.

(Correction, Jan. 22, 2014: Rep. Mark Lowery was misidentified in the original version of this article.)

Warning: Unknown: write failed: No space left on device (28) in Unknown on line 0 Warning: Unknown: Failed to write session data (files). Please verify that the current setting of session.save_path is correct (/var/lib/php5) in Unknown on line 0