PaineWebber Inc.'s Hunt Valley office has collected abnormally large commissions on investments of a Lutherville credit union whose members include schoolteachers and federal workers, according to brokerage documents obtained by The Sun.
This spring, on five trades involving government bonds worth under $12 million, broker Robert W. Sitton Jr. and his office manager at PaineWebber charged First Financial Federal Credit Union of Maryland almost $200,000 in sales charges, PaineWebber trading records show. Others in the industry say those trades typically cost no more than $14,000 -- and maybe as little as $3,500.
Further, Mr. Sitton's wife has a prominent role at First Financial, apparently putting the credit union in violation of a federal conflict-of-interest regulation.
First Financial assured regulators last year that it had resolved the potential conflict by replacing Mr. Sitton as its broker. But several PaineWebber memos obtained by The Sun directed that, while the office manager's name would be placed on First Financial trading orders, nearly all commissions from First Financial's account were to go to Mr. Sitton.
Officials of the credit union, which has used PaineWebber's brokerage services for about seven years, would not say how many trades the firm has handled. The Sun obtained records documenting five bond trades made in April and May this year.
First Financial has $150 million in assets and 35,000 depositors, including Carroll and Baltimore county school employees, federal workers and others. Commissions paid on credit union investments could affect what members pay to borrow money, what they earn on deposits, and the prices of other services the credit union provides.
Mr. Sitton denied wrongdoing in a brief interview but said company policy prevented him from discussing the matter.
First Financial President George O. Hansen Jr. confirmed that all five trades occurred and said he would respond later in detail, but did not do so. He denied paying excessive commissions and said he was pleased with the service Mr. Sitton and PaineWebber have provided. He denied any wrongdoing, as did PaineWebber officials.
The National Credit Union Administration, which regulates the nation's federally chartered credit unions, said First Financial is "a very strong credit union financially," and that deposits are insured up to $100,000 per account. But the NCUA has objected to the relationship involving Mr. Sitton, his wife and First )R Financial.
The role of Mr. Sitton's wife, Afsar "Alfie" Sitton, appears to violate an NCUA regulation intended to prohibit favoritism and conflicts of interest in contracting for outside services, such as securities trading.
When the regulation first took effect in 1987, First Financial offered to change Mrs. Sitton from a full-time employee to an "operations consultant." And last year, First Financial told the NCUA that it would no longer deal at all with Mr. Sitton, but with his superior, Kevin Broderick, manager of the Hunt Valley PaineWebber office.
Both moves appear to have been shams, according to the NCUA and information contained in internal PaineWebber memos.
Mrs. Sitton insisted in an interview last week that "I'm an independent consultant," and that the NCUA considers her as such. But an NCUA examination of First Financial last year "determined that [Mrs. Sitton's] capacity was the same, whether she was called a consultant or an employee," said Robert Schafer, deputy director of the NCUA's Region 2, which includes the Baltimore area.
He said Mrs. Sitton continued to attend management and board of directors meetings and to serve as assistant to Mr. Hansen. That conclusion was confirmed during a routine examination in April, Mr. Schafer added. Because Mr. Sitton officially no longer handled the First Financial account, however, the agency had no reason to find the credit union out of compliance, Mr. Schafer said.
But the PaineWebber memos obtained by The Sun show that, while the brokerage changed First Financial's listed investment executive to Mr. Broderick last year, a "split account" then was established in which Mr. Broderick received 1 percent of the commissions from the trading activity and Mr. Sitton received 99 percent.
Other documents tie Mr. Sitton to the First Financial account in a more direct way. PaineWebber order tickets prepared for securities trades include an "investment executive number" that identifies the broker who handled the trade. Mr. Sitton's identification number appears on two of the five PaineWebber order tickets The Sun obtained, indicating Mr. Sitton took the orders by telephone.
Mr. Hansen, who has handled the credit union's investments for 28 years, said he knew nothing about the commission arrangement and did not know why Mr. Sitton's identification number appeared on several order tickets. "As far as I'm concerned he hasn't been" First Financial's broker since last year, Mr. Hansen said.
It's unlikely Mr. Sitton could have acted without the knowledge of others in his firm, according to Patrick G. Finegan Jr., a former in-house counsel to Advest Group Inc., a national brokerage firm, and author of a book on securities industry practices.
Former employees at the Hunt Valley PaineWebber office confirmed Mr. Finegan's assessment but declined to be identified.
The order tickets, which describe the details of the trades and the amount of sales charges, make their way through many departments of a typical securities firm, Mr. Finegan said, most of which would know the difference between an appropriate markup and an excessive one, according to industry members.
In a typical firm the office manager, such as Kevin Broderick, would initial the ticket for each large trade, Mr. Finegan said. The initials "K.B." appeared in a box labeled "branch manager's approval" on the documents The Sun obtained.
The ticket then would be transferred by computer to the bond trading desk in New York, which would send back a confirmation form that is attached to the original handwritten order ticket. The company's compliance department at headquarters receives copies of all large orders, especially those with big commissions, Mr. Finegan said, and often the president of the firm is made aware of "top producers," such as Mr. Sitton.
Mr. Sitton said he "would love to go over and clear up this misconception. Somebody obviously is duping you into doing this. I sort of resent the whole situation, because I have an outstanding record," he added, but declined to comment any further without permission from his company.
Mr. Broderick also referred all questions to PaineWebber headquarters in New York.
Beverly Spano, a PaineWebber spokeswoman, said the company's policy "prohibits discussion of the details of any individual account. In this instance, it is our understanding that the client has told you that he is satisfied with PaineWebber's services."
Indeed, Mr. Hansen said he has received outstanding service from PaineWebber and generally profits from his trades in government agency bonds.
Mr. Hansen said he has been buying and selling the securities for decades. "I'm constantly in the market" to keep abreast of the prices of various securities, he explained.
In fact, for about 75 percent of his trades, Mr. Hansen said, he calls several brokerage firms to compare prices, including Alex. Brown, Shearson Lehman and Bear Stearns, although Mr. Hansen acknowledged he uses PaineWebber "most of the time."
Mr. Hansen said he couldn't estimate how many times a year he trades in the bonds, which were issued by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).
Of these trades, it's unclear how many trades Mr. Sitton executed and how much he earned in commissions overall, but he had been buying and selling the securities for First Financial since before he left Legg Mason Wood Walker Inc. in 1985, Mr. Hansen acknowledged.
(After he left to join PaineWebber, Mr. Sitton sued Legg Mason and his former office manager for defamation, among other things. The suit, filed in Baltimore County Circuit Court, accused the manager of falsely telling Mr. Sitton's clients that he had been fired for violating securities regulations and other unethical behavior. Legg Mason denied Mr. Sitton's claims. The action was later settled under confidential terms.)
Because the Fannie Mae and Freddie Mac securities are nearly government-grade and are very widely traded, institutions such as First Financial generally pay minimal markups of anywhere from 1/32 of a percent to 1/8 of a percent of the value of the bonds, according to NCUA officials, securities lawyers, investment officers at several Maryland credit unions, and bond traders at investment houses, including PaineWebber offices in other cities.
The PaineWebber order tickets show that First Financial paid markups of 1/2 percent, 1 percent, 1 3/4 percent and as much as 2 1/8 percent -- or more than 27 times the average industry markup -- on some of the trades in Freddie Mac and Fannie Mae bonds during April and May.
For single trades of $1 million or more, the markup "wouldn't even be a real percentage, they'd just tack on an execution fee, say $300 or $500," Mr. Finegan said.
An investment officer at the State Employees Credit Union said a typical markup on a $5 million bond might be as low as $1,500, and no higher than about $6,000. Mr. Hansen paid almost $93,000 in sales charges when he bought a $4.375 million Freddie Mac bond in May, the order ticket shows.
After an initial interview at which he denied paying too much to invest with PaineWebber, Mr. Hansen telephoned to say he had discovered the commissions on some of his trades "go up to 1/2 , and some of the commissions are even higher than that. . . ."
In a later telephone call, he said: "I don't think we've made any unwise moves in the marketplace, and I think that our results bear that out." But he declined to make his trading records available for inspection.
The Securities and Exchange Commission recently completed an examination of the PaineWebber offices in Hunt Valley and New York. The SEC wouldn't comment on the action, and PaineWebber officials said they were "routine and customary" examinations.
PaineWebber offices, like those of many large brokerages, have been involved in regulatory and legal actions around the country in the past year. In February, Consumers Union of the United States Inc. filed a lawsuit against PaineWebber in New York.
The suit alleges a PaineWebber broker bought and sold government agency bonds for the Consumers Union pension plan, and charged "undisclosed grossly excessive markups, commissions and fees, which were in no way reasonably related to the fair market prices of the securities purchased or sold." The suit is still pending, according to Consumers Union's attorney.