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Executives at brokerage leave amid investigation

The Baltimore Sun

Ferris Baker Watts, the century-old investment brokerage with deep Baltimore roots, said yesterday that six executives and traders have resigned or taken temporary leave since federal officials and outside counsel began investigating the firm's trades for a former client accused of stealing millions of dollars.

The list of temporary and permanent departures includes several top executives in Baltimore and Hunt Valley, indicating the investigations have disrupted management at the firm more broadly than company officials disclosed two weeks ago.

The changes are fallout from a federal probe of an investment fund set up by a Cleveland man who, according to a Securities and Exchange Commission lawsuit, took in $50 million from investors and spent much of the money on stock trades placed through Ferris and other firms. Most of the money is missing. Ferris has stressed that neither it nor its clients lost money in the scheme and that it is cooperating with regulators and federal investigators.

Legal experts and former SEC enforcement officials say even the temporary absence of so many top people shows how seriously Ferris is taking the matter and suggests the firm faces a lengthy and costly probe of its internal controls designed to prevent fraud. Brokers are subject to extensive regulatory oversight and are required to police trading activity to ensure fairness in the market.

"Outside counsel is going to want to impress the SEC and impress the [Justice Department] ... that the company is doing everything it can to clean house, and on the other hand it's certainly par for the course that key folks might step aside so that there's no appearance of any influence on the investigation," said Charles Ross, a white-collar defense attorney in New York who has defended compliance officers, fund managers and brokers in securities cases.

Personnel changes

Ted Urban, the firm's executive vice president and general counsel, took voluntary leave in November and subsequently opted for early retirement, effective yesterday. He has been replaced by Dana S. Gloor, an associate general counsel with Ferris since 2001.

Horace Usry, director of institutional sales, was put on leave Jan. 3 and resigned last week, a firm spokeswoman said. He has been replaced by Jeff Fowlds, a former Stiefel Nicholas managing director, the firm said yesterday. Usry did not respond to a phone message yesterday.

John Belgrade and Mark LaVerghetta, both institutional traders, are on temporary leave during the investigation, the firm said. Neither of the traders could be reached for comment yesterday.

Ferris confirmed on Feb. 12 that Louis Akers Jr., director of the firm's private client group, and Patrick Vaughan, director of retail sales, took temporary paid leave while outside counsel conducted its investigation. At that time, Robin Oegerle, a Ferris spokeswoman, declined The Sun's request to confirm that Usry, Urban, Belgrade and LaVerghetta also had stepped aside, citing the firm's policy of not commenting on personnel matters.

"We note that we are not a public company, so we are not subject to the disclosure requirements that would apply to a public company," she said yesterday.

Oegerle added that the firm brought in outside counsel to investigate what role, if any, the individuals on leave played in the supervision of the trading activity in question.

"It is common to ask individuals who may be close to the inquiry to step aside while the investigation takes place," she said.

The firm, which has dual headquarters in Baltimore and Washington, said previously that it expects the executives still on leave to return once the investigation has reached an advanced stage.

Gathering facts

"Just because there's this internal investigation and people are evaluating what happened doesn't necessarily mean that people engaged in wrongdoing," said Kathleen M. Hamm, a former SEC enforcement official who heads the securities practice group for Promontory Financial Group in Washington.

"I would say this is just the process pursuant to which regulators and prosecutors confirm either that a broker-dealer was a victim of their client's misbehavior or eliminate the potential that someone at the firm knew more."

Hamm said outside counsel will often identify failures in internal controls and recommend how to strengthen fraud-prevention measures. But firms sometimes suffer damage to their reputations and incur great expense while the investigations play out, she said.

"They're incredibly costly, they're time-consuming and they certainly are disruptive," she said.

Ferris Baker's troubles can be traced back to David A. Dadante, the Cleveland man who the SEC says operated his IPOF investment fund as a Ponzi scheme. The SEC complaint says Dadante "misappropriated investor funds for his own use" and pursued an "undisclosed high-risk investment strategy." At least $28 million of investor money is missing.

Dadante diverted some of the funds to amass a 35 percent stake in Innotrac, a lightly traded company in Georgia that processes orders for companies that sell merchandise on the Internet. Some of the trades were placed through Stephen J. Glantz, a Ferris Baker broker who left the firm in 2005. Glantz has denied any impropriety, saying that while he handled Dadante's account, the fund manager's trades often went straight to Ferris' trading desk.

Ferris was one of at least six brokerage houses processing huge purchases of Innotrac stock for Dadante, according to Mark Dottore, the court-appointed receiver for what remains of IPOF. Dottore said Dadante made the trades through numerous accounts, similar to a prescription drug addict obtaining multiple prescriptions through several doctors without each doctor knowing about the others. Investigators are likely asking whether the brokerages sufficiently policed Dadante's activities, Dottore and other securities experts said.

"Some things happened all across the board at all of these different firms," Dottore said. He indicated that Ferris has been cooperative.

That several other firms also were apparently duped by Dadante could play to Ferris' favor, said Ross, the defense attorney. But it might come down to how much trading Dadante conducted through Ferris and how quickly and fully the company reported the problems to regulators once it discovered them.

Regulators also might look favorably on the firm's decision to remove key managers during the probe and to bring in outside counsel, he said.

Ferris said the management changes announced yesterday coincide with the start of the firm's new fiscal year. In addition to the appointments of Fowlds and Gloor, the firm promoted Adrian G. Teel, a Ferris board member and former director of the Maryland Port Authority, to chief operating officer.

paul.adams@baltsun.com

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