Senior executives at the investment firm Ferris Baker Watts were warned numerous times over three years that one of their employees was manipulating stock prices and trading money from the accounts of unwary customers, but didn't rein in the illegal scheme and even allowed it to widen, according to the Securities and Exchange Commission.
Ending its long-running investigation into the trading scandal at the Baltimore brokerage, the SEC fined Ferris $500,000 and ordered it to return another $300,000 in ill-gotten gains and interest. The agency did not lodge any civil or criminal charges.
Patrick J. Vaughan, who was Ferris' director of retail sales, was fined $50,000, ordered to hand over another $16,627 in illegal gains, and suspended from the securities industry for six months. Broker Stephen Glantz, who helped one of his clients carry out the scheme at the firm's office in Cleveland and perpetuated it after being moved to offices in Baltimore, is already in federal prison on charges related to the fraud. So are the client, David A. Dadante, and a trader at the brokerage firm Advest Inc. who aided the scheme.
The fines, part of a negotiated settlement between Ferris and the SEC, were imposed earlier this month and are lower than the $1.2 million the firm had anticipated in regulatory filings last year.
"I'd say that is still a substantial fine," said Ross A. Albert, a partner with Morris, Manning & Martin in Atlanta and a former SEC attorney.
Ferris spokeswoman Robin Oegerle referred questions to RBC Wealth Management, the Royal Bank of Canada subsidiary that bought the brokerage last year for $230 million. An RBC spokeswoman did not respond to calls yesterday. A message left for Vaughan, who was hired by RBC as its regional director after the acquisition, was not returned.
Details of how Glantz used his Ferris trading operations to prop up Dadante's Ponzi scheme, which cost Dadante's clients about $28 million, have trickled out since the scheme collapsed in late 2005. Ferris previously paid $7.2 million to about 100 investors to settle lawsuits.
But the scope of the illegal trading, as outlined by the SEC, and the number and urgency of warnings about Glantz that Ferris' senior management ignored were wider than previously known.
Glantz started working for Ferris on Jan. 2, 2003, from an office in Beachwood, Ohio. The firm hired him despite 10 complaints from customers listed in his files with the National Association of Securities Dealers, and warnings from other employees in Ohio of his "questionable reputation in the industry," the documents say.
Within four months of his hiring, Ferris compliance officers noticed an odd pattern of trades from Glantz, particularly in shares of Georgia e-commerce company called Innotrac Corp. that seemed designed to manipulate the company's stock price. Compliance officers sent a memo to the firm's managers alerting them to the trades, and noting "a breakdown of supervisory responsibilities."
But Ferris executives didn't do anything, according to the reports. Over the next several months, three of the firm's officials - Vaughan and two others identified only as "Senior Executives A and B" - were warned repeatedly about questionable trades from Glantz but did little to intervene.
At one point, Glantz accumulated more than $18 million in trades made on margin, or with money borrowed from the firm, posing a "significant credit risk" for Ferris. But company executives continued to let him trade with little supervision.
In March 2004, as part of a plan to impose more supervision, Glantz was moved to Ferris' main office in Baltimore. But the Baltimore branch manager was never told of the concerns about Glantz, and his questionable trading continued.
Several months later, during an annual audit, compliance officers noticed a series of questionable trades in Innotrac, including $400,000 worth of shares transferred from one of Glantz' customer's accounts into four other customers' accounts. The Baltimore branch manager said he could not supervise Glantz and recommended he be fired. Again, senior executives "failed reasonably to respond," according to the SEC.
In December 2004, after Glantz was caught buying Innotrac shares for his customers without their knowledge, one of Ferris' top executives wrote a memo calling him "clearly unsuitable" for employment. But after meeting with two other executives, he rescinded the memo and chose to place Glantz on "special supervision" instead.
The SEC's sanctions against Ferris conclude that the firm failed to properly supervise Glantz. If it had, "it is likely that Glantz's fraudulent conduct could have been prevented and detected," the SEC wrote.
Glantz pleaded guilty Sept. 4, 2007, to securities fraud and lying to law enforcement officials. He was sentenced to 33 months in prison and ordered to pay $110,000 in restitution.
"There's a tendency to say something like this is focused around just a few rogue employees," said Albert. "But from what the SEC is saying, it seems the firm failed to make proper remedial steps and respond to a significant number of red flags when they should have."