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Much-criticized securities watchdog to lose its boss

Published February 5, 2008 9:15 am
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Posted: 9:15 AM- Amid concerns of mismanagement, too many unfair prosecutions and an ongoing state audit, the director of the Utah Division of Securities is stepping down.

Wayne Klein, who was named director in October 2005, said he will be leaving his post at the end of the month.

"I just felt this was the best way to divert criticism from the division and the important work it does, so that someone else can come in and have a fresh start," Klein said Monday, without elaborating.

The Securities Division's job is to stand as a sentinel, protecting the public from shady operators bent on dipping their fingers into the wallets and pocketbooks of unwary investors.

Yet lately, the state agency that in the past handed many a swindler a black eye, has been sporting a shiner of its own over the spurious fraud charges it levied last year against Salt Lake City-based First Western Advisors and several of its stockbrokers.

Concerned about the state's handling of the First Western case and after hearing from several division staff members who expressed concerns about how the agency was being run, Rep. Jim Bird, R-West Jordan, late last year requested that the Legislative Auditor General's Office audit the division.

Bird also has introduced legislation that would rein in the powers of the division's director.

The audit began in early November as an informal examination. It later was upgraded to a formal evaluation after auditors determined they needed more time to understand the complexity of the Securities Division's work, said Tim Osterstock, an audit manager at the Legislative Auditor General's Office.

Auditors hope to have their evaluation completed by the end of the legislative session, he said.

"They obviously haven't told me the results of the audit but I've heard words like [the division is in] 'disarray' and the 'deeper we [the auditors] go, the deeper we need to go,' " Bird said last week during a meeting of the House Business and Labor Committee.

Francine Giani, who as director of the Department of Commerce oversees the Securities Division and appointed Klein, said Monday that she is sad to see Klein leave. "He has been a good director, and in terms of his background in the securities industry, there is no one better."

At last week's meeting of the House Business and Labor Committee, Giani said that critics both inside and outside the division were out for Klein's blood. Like Bird, Giani said division staff members had complained to her about how the division was being run.

"I'm not going to listen if anyone comes in with [unfounded] claims of mismanagement or theft of money or some other nonsense," she said.

Giani said she welcomes the audit because it is being conducted by independent examiners who will take an honest look at the division and its operations.

Bird said he is concerned about those operations because "innocent people are being hurt," pointing to the First Western Advisors case and another prosecution with which he is familiar.

In a petition released in March 2007, the Securities Division accused First Western and four current and former brokers with generating excess commissions by making inappropriate investments for nine clients. It alleged the clients, who had $20.6 million combined invested at First Western, paid "tens of thousands of dollars" in excess commissions when brokers placed their money in "Class B" mutual fund shares rather than in lower-commission "Class A" shares.

Many mutual funds offer more than one class of shares that carry different fees and expenses. The different classes with their varying fee structures cater to investors with different goals, such as the length of time investors intend to keep their money tied up in the funds.

First Western President Gary Teran said he had no idea there was an investigation prior to the Securities Division publicly announcing its charges against his company and its brokers.

"They never talked to us or asked us for an explanation," Teran said, noting the state never questioned First Western clients. "Instead, they announced they wanted to take my license and put me out of business."

To his dismay, Teran discovered that division director Klein was to be the hearing officer for the case.

But matters didn't get that far. Within weeks of announcing its initial action, the state dropped charges against Teran and the three other brokers. It even offered a rare apology for any harm its allegations of misconduct may have caused to their reputations.

Regulators, however, were less willing to let First Western Advisors off the hook, even though in mid-January, a judge dismissed the state's final action that sought to fine the brokerage. Administrative Law Judge J. Steven Eklund pointed out that during the state's investigation it repeatedly renewed First Western's license to operate without any restrictions.

Giani of the Commerce Department said the Securities Division was never able to get a hearing on the merits of its complaint because the judge ruled that the charges were not filed in a timely manner.

Bird, however, pointed out that most of the nation's big brokerage houses will sell "B" shares to their customers if it is appropriate. "But you didn't see the Utah Securities Division out there trying to string them up."

First Western's case was not unique. "There are several cases that have gone down this same path," Bird said, pointing to the recent case of Richard W. Mack, a broker with whom Bird was affiliated.

In February 2005, the division filed a complaint against Mack, alleging that he failed to adequately supervise a broker who was selling unregistered securities and raised $3.2 million from 12 investors.

The division conceded that Mack didn't know of the broker's activities but nevertheless sought to permanently bar Mack from working in the securities industry. A judge subsequently granted Mack's motion to dismiss the complaint.

But in August 2006, the division started an administrative action against Mack, making the same allegations. Mack sued in Utah's 3rd District Court and won again. The court ruled that the division couldn't retry the matter.

The division is appealing that ruling to the Utah Supreme Court.

Giani, in defending the division's actions, told the House Business and Labor Committee last week that Bird used to work for Mack. The legislator countered that he never had an employee/employer relationship with Mack.

Alarmed at a system that he said makes the division the investigating body and its director, Klein, the judge and jury, Bird is sponsoring House Bill 83. The legislation would give the division's board of independent advisers - the Securities Advisory Board - the ability to determine what cases should be pursued. As of now, the board primarily provides input only on what level of fines the division should levy in cases it is pursuing.

"There needs to be a place where people can come and state their case, and move forward," Bird said.

Klein declined to comment on HB83, deferring to Giani, who told committee members she would prefer they hold off on the bill until after the audit is completed.

"We'd ask you to wait for the audit to come down before you start dismantling a very good division," she said. The bill, however, was moved out of the committee and sent to the full House of Representatives for a vote.




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