Broker collected abnormally large fees on trades for Lutherville credit union

October 01, 1992|By David Conn | David Conn,Staff Writer

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.

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