Trades raised flags at Ferris

2003 memo voiced concerns about Ohio customer

April 29, 2007|By Paul Adams | Paul Adams,Sun reporter

Ferris Baker Watts employees expressed concerns to top executives in 2003 about an Ohio fund manager's stock trades, yet the firm let him keep trading for much of the next year and maintained the account until the fund was shut down amid fraud allegations in late 2005, according to documents and interviews.

The allegations against fund manager David A. Dadante, which led to a criminal complaint last month, have caused federal officials to probe his trades through the conservative Baltimore brokerage whose history in the city spans a century. Federal investigators say in a criminal complaint that Dadante used the trading desk at Ferris and other firms in a stock manipulation scheme that didn't stop until a group of investors uncovered it on their own.

The alleged fraud was occurring even as Ferris' internal watchdogs were flagging problems in Dadante's account and asking the firm's chief executive and general counsel for guidance on how to proceed, according to a company memo from May 2003.

The document shows that Ferris' compliance department believed that Dadante's trading through the firm had caused the share price of Atlanta-based Innotrac Corp. to increase and that he had potentially violated securities laws by not making required regulatory filings. The memo also questioned whether Ferris was adequately supervising Dadante's account and whether it knew enough about the source of his money and the nature of his nearly $50 million investment fund, known as the IPOF Fund.

Dadante, who was arrested last month, faces federal charges of securities fraud in Cleveland. The criminal complaint alleges that he artificially boosted the price of Innotrac's stock and looted the IPOF Fund to finance gambling junkets to Las Vegas and a luxury home in Gates Mills, Ohio.

$28 million lost

More than 100 investors lost about $28 million in what authorities say was a Ponzi scheme, in which money from new investors is used to pay phony returns to earlier investors.

Ferris has said that officials from the Securities and Exchange Commission and Justice Department are investigating Dadante's trades through his accounts at the firm.

Documents suggest that the firm took certain steps to monitor the account and correct some of the problems noted in the memo. Ferris executives restricted Dadante's trading at several points to address concerns about the millions of dollars he was borrowing from the firm to buy stock. Records also show that in June 2003, shortly after the memo was distributed, Dadante made required regulatory filings to correct a violation alluded to in the memo.

But he subsequently continued trading Innotrac stock almost daily through Ferris and other firms, according to court records and SEC filings.

In a February 2004 memo to one of the firm's traders, Ferris Chief Executive Roger Calvert instructed that Dadante could continue buying Innotrac shares as long as he paid for them in cash.

It's unclear what steps Ferris took to address the 2003 memo's concerns about Dadante's trading patterns and their influence on Innotrac's stock price. The memo was addressed to Calvert, general counsel Ted Urban and other top officers of the privately held brokerage. The firm, which has said that neither it nor Ferris clients lost money in Dadante's transactions, declined to make executives available for interviews last week or to answer oral and written questions.

Documents and interviews indicate that Dadante preferred to buy most of his shares with money borrowed from Ferris and other firms, a common practice known as buying on margin. Calvert's restriction came at a time when Dadante's debt had reached $18.4 million.

Ferris spokeswoman Robin Oegerle said the firm has already addressed issues raised in its own internal probe and is cooperating with federal investigators: "Because this matter is under investigation, it is not appropriate for us to comment further."

Four top executives and two traders took temporary leave during Ferris' internal investigation.

Urban has since retired, and Horace Usry, its head of institutional sales, has resigned. Two traders and the head of retail sales have returned to work, but Louis Akers, Ferris' vice chairman and former chief executive, remains on leave.

An attorney for Calvert did not respond to phone messages last week. An attorney for Urban said his client's departure from the firm was amicable. He declined to comment on the memo, saying his client, as former general counsel for Ferris, remains bound by attorney-client privilege restrictions.

The authenticity of the 2003 memo was confirmed by multiple sources.

Investment firms are required by law to police the trading activity of their brokers, traders and customers such as Dadante to prevent fraud and ensure fairness in the market. The SEC and Justice Department declined to comment on the matter.

The criminal case is pending before the U.S. District Court in the Northern District of Ohio.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.