Ferris in talks on SEC penalty

Baltimore firm could pay $1.2 million fine in stock manipulation

April 11, 2008|By Paul Adams | Paul Adams,Sun reporter

Ferris, Baker Watts is negotiating a settlement with the Securities and Exchange Commission that could result in a civil fine of $1.2 million or more and lead to additional penalties against current and former employees, according to regulatory documents filed yesterday.

The negotiations stem from a lengthy federal investigation of the Baltimore brokerage's supervision of a former broker and client who used Ferris accounts to engage in illegal stock trading. The documents say that an SEC and Justice Department probe of the matter helped spur the century-old firm's decision in February to sell itself to Minneapolis-based RBC Dain Rauscher, a division of Royal Bank of Canada.

"Given the size of Ferris and that it's a regional firm, I would regard that as a significant and substantial fine," said Ross A. Albert, a partner with Morris, Manning & Martin in Atlanta and a former SEC enforcement lawyer.

Ferris had previously said the federal probe was focused on the activities of a former broker and his client, both now in prison, and had not disclosed that current employees are also being investigated.

The deal will result in multimillion- dollar payouts to top Ferris executives who were at the helm while the stock manipulation fraud was being conducted through the firm's trading desk.

RBC is buying Ferris for $230 million in stock, subject to last-minute adjustments, according to the documents, which for the first time disclosed financial terms of the deal as well as the circumstances that led to it. The range of values that the deal places on Ferris stock is mostly above the shares' appraised value as of last August.

George Ferris, the firm's chairman and owner of about one-fourth of its shares, would have RBC stock worth $50.6 million if the transaction values Ferris, Baker Watts shares at the approximate midpoint of the price RBC could ultimately pay at closing, the filing shows. The shares, which are all owned by employees, were appraised at $202.56 apiece last year.

Roger Calvert, president and chief executive, would receive $4.5 million in RBC shares for his stock and options, and a change-of-control payment of $2.54 million.

Patrick Vaughan, one of six employees put on temporary leave last year while the firm investigated the stock fraud, has stock worth about $1.4 million under terms of the deal. He would also get payments totaling about $4.1 million if, as expected, he stays with Dain Rauscher as its senior vice president and regional director for at least four years.

The deal also creates a $97 million pool of money to keep brokers from leaving. Ferris has about 850 employees and 42 retail branches in the Mid-Atlantic, Michigan and Ohio.

A spokeswoman for Ferris declined to comment on the filing, and a Dain Rauscher spokesman did not return a phone message yesterday. The SEC also declined to comment.

Ferris has suffered financially in the past year as its trading revenue shrank while legal expenses have grown, the regulatory filing shows. The firm reported a net loss of $10.6 million in the fiscal year ended Feb. 29, compared with a profit of $16 million in the previous year, according to newly completed audited financial statements.

Ferris had long been rumored to be on the auction block, but pressure to sell accelerated after it came under increased scrutiny by federal regulators last year. The firm's board met in August to discuss options, and after hiring consultants to conduct a strategic review, concluded it was time to sell, the filing states. It approached six potential buyers, eventually leading to two bids and a decision in February to go with RBC. The other bidder was not identified.

The troubles date to 2003, when Ferris hired Ohio broker Stephen J. Glantz, who brought with him a client, David A. Dadante, who managed a $47 million investment fund based in Ohio. The fund turned out to be a Ponzi scheme, in which money from new investors is used to pay phony returns to earlier investors.

Dadante used a combination of investor money and millions borrowed from Ferris to purchase a 35 percent stake in Duluth, Ga.-based Innotrac Corp. With assistance from Glantz, he placed trades that artificially inflated Innotrac's share price.

The fraud occurred even as Ferris' internal watchdogs were raising concerns. In a May 2003 memo, Ferris' compliance department said it believed Dadante's unusual trading had caused Innotrac's shares to rise and questioned whether the firm was adequately supervising the account and Glantz, The Sun reported last year. Securities firms are required by law to police their brokers and clients to protect the integrity of financial markets.

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