Ferris bosses were colorblind to the red flags

March 04, 2009|By JAY HANCOCK | JAY HANCOCK,jay.hancock@baltsun.com

Ferris Baker Watts executives dismissed so many alerts about rogue broker Stephen Glantz that famous ignoramuses of myth and history must now retire humbly into the background.

Even the Trojans were warned of their destruction only a few times by the clairvoyant Cassandra. Even the Securities and Exchange Commission heard maybe a half-dozen complaints about Ponzi schemer Bernard Madoff.

The words "red flags" appear no fewer than 10 times in the government's description of how Ferris enabled Glantz. Over three years, the guy manipulated penny stocks, raided clients' accounts, opened a fake account and let a shady client borrow millions from the firm.

Top Ferris executives knew all this "but took no reasonable action in response," in the dry words of the government lawyers.

So maybe it's no surprise that the SEC's inquiry into the Ferris affair isn't over. Last month, the agency settled with the firm and one executive, retail sales director Patrick Vaughan, in a noncriminal, administrative proceeding.

But the SEC's order, which portrays Ferris' failure to act in new and loving detail, indicates that other, unidentified executives knew as much or more than Vaughan about what was going on.

"Our investigation continues," says Kathryn Pryszka, assistant regional director in the SEC's Chicago office, which is handling the case.

Maybe the most stunning detail - in a document full of them - is how a new internal watchdog team at Ferris had to learn about Glantz's shenanigans from scratch even though a predecessor team had already built a fat file.

Ferris hired Glantz in early 2003 despite a trail of formal complaints against him. Within four months, it was clear that accounts he controlled were taking huge positions in shares of Innotrac, a small Georgia company that fulfills orders for Internet merchants.

Glantz's big client was David Dadante, a Cleveland-area fund manager who was throwing millions at the stock market. The Innotrac orders were so enormous - at one point, Ferris accounts held 40 percent of the available shares - that Ferris watchdogs suspected that he and Glantz were manipulating the stock by bidding it up.

As reported by The Sun two years ago, they sent a scathing memo up the chain that was mainly ignored. What wasn't previously known was how many subsequent warnings also fell on what seem to be willfully deaf ears.

Bosses blocked Dadante from buying Innotrac but then relented. They ignored new reports of manipulation. They talked about transferring Glantz from Ohio to Maryland to keep an eye on him but didn't. They got new reports of manipulation.

They finally sent him to Maryland but didn't tell the new boss about his "issues." Nor did they tell the new internal watchdogs. An unnamed top executive "never briefed any of these new compliance employees regarding Glantz, Dadante" or Dadante's fund, the SEC order says.

The new team quickly figured it out. Glantz was moving Innotrac shares from one account to another. He was buying Innotrac for other clients without their knowledge. One top manager (identified by the SEC only as "Senior Executive A") decided to fire Glantz, only to be talked out of it by another. New abuses surfaced. More memos went to the top dogs. Many more months went by.

Only in late 2005 did Glantz and Ferris part company.

The SEC doesn't say it. But it seems logical to conclude Ferris bosses were so happy about the huge commissions Glantz was running up and so worried about the millions Dadante had borrowed from the company that they stuck their heads in their briefcases and hoped everything would work out.

Meanwhile, people were getting ripped off. Dadante lost at least $28 million for clients in his fund. He and Glantz, who allowed him to perpetrate his scam, are in prison.

Senior Ferris executives during Glantz's spree included Chief Executive Officer Roger Calvert, who left the company last year after it was purchased by RBC Wealth Management. Also overseeing Glantz were Vice Chairman Louis Akers Jr. and General Counsel Ted Urban, who both left in 2007 as federal investigators were looking into Glantz's activities.

A lawyer for Calvert did not return calls. Akers' attorney previously said he did not expect Akers to be subject to regulatory action. A spokesman for RBC said the recent settlement with the firm and with Vaughan concludes the SEC's investigation "with respect to both those parties." Vaughan is still with Ferris. Urban attorney John Sturc said: "Our belief is that Mr. Urban acted appropriately as the firm's general counsel."

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