Recent enforcement actions by the SEC and FINRA ensnared a former Hall of Fame college football coach charged in an $80 million Ponzi scheme and a Wells Fargo vice president for failing to disclose the risks of mortgage-backed securities.
Other actions included charges of fraud amid an emergency asset freeze to halt a $15.7 million Ponzi scheme originating in Colorado; and the barring of a firm, its CEO and CFO over findings that it misstated its financial records and for engaging in securities transactions when it was below its required net capital.
Hall of Fame Football Coach Charged in $80 Million Ponzi Scheme
Jim Donnan, a College Football Hall of Fame inductee who guided teams at Marshall University and the University of Georgia and later became a television commentator, was charged by the SEC, together with his business partner Gregory Crabtree in an $80 million Ponzi scheme.
The SEC said the two allegedly conducted the fraud through a West Virginia-based company called GLC Limited, which, according to Donnan and Crabtree, was in the wholesale liquidation business and earning substantial profits by buying leftover merchandise from major retailers and reselling those discontinued, damaged or returned products to discount retailers.
Promising returns ranging from 50% to 380%, the two only used about $12 million of the money they received to actually purchase merchandise, much of which was simply abandoned in warehouses in West Virginia and Ohio. The rest was either used to pay off earlier investors or stolen by the pair for their own purposes.
According to the SEC’s complaint filed in federal court in Atlanta, the scheme began in August 2007 and collapsed in October 2010. Donnan recruited most of his investors by approaching contacts he made as a sports commentator and as a coach and then capitalizing on the relationships. For instance, he told one former player, “Your daddy is going to take care of you” … “if you weren’t my son, I wouldn’t be doing this for you.” The player later invested $800,000. In a conference call to discuss the action, William P. Hicks, associate director of the SEC’s Atlanta regional office, said that losses to individual investors ranged from about $4 million down to a few thousand dollars.
While Donnan allegedly told his investors that he was investing right along with them, by the time his scheme fell apart, he’d managed to divert more than $7 million to his own ends; Crabtree had allegedly taken about $1.08 million.
Risk Disclosure Failure Costs Wells Fargo $6.5 Million
Wells Fargo’s brokerage firm and a former vice president, Shawn McMurtry, were charged by the SEC with selling investments tied to mortgage-backed securities without fully understanding their complexity or disclosing the risks to investors with generally conservative investment objectives.
Both consented to the SEC’s order without admitting or denying the findings, and the firm agreed to pay more than $6.5 million to settle the charges; the money will be placed into a Fair Fund for the benefit of harmed investors. McMurtry agreed to be suspended from the securities industry for six months and to pay a $25,000 penalty.
According to the SEC’s order instituting settled administrative proceedings against Minneapolis-based Wells Fargo Brokerage Services (now Wells Fargo Securities), the firm improperly sold asset-backed commercial paper (ABCP) structured with high-risk mortgage-backed securities and collateralized debt obligations (CDOs) to municipalities, nonprofit institutions and other customers without performing adequate research, instead relying on credit ratings. The improper sales occurred from January 2007 to August 2007. Registered representatives in Wells Fargo’s institutional brokerage and sales division made recommendations to institutional customers to purchase ABCP issued by limited purpose companies called structured investment vehicles (SIVs) and SIV-Lites backed largely by mortgage-backed securities and CDOs.
A number of customers purchased SIV-issued ABCP as a result of Wells Fargo’s recommendations, and many of them ultimately suffered substantial losses after three SIV-issued ABCP programs defaulted in 2007.
McMurtry was charged for his improper sale of SIV-issued ABCP, the SEC said; he exercised discretionary authority in violation of Wells Fargo’s internal policy and selected the particular issuer of paper for one longstanding municipal customer. McMurtry did not obtain sufficient information about the investment and relied almost entirely upon its credit rating.