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Bond daddy circus: State Securities Department stands trial at U.S. Associates' disciplinary hearing.

Bond Daddy Circus

A trip to the circus is supposed to be fun, but when a quasi-judicial proceeding of the Arkansas Securities Department gets out of hand and takes on the characteristics of a three-ring performance, it's not a joy for anyone.

A 39-day hearing on alleged securities violations by the president/CEO of U.S. Associates Inc., and two company bond traders ended in February, and a decision is nowhere in sight.

Transcripts, standing three feet high, were completed at the end of June. Joe E. Madden Jr., the hearing officer, is working on an order and cannot say when it will be finished.

Soon after the hearing ended, he was promoted from assistant commissioner to chief counsel and now has other duties.

Continuing Cleanup

As part of a continuing effort to clean up the unsavory image of Little Rock's investment firms, Beverly Bassett, state securities commissioner, lodged charges against U.S. Associates in March 1989.

Some observers say she acted too late. Three months earlier, the firm announced it was closing.

"U.S. Associates was already dead," says Rep. Doug Wood of Sherwood. "It was a corpse, and the department was beating up on a corpse."

Named individually in the complaint were Rondell Eugene Loftin, president/CEO, and investment bankers, Ronald Floyd Davis and Gary Ellis Johnson, and four others.

After negotiations with defendants in similar complaints before, the regular result included probation, license suspension or a fine. But this time, Loftin, Davis and Johnson decided to fight.

Loftin is riled about bad publicity Bassett gave him in June 1988 after he agreed to a consent order that included a $15,000 fine for his company's dealings with two failed Kansas banks. He vowed never to cave in to the department again.

Bassett declines to talk about the case because it is pending. "While it is seldom desirable for a public servant to refuse comment entirely on any matter, in this instance it is almost certain that anything I say regarding this matter might jeopardize not only the interests of the Department, but those of Mr. Loftin, Mr. Johnson and Mr. Davis as well," she wrote in reply to typewritten questions submitted to her.

Acting As Their Own Attorneys

Pleading poverty, the three men act as their own legal counsel. (Johnson is a licensed attorney.)

The charges against them ran 18 pages, and some critics attribute the circus-like atmosphere to the extent and unfocused nature of the case.

Rather than going after individual charges, which could be proved relatively easily, the department went after a host of infractions, apparently giving them equal weight.

The matter also may have been streamlined by handling each of the defendants in a separate hearing.

Madden, 30, and a 1986 law school graduate, ran a relatively loose ship, possibly out of consideration for the two non-lawyer defendants, possibly out of the desire to allow them to build as large a record for appeal as possible. He has a reputation as a sharp lawyer, but his boyish appearance and inexperience in presiding led the defendants to take advantage of him.

Each of the defendants aggressively seeks to show their innocence, and they probably would have irritated a more seasoned hearing officer. They are agitated about the treatment they received from the department and made light of the case. During one recess near the hearing's end, Loftin and Johnson playfully put their fingers up like rabbit ears behind the head of John E. Moore Jr., the department's chief counsel, as a news photographer took pictures for publication.

Moore left the department for private practice at the hearing's end.

The trio put Madden on the defensive from the start. He participated in the investigation of Adron Jerome Gilbert, a fourth bond trader accused of securities violations. Consequently, to avoid charges of bias, he disqualified himself as a hearing officer in Gilbert's case, scheduled for later consideration.

Loftin tried unsuccessfully to convince Madden to also step down from his case because while pursuing Gilbert's alleged wrongdoing, Madden also had to review Loftin's alleged lack of supervision of Gilbert. Johnson and Davis made similar appeals about Madden's involvement in their cases. Madden says he would still be impartial.

Throughout the proceeding, the three defendants often complained about the department serving as prosecutor, judge and executioner.

Getting Out Of Hand

The hearing was not expected to last as long as it did. It dragged on because of an unwieldy format allowing cross-examination of witnesses by each of the three defendants. Madden expressed frustration at trying to maintain decorum and keeping the proceedings moving.

At one point, he reached his fill of the defendants' unruly conduct, called a recess and went to Pulaksi County Circuit Judge David Bogard seeking a court order requiring Loftin and Johnson to comply with his rulings. Bogard declined to issue a written order, but told the defendants to follow Madden's rulings.

The defendants filed a request that Gov. Bill Clinton be called as a witness to discuss a letter he sent regarding the case to Wood, an acquaintance of Davis.

In the letter, Clinton says Bassett assured him that her staff did not solicit complaints against U.S. Associates and that customers were contacted after defendants were notified of charges against them.

Wood, however, made calls to Davis' clients and determined they were contacted by the department before charges were filed.

Bizarre Turn

The strangest turn, and perhaps the most damaging to the department's case, came when Johnson allegedly inadvertently left a tape recorder running in the hearing room during a lunch break.

Loftin's wife, Liz, who attended the hearing, made a transcript of the conversation involving Madden, Moore, Becky Berry, deputy securities commissioner, and two other department attorneys.

Madden allegedly discussed the department's strategy, counseled Berry, told her to prepare to take the witness stand and indicated he would consider department objections to hearsay testimony.

They also allegedly discussed the bias Madden had in Gilbert's case and how it related to Loftin, Johnson and Davis.

The next day, Loftin immediately called Berry as a witness. After handing transcript copies to reporters, he asked questions covering transcript topics. She denied discussing the case with Madden, and after an hour of testimony, Loftin gave her a copy of the transcript for more questioning. Loftin alleges Berry perjured herself 14 times.

The department called for an FBI investigation into the legality of the tape recording, and Loftin went to the Pulaski County Prosecutor's Office seeking charges against Berry for lying under oath.

The FBI has not gone beyond questioning several people, and the county prosecutor recently declined to file perjury charges.

Richard C. Downing, a Little Rock securities attorney not involved with the U.S. Associates case, says, "If it is true that the tape is authentic, it goes a long way toward impeaching the department's position as being fair and impartial."

Downing voices the opinion of a number of critics of the system when he advocates reform in the way state agencies perform regulatory functions. An agency's administrative functions, which are subjective, should be separate from due process functions, which demand fairness or review by an independent party, he says.

Closing Arguments

The department waived its right to a closing argument, but in their closing statements, the three defendants denied all of the charges.

Loftin outlined a conspiracy theory in which he says U.S. Associates' competitors and older investment banking firms applied political pressure to Bassett, whose father was a strong supporter of Clinton and whose husband, Archie Schaffer, is a nephew and former aide to U.S. Sen. Dale Bumpers.

"It's silly," says William L. Tedford Jr., SVP at Stephens Inc. and former chairman of the National Association of Securities Dealers, about the alleged conspiracy.

While the two firms may have called on the same customers, Stephens was never threatened by U.S. Associates, Tedford says.

"Baloney," comments Jerry Roberts, president of Hill Crawford & Landford Inc. and a member of the NASD board. He says his firm and U.S. Associates had a considerably different client base.

Making Too Much Money?

Johnson notes the evidence of the department's own witnesses refutes charges against him. "What was I really guilty of, Mr. Madden? I'm guilty of making too much money," he says.

Davis stalked out and submitted his closing statement in writing. He says the department had not shown where any of his clients were dissatisfied. "No where within this now year-long process have they shown, substantiated or proven anything that could even remotely be construed as dishonest or unethical on my part at all," Davis says.

Going back to the mid 1980s, Little Rock acquired an infamous national reputation based on quick-buck artists in the city's securities industry.

Bassett draws praise from officials in the securities community for her work in cleaning it up.

Lee S. Thalheimer, who preceded Bassett as commissioner from 1981-1985 and is an attorney in private practice, notes there was a bull market (rising stock prices) during his tenure, while Bassett is serving during a bear market (declining prices). Consequently, she has a tougher job than he did, he says, because more investment clients are losing money and blaming dealers.

"They [department officials] have done a respectable job, considering the magnitude of their undertaking," Tedford says.

There is the impression that the Arkansas securities community is smaller now than before the cleanup. There are now 601 broker-dealers and 17,692 registered securities salespersons sons compared with 486 broker-dealers and 186 broker-dealer applications and 9,222 agents and 6,123 agent applications for the fiscal year ending June 30, 1986.

"It was a bad situation, and nothing good was going to come from it," Roberts says. "There are not going to be any winners coming out of that hearing."

Boesky-Milken Comparison

Bemoaning his frustration in moving the case along toward final resolution, Loftin says, "Even Ivan Boesky and Michael Milken did not take five months to get a decision from the federal government."

Both Boesky and Milken, however, avoided trials by pleading guilty to federal charges and receiving prison terms.

Even if Madden orders the defendant's licenses suspended and other sanctions, the department agreed to withhold penalties until their appeals process has been completed. In return, the defendants agreed to drop a civil lawsuit against the department.

The department entered the arena of the U.S. Associates case with serious intentions.

It professed to be fair, but it fell down and left the spotlight covered with mud. Part of the blame is the system, but there also is the conduct of department officials.

As for the bond daddies, they'll have to give up their clown suits and put on a serious demeanor. If the department rules against them, they may find it more difficult to act as their own attorneys as they move up the appeals process.

Meanwhile, Bassett is hanging tough. There's no indication how long she's going to put up with such a difficult assignment, or whether the governor, at whose pleasure the commissioner serves, has seen enough of her department's antics under the big top.

PHOTO : RABBIT EARS: John E. Moore Jr. is amused by the antics of Ron Loftin and Gary Johnson (both off camera) during a break in a 39-day hearing on charges against U.S. Associates Inc. Photo by David F. Kern.
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Title Annotation:U.S. Associates Inc. up on charges alleged securities violation, accuses securities department official of perjury
Author:Kern, David F.
Publication:Arkansas Business
Date:Aug 13, 1990
Previous Article:End of an era.
Next Article:Taxing situation.

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