Settles ‘Adjusted Trading’ Complaint : Irvine Broker Ceases Business in New Mexico
An Irvine brokerage has agreed to stop doing business in New Mexico to settle a complaint with that state’s securities division, but the company still faces at least two lawsuits brought by local governments there that allege they were defrauded.
New Mexico’s securities division announced Monday that Liberty Capital Markets said it would withdraw its securities license and had agreed not to conduct any securities business in the state for the next five years.
Without admitting or denying the allegations against it, Liberty Capital further agreed to pledge $75,000 to be used toward any settlements that might be reached in lawsuits filed by San Juan County, Bernalillo County and the city of Santa Fe. Those suits allege that county funds were manipulated in a series of transactions handled by Liberty Capital.
The company said it would pay an additional $20,000 in penalties and $5,000 to cover the costs of the state’s investigation.
Robert C. Holmes, CEO and chairman of Liberty Capital, could not be reached for comment on Wednesday.
New Mexico charged last December that Liberty Capital had engaged in a series of transactions called adjusted trading that violated its securities acts. The practice is condemned by the National Assn. of Securities Dealers and several brokerages were recently forced out of business after the association took disciplinary action against them.
The purpose of adjusted trading is to help a client hide losses on his investments and to disguise the commission that a brokerage is receiving.
For instance, a county official who lost $100 on a bond he bought for $1,000 might engage in adjusted trading in order to hide the loss from public scrutiny. Here’s how a hypothetical adjusted trade would work:
The official sells the bond back to the brokerage for $1,000, even though it is worth only $900. The brokerage then sells the official another $1,000 bond but charges him $1,150 to cover the original $100 loss, plus a $50 commission.
No loss would be recorded on the first bond, while the second $1,000 bond would be recorded at an inflated value.
Documents prepared by the state of New Mexico allege that Liberty Capital marked up securities sold to local governments by as much as 45% in transactions involving adjusted trading.
New Mexico said the alleged adjusted trading scheme was done “with the approval of Liberty’s managing partners and supervisory employees.”
“Everybody looks good if they don’t show any losses,” said Michael J. Vargon, deputy director of New Mexico’s securities division. “If it was carried out to its ultimate end, you would have securities that you would be paying huge markups on. You could get to the point where you are buying worthless securities to get something cheap enough to cover up the previous loss.”
Besides adjusted trading, New Mexico said in its December notice that Liberty Capital and a predecessor called Liberty Group had failed to obtain the appropriate registrations for some of its brokers.
The state’s security division also said in its notice that Liberty Capital had preyed on inexperienced financial advisers in local governments and persuaded them to put public money in non-traditional investments.
“Such risky recommendations were highly unsuitable,” the notice said.
But a lawyer for the company, Don Proudfoot, said the advisers were qualified investors who in fact solicited many of the trades now in question.
Liberty’s Holmes is president of Zebra Publishing, which puts out Orange County Business to Business--published for the first time this month.
The NASD has begun cracking down on brokerages practicing adjusted trading. Thomas Bryan & Associates in Birmingham, Ala., was fined $20,000 and expelled from membership in the group in April; United Capital Corp. of Little Rock, Ark., and four of its employees were fined $150,000 late last year in connection with adjusted trading.
The town of Camarillo in Ventura County sued United Capital in U.S. District Court in Los Angeles and recently settled out of court for $550,000. Camarillo alleged that it had lost its entire retirement fund and most of its investment account because of adjusted trading. Camarillo said it had no knowledge that United Capital was using its funds for the purpose of adjusted trading.
