SEC Bars Traders Who Lost Cities’ Funds : Investment: Two bond traders who steered accounts for San Marino and several other government entities into $8 million in losses have been barred from the securities business for life. Meanwhile, the cities and agencies are suing to recover their money.
Federal regulators have barred for life from the securities business two traders accused of bilking San Marino, the Three Valleys Municipal Water District and several other Southern California government entities out of more than $8 million.
As part of a settlement with the U.S. Securities and Exchange Commission, the brokers, William E. Parodi Sr., 47, of Woodland Hills and Frederick W. Parodi, 35, of Canoga Park, did not admit to breaking federal securities laws.
But the SEC, in findings accompanying the settlement, charged that the Parodi brothers had engaged in “excessive and unsuitable trading” that resulted in “significant customer losses.”
Among the Parodi customers cited in the SEC findings were the cities of Lawndale, San Marino and Palmdale, Palmdale’s redevelopment agency, and the Three Valleys Municipal Water District, which serves the eastern end of the San Gabriel Valley.
These entities, along with the redevelopment agency of Maywood, have sued the Parodis, four other account executives and two brokerage houses, Shearson Lehman Hutton and First Investment Securities Inc. The U.S. District Court suit, filed in Los Angeles last year, charges that the defendants violated state and federal securities laws. It seeks $8.3 million in compensatory damages and $16 million in punitive damages.
The SEC ruling Sept. 27 “will strengthen our case, particularly in a jury trial,” said San Marino City Manager John Nowak. “The SEC has indicated that (the Parodis) were involved in inappropriate activities for a long period of time, including when they were handling our accounts.”
San Marino, Nowak said, lost $1.6 million in investments out of a total portfolio of $7 million.
General Manager Richard W. Hansen said the Three Valleys district lost $1.5 million, or 12% of its portfolio.
Hansen and other officials said FBI investigators also have been asking questions in connection with accounts handled by the Parodis.
SEC officials say the Parodi case reflects abuses elsewhere in the country in which unscrupulous bond salesmen persuade small government entities to let them invest their surplus money. Dubbed “bond daddies,” the salesmen use the money in short-term, high-volume bond trading that wins them fat commissions and exposes their clients to considerable financial risk.
“Though I’d be hesitant to say it’s widespread, I’d have to say it isn’t isolated,” said Elaine Cacheris, assistant enforcement administrator in the SEC’s Los Angeles office. “We are seeing public institutions being solicited to make transactions that are unsuitable for their investment strategy.”
Cacheris said the settlement means that the SEC records are confidential and probably can’t be used in the suit.
Parodi attorney Gerry Boltz stressed that his clients neither admit nor deny the commission’s findings in the settlement.
The SEC said the Parodis concealed from their customers the riskiness of the bond transactions and the fact that some of those transactions could leave accounts in debt.
The federal agency also alleged that money solicited by the Parodis was used to fuel a flurry of bond buying and selling known as “churning” that generated a steady stream of commissions for the Parodis and losses for clients.
For instance, from April to September, 1987, the SEC says, accounts managed by the Parodis for Lawndale, Palmdale, San Marino and the Palmdale Redevelopment Agency yielded $133,000 in commissions on an average monthly cash investment of $1.3 million per account.
For the clients, however, the result was different. According to the SEC, trading during the five-month period left losses of $234,182 for Lawndale, $247,109 for Palmdale, $242,060 for San Marino and $235,371 for the Palmdale Redevelopment Agency. Other cities that suffered large losses were Bellflower, Imperial Beach, Chino and Rancho Palos Verdes.
Among the fortunate investors was the city of La Verne, according to the city’s finance officer and deputy treasurer, Ron Clark. In fact, La Verne, whose accounts for a brief time in 1986 and 1987 were managed by the Parodis, earned 5% to 6% on its investment of $500,000.
“But we decided it didn’t seem like the type of arrangement we should be in,” Clark said. “We’d like to say now that our decision to get out was based on pure intelligence, but it could have been dumb luck, too.”
