Hill Williams Debacle Haunts O.C. Brokerage : Securities: Titan co-founder is confident his company’s name will be cleared. But suits, inquiries continue to pile up.
These are tumultuous times for Frank L. King, co-founder and president of Orange County’s largest stock brokerage. Earlier this year, Titan Value Equities Group Inc. landed in the middle of two high-profile controversies that continue to haunt it.
First, there was the fall of Hill Williams Development Corp. Over 3 1/2 years, the Anaheim Hills home builder raised $90 million--a third of it generated from about 1,800 Titan customers--only to file for bankruptcy liquidation in February. Half a dozen lawsuits have since piled up against the brokerage.
Within weeks, a broker for Titan emerged as a key player in a financial investment controversy surrounding the Santa Margarita Water District. State and federal agencies are looking into conflict-of-interest allegations against two former senior managers of the water district, including possible broker kickbacks.
Seventy-year-old King is an amiable, cigar-chomping ex-Marine whose office is decorated with John Wayne and Clint Eastwood posters. Given all the pending litigation, he probably shouldn’t be talking to the press, he says. But he figures that he’s caught in a bind: If he doesn’t agree to be interviewed, he’ll look as if he has something to hide.
So on a recent afternoon, King sat down to defend the beleaguered company. “We are proud of our good reputation,” he said. “I hope I can make you understand that we’re not some wild-eyed beast out here taking advantage of people.”
He confidently asserts that his brokerage’s name will eventually be cleared of any malfeasance regarding the Hill Williams catastrophe. Hill Williams chief Donald Hill Williams Jr., who was accused last spring by the California Department of Corporations of operating a scam, charmed and misled Titan into believing the developer represented a sound investment, according to King.
And he dismisses evidence of improper commissions taken by a Titan broker as “bookkeeping errors.”
Broker Vann Thomas Wesson, of La Mesa in San Diego County, managed $70 million in investments for the Santa Margarita Water District--almost half of the district’s $156-million fund reserved for emergencies and future projects.
Two former top water district officials face accusations that they frivolously spent taxpayers’ money, took more than $60,000 in gifts from companies they later recommended for district contracts, accepted broker kickbacks and paid Wesson $160,000 in unauthorized commissions.
Wesson, who has strongly denied paying any kickbacks to secure business with the district, declined to be interviewed for this report.
An outside accountant for the district discovered a list of transactions handled by Titan that indicated Wesson earned unreported commissions--an accusation that King shrugs off.
“The district got ahold of an internal statement where we lumped the normal compensation received for that kind of account under a heading labeled ‘commissions,’ ” King said.
On a no-commission account, commonly used for institutional and high-volume customers, brokers make money by selling at retail value securities that were purchased wholesale.
The water district severed ties with Wesson last April, but Titan stands by its man. “He did nothing wrong, yet every municipal district he worked for has let him go because of the publicity,” King said. “This has ruined his career.”
King said that an “extensive internal investigation” by Titan failed to reveal any inappropriate behavior by Wesson. “We gave the SEC and the FBI a boatload of records, and never heard back from them, so I assume they couldn’t find anything, either,” he added.
Spokesmen with the Orange County district attorney’s office, the Securities and Exchange Commission and the FBI would not comment on the investigation.
*
King met Donald Williams in 1989, when the home builder formed the first of four fund-raising partnerships, saying that the money would be used to buy land and build houses.
“He was very professional and came across as being highly religious,” King said of Williams, a Mormon. “I talked to people who had done business with him in the past, and they had nothing but praise for him.”
Hill Williams continued to solicit money right up until its sudden announcement last January that it could no longer make monthly dividend payments to its 5,000 investors--mostly elderly people enticed by a 15% annual return.
During the 45 months that it raised public dollars, Hill Williams built only about 50 homes, instead of hundreds. When it filed under the U.S. Bankruptcy Code’s Chapter 7, all the company had to show for the $90 million it had collected from investors was 30 over-encumbered properties--most of them parcels of raw land in the Southern California desert.
The SEC and the Orange County district attorney’s office are conducting a criminal investigation of Hill Williams, which is accused by the California Department of Corporations of running a Ponzi scheme--using new investors’ money to meet obligations to prior clients.
Without admitting or denying guilt, Williams on Friday signed a consent decree with the Corporations Department to settle the state’s civil lawsuit against him. This agreement with the department, which does not have authority to file criminal charges, would not affect any other agency’s ability to take further action.
Williams agreed to never work at a stock brokerage or financial consulting firm, although his company used outside brokerages such as Titan to raise money for his development funds.
If not for brokers, the company never would have been able to attract so much money with so little collateral, allege the attorneys representing Hill Williams investors. A handful of lawsuits, including a class-action suit covering up to 5,000 investors, have been filed against Hill Williams and the two dozen brokerages that sold its partnerships.
Titan had hoped to deflect criticism of its participation in the collapsed program by assuring investors that it was devising a reorganization to stop the liquidation and revitalize the developer’s real estate partnerships.
“We feel a great deal of compassion and responsibility for the investors,” King said. “That’s why we’ve done everything we can to try to help them.”
Over the past few months, Titan has sent periodic newsletters to Hill Williams investors, updating them on its attempts to reorganize the partnerships. When a U.S. bankruptcy judge chided Titan in July for dragging its feet on the pledged conversion plan, the brokerage mailed investors letters saying, “We believe he did not have access to all of the relevant information concerning our efforts.”
But now, chances of a reorganization appear dim, said Ron Rus, attorney for the court-appointed trustee of the partnerships’ estate. Discussions with the trustee have yet to produce a feasible proposal, he said. Talks for some sort of rescue plan, however, are still underway.
The reorganization proposal hinges on Titan’s ability to raise additional money from the public to build houses on the fallow properties, and then repay investors with sales proceeds. But the trustee fears that, “considering the background of this case,” government regulators would balk at such an arrangement, Rus said.
Brian Thompson, chief deputy commissioner for the Department of Corporations, concurred that the agency would “take into consideration the fact that (the investments) have had substantial problems in the past” before approving another fund-raising campaign.
“I can’t imagine that people would be standing in line to invest,” Thompson said.
*
Frank L. King founded Titan Capital Corp. in 1977 with fellow Marine Bruce Anderson. Twelve years ago, Titan Capital merged with Value Equities of San Diego, making it one of the nation’s top five networks of independent securities brokers.
Titan has about 1,100 brokers in 365 branch offices nationwide. Unlike brokers at most of the major stock brokerages, such as Paine Webber and Merrill Lynch, Titan brokers work as independent contractors rather than actual employees. All securities brokers must sell only products that have been approved by their firm’s “due diligence” officers, who are responsible for screening investments and ascertaining their soundness.
It’s difficult to assess Titan’s track record simply by surveying lawsuits and other actions taken against it. Over the years, the company has faced several suits filed by disgruntled clients. But in the brokerage world, where investments can and do go sour, litigation is a price of doing business.
Most unhappy clients air their complaints before a panel of arbitrators assigned by the industry’s self-regulatory organization, the National Assn. of Securities Dealers. Generally, an arbitration is speedier and less expensive than a court proceeding.
According to the National Assn. of Securities Dealers, Titan has paid restitution to investors in three of the association’s arbitrations. That’s not excessive, given the brokerage’s 16 years in business and the number of brokers with which it is affiliated, experts say.
“If you’ve got 1,100 brokers, you’re going to have some loose cannons,” said Bill Jordan, a business professor at Florida State University in Tallahassee who specializes in limited partnership investments.
One of the arbitration cases involved an elderly couple in Norcross, Ga., who from 1984 through 1988 invested their retirement savings of about $300,000 with a Titan broker.
“He put our money into things like commercial real estate partnerships and told us they were safe investments,” said Thomas Bailey, 68. “They paid 10% to 15%” in annual returns, “and we were getting our dividend checks every month. Then everything stopped, and the broker did a disappearing act.”
Bailey drove trucks for 32 years while his wife, Naomi, worked as a payroll supervisor for a convenience store chain. Together they earned about $50,000 a year, and managed to sock away a comfortable nest egg through employee savings plans and company stock.
“The only thing we ever had in life was a high school education,” said Naomi Bailey, 67. “We just did the best we could, accumulating as much money as we could.”
She and her husband were awarded $262,000 in 1990 by a panel of arbitrators. Titan attorneys argued that the Baileys “were competent and able to manage their financial affairs and were responsible for the losses occasioned by their own choices,” according to a case summary by the National Assn. of Securities Dealers. The dealers association “felt that those investments were not suitable for those particular investors, and maybe they were right,” King said. “Sometimes with investments, it’s easier to be a Monday morning quarterback. Unfortunately, the broker put (the Baileys) into partnerships that got caught in the real estate crunch of the ‘80s.”
Titan also has on record three dealers association disciplinary actions taken against it by Minnesota, Missouri and Iowa in 1984 and 1985 for “failure to supervise its agents.” Again, that’s not necessarily an alarming statistic, sources say, especially since eight years have elapsed--although state censures are reserved for flagrant misconduct.
Minnesota cited Titan after one of the company’s brokers stole money from a client. “He was a bad apple,” King said of the broker. “We told the state we would make the investor whole, and we did.”
Like most brokerages, Titan does not carry insurance for broker errors, because such coverage would cost hundreds of thousands of dollars annually. As a rule, brokerages settle claims out of pocket.
“Whenever possible, we try to reach some sort of settlement with clients in our office so that everyone leaves happy,” King said. “Even when you win in arbitration, you lose, because you lose a client.”
*
How is it Titan became so intertwined with Hill Williams--even advertising the home building investment in radio and cable television commercials--despite what industry watchers call red flags that should have scared brokers away?
When it came to Hill Williams, Titan did not do its homework, the heads of three respected Orange County brokerages contend. “It found an easy product to sell with a high sales commission, and went after it aggressively without investigating it thoroughly enough,” said one brokerage president, who--as did the others--requested anonymity.
“How hard could it have been for Titan to find out that Hill Williams was not building houses?” asked another brokerage owner. “I can see how someone might have looked at the first partnership and said, ‘Let’s give it a go.’ But the third and fourth partnerships--when the first two had yet to perform? And by then, everybody who doesn’t live in a bubble knew that the Southern California real estate market was in the tank.”
King allows that he indeed was aware Hill Williams had not carried through with developing the properties--typically bought with little money down. But, he said, Williams’ “business plan continued to make sense.”
“He told me he was buying land at 40% to 50% below market value, and he was about to begin building on it,” King said.
A small Redlands brokerage that sold Hill Williams partnerships early on backed out toward the end. “We recognized that the value of residential and commercial real estate had dropped in California,” said Barrick Smart, president of Great American Securities Inc., which sold about $1.5 million worth of securities in the first two partnerships. “It seemed to us that other investments would offer a greater rate of return.”
Jim Villalobos, chairman and chief executive officer of U.S. Securities Clearing Corp. in San Diego, said that although his firm did not sell Hill Williams, he could understand how other brokerages became involved with it.
“A deal can look good and smell good, but turn out to be a disaster,” he said. “Every time a brokerage approves a product, it sticks its neck out. I know Frank, and I know he wouldn’t have bitten off that big of a piece (of Hill Williams) if he had not carefully looked into it.”
For whatever reason Titan became the lead money source for the ill-fated developer, one thing is certain: King has a mess on his hands.
“This has been a blow to us,” he said. “Our business is helping people, but we’re not magicians. Sometimes helping people doesn’t go right.”
Titan Works to Regain Investor Trust
The Titan Value Equities Group refuses to be sidetracked after being linked to back-to-back investment controversies. Its founder, former Marine Sgt. Frank L. King, says his firm has compassion for and is attempting to help clients who lost money in the Hill Williams Development scandal.
TITAN VALUE EQUITIES GROUP * Business: Stock brokerage * Founded: 1977 * President: Frank L. King, co-founder * Headquarters: Tustin * 1992 investments for customers: $759 million * 1992 investments (in limited partnerships for customers): $87.3 million * 1992 revenues (before payment of commissions): $48 million * Representatives: 1,117 * Average revenue per representative: 42,988
PROFILE: FRANK L. KING * Age: 70 * Title: President, Titan Value Equities Group Inc. * Background: Enlisted in Marine Corps after graduating from Iuka High School in Iuka, Miss., in 1942; left Marines in 1964 and became a stockbroker. Co-founded Titan, along with fellow Marine Bruce Anderson in 1977. * Organizations: Joined National Assn. of Securities Dealers District 2 Business Conduct Committee in 1988 and served as chairman in 1991. Currently chairman of the securities dealers nominating committee and member of the International Assn. of Financial Planners.
LIMITED INVESTMENT RISKS
* Definition: In these partnerships, the limited investors are not personally liable for partnership debts but may lose up to the entire amount of their original investment. * How it works: A group of partners finds a product or real estate (strip mall, for example) that it wants to acquire. To raise money for the purchase, the partners sell shares to investors who become limited partners but with no say in how the investment is managed. * The fine print: Limited partnerships pay higher broker commissions, operating costs and syndication fees. In some cases, only 67 cents to 80 cents on the dollar actually goes toward the investment.
* Worst case: If the investment is mismanaged, or overly optimistic projections about its potential fail to pan out, limited partners may be unable to find subsequent buyers for their shares. If the project goes bankrupt, they may lose their entire investment.
Sources: Titan Value Equities Group Inc., “Investor Beware!” by John Lawrence Allen (John Wiley & Sons Inc., 1993); Researched by JANICE L. JONES / Los Angeles Times
