Pacific Inland Bank Settles SEC Suit : Courts: Anaheim firm, parent company will pay $50,000 penalty. Agency accused them of letting four investors buy securities and use cash from quick sales to cover the purchase price.
Pacific Inland Bank and its parent company agreed Wednesday to settle a lawsuit accusing it of helping four investors operate an extensive scheme to buy $260 million in securities without the cash to pay for them.
The Anaheim bank and Pacific Inland Bancorp will pay a $50,000 penalty to the Securities and Exchange Commission, and promised not to violate securities laws in the future. The settlement is part of an SEC lawsuit filed Wednesday in federal court in New York City.
The SEC suit accuses the bank and the investors of participating for four years in a scheme called free-riding, in which the investors allegedly bought stocks and bonds and covered the purchase price by selling the securities almost immediately.
Executives at the bank would not comment, said Joanie James, its chief administrative officer. The bank didn’t admit any liability in settling the case.
“This was an unusually large free-riding scheme in terms of the scope of the activity,” said Wayne Carlin, the SEC’s assistant regional director in New York.
The four individuals carried out the scheme by opening more than 645 accounts at 62 brokerages under 40 different names, the SEC alleges. They collected $2.7 million in gains through the scheme, the agency asserts.
The investors cleared their trades--paying for the securities and collecting on the sales--through custodial accounts at the trust division of Pacific Inland Bank.
The SEC complaint alleges that the bank extended millions of dollars of credit to pay for securities purchases and settled trades that the defendants could not finance.
Carlin said federal law requires that investors have the money to pay for cash purchases of securities, in large part to avoid defrauding others. If brokers are falsely led to believe that buyers have the cash to pay for the securities, the brokers could be forced to cover any securities later sold at a loss.
“These defendants were ordering purchases of stock that they didn’t have the money to pay for, and on same day, they ordered sales of the same stock, using proceeds to pay for the purchases,” Carlin said. “They were trying to make money quickly.”
Though Pacific Inland executives wouldn’t talk, the bank’s president at the time, Ronald L. Askew, said Wednesday that the free-riding apparently went on for some time before top management learned about it in 1992. The bank’s auditors hadn’t found anything wrong until then, he said.
“Once it surfaced, we closed down the custodial activity immediately because it just involved too much risk,” he said. “One employee ended up resigning.”
He said the bank didn’t do anything “knowingly wrong,” and it cooperated with SEC investigators.
“We were in an area where we shouldn’t have been committing our resources,” Askew said. “About five months later, we sold the trust department to Imperial Bank [Inglewood].”
Askew was forced out last year and is suing the bank for wrongful termination.
Pacific Inland’s former chairman, Richard J. Meyer, went to prison earlier this year for five years for defrauding a failed Northern California savings and loan he owned. He repaid the government $1.5 million, but S&L; regulators contend that he and his companies cost the thrift an additional $14.5 million in losses.
Pacific Inland has been the target of an unusual amount of litigation. Since 1987, investors and others have filed more than 50 lawsuits--more than 30 in the past five years--against the bank.
In addition, the bank is operating under state and federal cease-and-desist orders, the strongest enforcement action short of seizure. The orders, issued in the spring of 1994, require the bank to raise more investor cash, improve operating revenue, curtail bad loans and halt a number of unsafe practices.
In the SEC lawsuit, the agency said that two of the four defendants--Jury Matt Hansen, 50, of Bridgehampton, N.Y., and Fergus Sloan, 50, of New York City--operated a previous free-riding scheme that led to income tax fraud convictions in March, 1994, and one-year prison sentences. In 1975, Sloan pleaded guilty to breaking securities laws.
A third defendant, Nilda Zim, 55, of Long Island, N.Y., was permanently barred in 1990 from associating with National Assn. of Securities Dealers members and fined for trading to generate commissions in a customer’s account.
The fourth defendant, Robert Rowe, 48, of New York City, agreed to settle the SEC suit for $333,000. The agency, however, said it will allow him to pay only $100,000 because he isn’t able to pay more.
