Arizona Firm Cited by Spitzer Had Run-Ins With Bank Regulators
In 2002, Security Trust Co. chief executive Grant Seeger was honored as Arizona’s Entrepreneur of the Year in financial services for creating one of the largest independent trust and custody companies in the U.S.
The Phoenix firm, founded by Seeger in 1991, processes buy-and-sell orders in retirement plans, offering investment advisers an electronic platform for trading as many as 5,000 funds in 200 mutual fund companies, according to its Web site.
“He had great vision for his company,” said Kent Mueller, a Phoenix businessman who voted to recognize Seeger, 41, as the top entrepreneur because of Security Trust’s rapid growth.
Now Security Trust has received unwanted recognition: New York Attorney General Eliot Spitzer said the firm enabled — and profited from — illegal after-hours trading by hedge fund Canary Capital Partners LLC. The trades were so profitable that “STC ultimately demanded, and received, a percentage of Canary’s winnings,” according to Spitzer’s complaint against Canary.
Canary’s managing principal, Edward Stern, who paid a $40 million penalty to settle the civil case, is cooperating in a widening investigation of the $6.9 trillion mutual-fund industry’s trading practices. A former Bank of America Corp. broker was charged with criminal counts of grand larceny and securities fraud for his dealings with Stern.
Security Trust, which hasn’t been charged, became a “partner” to Stern in 2000, Spitzer said; the company said revenue rose 56 percent to $16.4 million in 2001, soared 70 percent to $27.7 million last year — and jumped to $20 million in the six months ended June 30.
Processing Trades
Security Trust denies wrongdoing and is “cooperating” in the investigation, said Seeger. “Canary was one of thousands of clients,” he said in a telephone interview. “We don’t manage money. We only process transactions.”
Arizonans expressed surprise over the alleged role of Seeger’s company in what Spitzer called “illegal trading schemes” that siphoned millions from mutual fund investors. “I don’t see how he could be involved in something like that,” said Mueller, a Phoenix venture capitalist. “He seemed like a stand-up person.”
The fund industry relies on so-called intermediaries like Security Trust to process electronic trades and keep records of the transactions of thousands of banks, financial advisers and small brokerages.
Mutual funds are priced once a day, and all trades made before 4 p.m. are supposed to get that day’s closing price. To give intermediaries time to pool together orders, fund companies often let them submit trades after the close of U.S. markets. Spitzer alleged Security Trust allowed Canary to slip in trades until 9 p.m. to take advantage of late-breaking news.
Violations
“It’s a system that has grown over the years for brokers to submit their trades to the funds,” said David Ruder, a former Securities and Exchange Commission chairman. “It’s a positive economic function. The question is how to prevent abuse.”
Eaton Vance Corp., a Boston-based mutual funds manager, said it’s investigating if any shareholders were harmed by trades processed through Security Trust. “There’s no way for us to know that, other than to rely on firms like STC to honor their obligation,” said James Hawkes, Eaton Vance’s chief executive.
It’s not the first time Seeger or Security Trust have run afoul of regulators. The Arizona State Banking Department has censured the firm and its chief executive three times since 1995 for harming investors by putting funds into inappropriate investments.
In 1999, the banking authorities said Security Trust failed to fulfill its duties as a trust, shifted poorly performing securities between accounts, bought risky securities for clients, and kept inadequate records. The firm paid a $50,000 fine.
‘Unsafe and Unsound’
In August 1995, Arizona bank examiners found that Security Trust had a “capital shortage” of $686,394. Among other infractions, the company commingled corporate and fiduciary accounts and violated trust company statutes by “failing to adequately disclose to clients the investment of their fiduciary funds in speculative real estate investments,” the state banking department said.
Three years later, the Arizona department said Security Trust was in violation of its earlier “cease-and-desist” order. The firm now was “acting in an unsafe and unsound manner” by putting more than $6.5 million of client funds into “highly speculative” investments, according to the complaint.
The company extended its “pattern of misrepresentation and concealment” to include the state banking department as well as clients, the Arizona officials said. Security Trust also failed to exercise due diligence by making complicated transactions that involved offshore funds or real estate, the examiners ruled.
Conflicts?
In addition, “Seeger misrepresented” Security Trust’s involvement in soliciting fiduciary clients to invest in what turned out to be non-performing natural gas wells in Texas, the bank examiners said.
Security Trust also placed client funds with promoters who’d been charged with securities fraud and racketeering by the state attorney general, according to the banking department. Clients had lost money because of Security Trust’s “self-dealing, conflicts of interest, and breaches of its fiduciary duties,” the examiners concluded.
The banking department ordered Security Trust not to place funds held in trust into investments in which the bank or its officers held an interest. It was also ordered not to solicit new clients until further notice.
Seeger didn’t respond to numerous phone messages seeking comment on the Arizona banking department’s charges.
Rainmaker
Seeger was “a great rainmaker” and the firm in the early 1990s was known “as a place for non-traditional retirement investments,” said Mark Chester, a Scottsdale, Arizona, lawyer. “They were putting money in real estate, in office buildings, undeveloped land, in private companies. You couldn’t go to Merrill Lynch and get that.”
In January, Security Trust converted its Arizona trust license to a federal charter, removing the firm from the state banking department’s oversight. It is now under the provisional supervision of the Office of the Comptroller of the Currency.
“We sought and received a national trust charter because of the expanding nature of our business,” said Nancy Murphy, a Security Trust vice president in an e-mail. “Our clients are all over the U.S. and we feel they are best served by a trust company that maintains the rigorous standards required by a national charter.”
Security Trust now has 185 employees and client assets have grown from $2 billion in 2000 to almost $13 billion, she said. The firm no longer manages money, she added.
Family Feud
With respect to Spitzer’s charges, Security Trust will hire an independent consultant to conduct an investigation, she said in a telephone interview. “We may have made a mistake when we stepped outside our core retirement business to deal with a hedge fund,” she said.
Seeger, who grew up in Grand Forks, North Dakota, graduated from Arizona State University in 1984. With a classmate named Hayden K. Holland, he started a financial consulting business in 1987. Four years later they formed Security Trust.
In 1992, Seeger persuaded his 71-year-old aunt to create a family partnership of her assets, which he supervised, according to her subsequent complaint with the National Association of Securities Dealers.
She then deposited $479,445 in cash and securities with Seeger’s firm. Over the next six years, he invested the money in risky Mexican securities and limited-partnership shares that lost money, the complaint said, adding that he generated even more fees by making short-term trades.
Convergent Enters
By March 31, 1998, the accounts contained $296,075, a 38 percent loss during a period when the Standard & Poor’s 500 index more than doubled. In 1999, she filed the complaint against Seeger; almost two years later, he agreed to make a payment without admitting wrongdoing in a confidential settlement.
“I think Grant has the ethics of a python,” said Geoffrey Fisher, Seeger’s cousin and a plaintiff with his mother in the case. He declined to discuss the settlement.
Seeger didn’t respond to telephone requests for comment on the arbitration matter.
While his arbitration case was underway, Security Trust was sold to a Chicago-based private investment firm. Convergent Capital Management Inc. paid an undisclosed price in November 1999 for a majority stake in the Arizona firm.
Seeger, as chief executive, and William Kenyon, Security Trust’s president, remained as minority shareholders. Hayden Holland, Seeger’s original partner, departed the previous year. “It was a business divorce,” said Mark Chester, the Scottsdale lawyer who represented Holland.
Convergent Exits
Kenyon, 57, a former executive vice president at the regional Valley Commerce Bank, handles Security Trust’s day-to-day operations and Seeger focuses on “strategic alliances and business development,” said Murphy.
Kenyon had also worked at Bank One. In his civil complaint, Spitzer said Security Trust introduced Stern to mutual fund managers at Bank One to further Canary’s trading activities there. It’s not known what role, if any, Kenyon played in Security Trust’s mutual fund transactions. He didn’t respond to repeated calls for comment.
Convergent, which had stakes in 12 money management firms with total assets of $18 billion, sold most of its holdings for $49 million in April to City National Corp., a Los Angeles bank. Security Trust wasn’t part of the transaction. City National wanted to expand in money management and Security Trust’s processing business “didn’t fit the strategy,” said Vernon Kozlen, head of City National’s investment business.
Probes
Convergent’s plans to sell its Security Trust stake have been put “on hold” following Spitzer’s complaint, said William Ruh, a principal at Castle Creek Capital LLC, a buyout company hired to analyze the Arizona firm’s value.
Richard Adler, a former principal at Convergent, said his firm is now part of City National and no longer involved with Security Trust. He declined further comment.
Security Trust, to be sure, isn’t the only company whose mutual fund practices are under scrutiny, said Barry Barbash, an attorney and former head of the SEC’s fund oversight division. “Distribution has always been the sore thumb,” he said, because “that’s where assets are gathered.” Still, Barbash predicted the system will now be improved. “Fund companies will work up some kind of standardized due diligence process,” he said. “You’ll have the SEC looking hard at intermediaries.”
On his part, Spitzer said the Canary Capital and Bank of America cases will have further consequences. “This is a wide-ranging and continuing investigation which is likely to result in numerous other charges,” he said.
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