Brokerage firm settles with state over sales practices at Proctor & Gamble plant in Augusta
Brokerage firm A.G. Edwards & Sons will pay a $500,000 fine and reimburse the state $200,000 for its investigation into stock fraud, bringing to a close a case that resulted in the largest securities settlement ever in Georgia.
The fines follow a final consent order issued earlier this month between the Secretary of State’s Office and the brokerage regarding sales practices at the company’s Augusta branch.
A.G. Edwards said it would hire an independent consultant to review its sales methods, its hiring and training of employees and its supervisory policies.
A.G. Edwards consented to the government order without admitting or denying the findings of fact or conclusion of law. The brokerage firm would not consent to the secretary of state’s finding that the misconduct was the result of supervisory failures.
Prior to the consent order, the company settled cases with 120 customers from the Augusta office by paying a total of about $28 million, according to the attorneys who represented the customers. Many of those customers were recent retirees from the Proctor & Gamble plant in Augusta.
Only one case has yet to be settled, according to Edward J. Dovin, Sandra L. Malkin and Brian N. Smiley of Gard Smiley Bishop & Dovin who represented the A.G. Edwards customers.
Two Brokers, Millions Lost
The cases centered around two licensed brokers at the Augusta office, William F. Gibbs Sr., who was the office branch manager from 1993 until he retired in January 2002, and his sales assistant, Susan H. Saccone.
The secretary of state’s order describes the following scenario. Gibbs and Saccone touted the benefits of an investment strategy that used fewer than a dozen stocks to obtain an annual return of 12 percent to 21 percent. When the stock market declined in value in 2000, Gibbs and Saccone started placing clients’ money into risky technology stocks even though many investors were either retired or near retirement age.
Gibbs and Saccone also traded stocks in clients’ portfolios without their authorization.
Later, the A.G. Edwards brokers began trading in options of technology stocks rated as “aggressive” and “speculative” by their company’s analysts. Those activities did not conform with many of the retirees’ stated desire to place their money in “conservative/growth” oriented investments.
In one instance cite by the secretary of state, Gibbs and Saccone placed a block order for $9.8 million in PSINet stock. The securities were purchased on behalf of clients participating in a “short-term trading program” who were not told of the trade until after it occurred. Neither Gibbs nor Saccone had authorization to make such a trade without client permission.
By the end of March 2000, the share price of PSINet had fallen more than 35 percent. The Internet service company later filed for bankruptcy protection, and the majority of its U.S. operations were purchased by Cogent Communications for just $10 million.
Efforts to reach Gibbs and Saccone were not successful.
Gibbs has retired and Saccone no longer works at A.G. Edwards. Records obtained from the National Association of Securities Dealers Inc. say she left in October 2003. The attorney who represented the two brokers, Peter J. Anderson of Sutherland Asbill & Brennan, did not return a phone message seeking comment.
A spokeswoman for A.G. Edwards, Margaret Welch, declined to comment on the Augusta case in detail or discuss any resulting changes in company policy, but she offered this statement: “We’re pleased to put the matter behind us. As we previously announced, we have settled the vast majority of claims. It was an isolated incident involving one branch, and those who were involved in those matters are no longer employed by the firm.”
The $28 million settlement represents 17.6 percent of A.G. Edwards’ net earnings of $159 million for the most recent fiscal year. The 117-year-old company employs 6,980 investment advisors in 708 offices in the United States. Total client assets managed by the firm were valued at $300 billion, according to the company’s year-end results announced March 25.
Impetus to Settle
The company began settlement negotiations with investors after the first case went to arbitration before a New York Stock Exchange panel. Last July, the panel found the brokerage and the two Augusta employees liable for fraud and breaches of fiduciary duty and awarded $924,626 to Wendall A. Gresham of Harlem, Ga. The award included $400,000 in punitive damages and $239,718 in attorney fees.
Gresham, who also was represented by Dovin, Smiley and Malkin, retired from Proctor & Gamble’s Augusta synthetic detergent plant in 1999 after working 31 years and acquiring company stock in his Employee Stock Ownership Plan worth about $1.4 million.
He turned over his retirement savings to Gibbs and Saccone, ultimately losing about $265,000, his lawyers said.
Other P&G retirees suffered worse. Some went into bankruptcy and others lost their homes, according to Gresham’s lawyers, who represented all 121 former A.G. Edwards clients. Half of the clients also were represented by the Augusta firm of Fulcher, Hagler, Reed, Hanks & Harper.
In a separate case, the New York Stock Exchange censured A.G. Edwards for supervisory deficiencies just seven months before the Gresham decision.
Without admitting or denying the findings of the NYSE, A.G. Edwards agreed to pay a $400,000 fine as part of a disciplinary action stemming from the marketing and sale of callable certificates of deposit.
By Steven H. Pollak