Utah’s top securities cop steps down

After drawing fierce criticism for his leadership, the top securities regulator in Utah resigned last week.

Wayne Klein, director of the Utah Division of Securities until Friday, has had a long career as a state securities regulator, distinguished for both groundbreaking wins for investors and a manner that could draw the ire of the industry.

But recently, he has had vocal detractors.

AUDIT DRAGS ON

After allegations of mismanagement, the securities division is being audited by the Utah Office of the Legislative Auditor General.

The audit, which began in November at the request of Republican state Assemblyman Jim Bird, is taking longer than expected to be completed, observers said, because both advocates and critics of Mr. Klein and the securities division want to be heard.

In a recent letter to Mr. Bird, Chuck Newton, the president of the Utah chapter of the Denver-based Financial Planning Association, blasted the division of securities for its management.

Mr. Bird is sponsoring a bill that outlines a process for those outside the Department of Commerce to be in charge of certain securities related proceedings. The Utah Division of Securities is part of the Utah Department of Commerce.

“Based on our knowledge of many shocking actions taking place within the division of securities which appear to be reaching the need for criminal prosecution of some government officials, we believe that [the bill] will be the first of many legislative changes that will be needed regarding the division of securities and Department of Commerce,” Mr. Newton wrote in his Feb. 2 letter.

His practice is based in South Jordan, Utah, and he is affiliated with Brecek & Young Advisors Inc. of Folsom, Calif.

In an interview, Mr. Newton said he was aware of the sharp criticism of Mr. Klein because he “knew people within the division. I’ve been taking them cases to prosecute.”

Mr. Klein said he denies any allegations of mismanagement and pointed to disgruntled employees as their source. “There are employees in the division who have had their duties restructured and are unhappy about it,” he said.

Mr. Klein said he resigned because he was becoming a “distraction” to the division’s work.

He added that about a year ago, he encouraged the state Legislature to begin an audit of the securities division. The auditors have told him that they haven’t released any findings yet, Mr. Klein said.

Mr. Bird, an insurance agent as well as a representative affiliated with Sammons Securities Co. LLC of Sioux Falls, S.D., said he is “absolutely concerned” about the matter of Mr. Klein and the length of time it took to complete the audit, which he thought would have been wrapped up in a few weeks.

“People who work at the division came to me and suggested to audit,” said Mr. Bird, noting that an extra auditor has been added to the project. “To me, that doesn’t bode well.”

But others disagree.

“I’m certain that Wayne will come off well” in the audit, said Francine Giani, director of Utah’s Department of Commerce, adding that the department was committed to making the changes recommended by the audit.

Mr. Klein, 52, will be temporarily replaced by Thad LeVar, who was the deputy executive director of the Department of Commerce. Mr. Klein said he expects a permanent director to be named after the results of the audit are released.

His colleagues said that he will be missed.

“Wayne’s knowledge and expertise is highly valued” by the regulators affiliated with the North American Securities Administrators Association Inc. in Washington, said its president, Karen Tyler, who is also the North Dakota securities commissioner.

She said she hasn’t spoken with Mr. Klein about his resignation, which he announced at the start of last month.

However, lawmakers would be better served “to stay focused on the protection of Main Street investors,” Ms. Tyler said.

Mr. Klein’s career, which began in 1983, includes success stories for investors, with the most prominent being the investigation of the former New York-based Prudential-Bache Securities Inc. in 1990.

At the time, he was securities commissioner of Idaho and acted upon a customer complaint for the sales of energy and real estate limited partnerships.

Mr. Klein eventually took charge of a multistate task force devoted to the issue. In total, federal and state regulators across the country imposed fines against Pru-Bache that totaled $1.4 billion.

But two recent cases have boomeranged on Mr. Klein, who had held the office of top Utah securities regulator since 2005.

One case involved a group of brokers and advisers who invested clients in mutual fund class B shares.

Over the past several years, securities regulators’ bringing B share cases against broker-dealers and reps has been one of the biggest disputes between the industry and its various watchdogs. Unlike mutual funds such as A shares, which charge an upfront fee, or front-end load, fees from B shares are drawn over time and can add up to twice as much as the upfront sales charge.

Another case involved the Utah securities division’s accusing a broker of failing to supervise another rep. A judge ruled that that case should be dismissed, but the division is appealing that ruling to the Utah Supreme Court.

NETTLESOME STYLE

Mr. Klein stressed that 85% to 90% of cases his office brought benefited the securities industry because they uncovered and drove out scam artists and fraudsters, who were often running fly-by-night operations.

“Everything we do is designed to help the industry,” he said. “They just complain when they get caught.”

In the past, Mr. Klein acknowledged, his style was nettlesome.

In 1995, on his way out the door as Idaho securities commissioner, he told the Idaho Business Review, “My job is to offend people. I’m a cop, and my job is to catch people violating the law and to try to make the markets function better.”

Last Thursday, with his bags packed again, Mr. Klein qualified that statement.

“My job is to catch people who are violating the law,” he said. “And that may well offend them.”

E-mail Bruce Kelly at [email protected].