Two former financial advisers who were barred from the securities industry have sued Utah for $357.6 million, accusing state regulators of targeting them without proof of wrongdoing in an over-zealous campaign to bring down securities violators.
Advisers Henry S. Brock and Jay Rice both lost their brokerage licenses after separate investigations by the Utah Division of Securities found them to have committed a host of securities violations, including making false promises to seniors at seminars.
The pair struck back last month by filing a lawsuit in U.S. District Court for the District of Utah, claiming that the Securities Division heaped dozens of allegations on each of them — 25 for Mr. Brock and 28 for Mr. Rice — without giving them a chance to appear before a judge in a timely manner. They claim that they were put out of business and forced to declare bankruptcy as a result of the agency's actions.
“They destroyed my reputation maliciously and wholly without cause,” Mr. Brock said in an interview.
“They ruined my lifetime of work and took everything from my family that I had spent my life building,” said Mr. Brock, who in 1997 published “Your Complete Guide to Money Happiness.”
Among the claims in the lawsuit are allegations that the Securities Division bribed Mr. Rice's clients, went through Mr. Brock's computers without permission and sent out a press release announcing the action to bar him from the securities industry that contained false information.
The Securities Division, which is part of the Utah Department of Commerce, has been accused of overly aggressive policing before. As a result of a number of adviser complaints, Republican state Assemblyman Jim Bird called for an audit of the division, which was completed in July 2008. The audit found that the division was grossly mismanaged — resulting in long procedural delays, internal conflicts and poor communication, both internally and with financial services professionals being investigated. Jennifer Bolton, a spokeswoman for the Securities Division, referred calls seeking comment to the Utah attorney general's office. Paul Murphy, a spokesman for that office, declined to comment on the case, except to say that his division is working on a legal response. The attorney general has assigned two attorneys to represent all the defendants in the case, a list that reads like a who's who of Utah politics. Those named include Gov. Gary Herbert, Attorney General Mark L. Shurtleff, Commerce Department head Francine Giani, and former and current directors of the Securities Division: Wayne Klein, Keith Woodwell, Tony Taggart and George Robison. Chuck Newton, chairman of the Utah chapter of the Financial Planning Association and president of Advanced Financial Strategies Inc., said he thinks that the lawsuit will be a “test case” that other states will follow to see whether they can raise revenue to fill budget gaps. “Various states are going after advisers for stupid stuff,” he said. Mr. Brock hasn't paid any fines. Mr. Bird said that though he wouldn't be surprised to hear of other lawsuits similar to this one cropping up in the next few months, the Utah Legislature has no immediate plans to revisit the issues. According to the lawsuit, within a month of getting his securities license in August 2002, Mr. Brock was notified that his firm, Brock and Associates Inc., was being shut down because of unspecified violations that carried a fine of $2,500 if proved. According to documents from the Securities Division and the Financial Industry Regulatory Authority Inc.'s BrokerCheck database, he had engaged in dishonest and unethical business practices, including running a “free-lunch” seminar at which seniors were promised unrealistic returns on investments. Mr. Brock was also cited for acting as an unlicensed broker-dealer agent. In October 2002, Securities Division investigators came into Mr. Brock's home and without permission downloaded the contents of his computer from the previous 15 years — even though the statutory limitation on prosecutions is five years, the lawsuit claims. He claims in his lawsuit that he sought an administrative hearing to answer the charges, but the hearing was delayed repeatedly. Two and half years later, after several delays, Mr. Brock received a letter from the Securities Division asking him to provide copies of his communications with a variety of sources, including leaders of the Church of Jesus Christ of Latter Day Saints, of which he is a member. “It was a total fishing expedition,” said JoAnn Secrist, a former Utah assistant attorney general who is representing Mr. Brock and Mr. Rice. In 2006, Mr. Brock settled the 2002 charges with the Securities Division because he was out of money to pay legal fees, he said. In exchange for agreeing to never sell securities again, the Securities Department waived a $100,000 fine. “I settled solely because I could no longer afford to fight them,” said Mr. Brock, adding that he spent more than $100,000 in legal fees. His lawsuit alleges that after the settlement, the Securities Department posted press releases containing false information about him. One such release stated: “An examination by the Division revealed that Mr. Brock solicited securities transactions and took commissions when he was not licensed, guaranteed customers against loss, offered to park the license of an inactive agent, improperly held himself out as a CFP, failed to maintain required books and records, and used scare tactics at seminars for seniors.” Mr. Brock claims that the division paid Google a special fee to make sure the releases showed up first when people searched his name.
Securities Department investigators disciplined Mr. Rice in 2000 because of what he calls minor violations, including being unable to provide a paper trail for a commission he received on a stock transaction.
“My broker-dealer was aware of the transactions, but we could not provide a paper trail to the DOS. I received a fine and a black mark on my record,” Mr. Rice wrote in an e-mail.
The violation cost him his broker-dealer's license and eventually led to a $135,000 fine from NASD, in addition to a $25,000 state fine from the Securities Department.
In 2009, after years of trying to work with enforcement agents, Mr. Rice claims in the complaint that he approached Mr. Woodwell about his problems. At that time, Mr. Woodwell told Mr. Rice to get written statements from three clients named in complaints against Mr. Rice, saying that they had no problems with the adviser.
According to the complaint, Mr. Woodwell then contacted one client directly and offered him $35,000 out of the fine imposed on Mr. Rice if he didn't write the statement.
As a result, Mr. Rice lost more than $3.5 million in net worth and was forced to declare bankruptcy, according to the lawsuit.
The experiences that Mr. Brock and Mr. Rice outline in their complaint are similar to others the Utah Legislature found in its audit.
“There were a lot of problems with the division getting decisions out procedurally, and there were a lot of overzealous individuals at the division,” said a former employee who asked not to be identified.
And though legislation was passed last year to create an independent board to address adjudication of cases brought on by the Securities Division, not everyone thinks that it is working.
“This type of attitude continues to go on at the Division of Securities,” said a Utah financial adviser who asked not to be identified. “It can take a year and a half before you get a decision and in that time you have spent a lot of money and lost a lot of business.”
Mr. Brock runs a small financial planning firm but doesn't have any assets under management.
Mr. Rice is well-known in Utah because his family donated the money to build Rice-Eccles Stadium in Salt Lake City, where the 2002 Winter Olympics were held.
But he thinks that if money had anything to do with why he was targeted by regulators, it was more related to how much he was making as a broker.
“I was making over $100,000 a month at one point,” Mr. Rice said. “In a regulated industry like securities, there is no question that you are going to be scrutinized more heavily if you are making large sums of money.”
He is now working in real estate.
E-mail Jessica Toonkel Marquez at firstname.lastname@example.org.