Small California Bank Charged with Giving Scam Artists a 'Free Ride' with Stock Trades

allowed bogus investors to purchase $179 million of securities without using any of their own money. Pacific Inland Bancorp, with $60 million of assets, last week settled the charges filed by the Securities and Exchange Commission, agreeing to pay a $50,000 fine. "You usually don't see a small community bank getting involved in deals like that, never mind fraudulent deals like that," said Steve Didion, an analyst with Hoefer & Arnett in San Francisco. The SEC alleged that Pacific Inland Bank, which maintained custodial clearing accounts for the four individuals, acted as an intermediary for the investors and their brokerages. The SEC also charged the bank with trying to cover up the scam by filing a false earnings report. "The violations were unusually extensive," said Wayne Carlin, assistant director of the SEC's Northeast regional office. "This was a large amount of trading for an institution of almost any size." Pacific Inland neither admitted nor denied wrongdoing in its settlement, though it did admit to violating credit extension provisions. The bank, which would not comment for this report, is expected to make some sort of statement tomorrow. The SEC complaint charged that beginning in December 1989 the four investors, all from New York, opened more than 645 accounts at more than 62 brokerage firms, using approximately 40 different assumed names. By grossly misrepresenting their net worth, the investors were able to buy more than $260 million of securities - $179 million through Pacific Inland - over several years with little or no capital, while shifting the risk of loss onto unwitting brokerage firms, the SEC charged. The scheme, known as free-riding, netted the defendants more than $2.7 million in profits, according to the complaint. Pacific Inland, through which the investors cleared most of the trades, facilitated the scheme by extending millions of dollars of credit to pay for the securities and to settle trades that the investors could not finance, the SEC charged. The 11-year-old bank began offering securities clearing services in early 1990, and conducted the business for the defendants from Feb. 1991 to March 1993, according to the complaint. It discontinued its clearing operations on March 31, 1993. Pacific Inland also made a false SEC filing in the second quarter of 1992, stating that more than $8.5 million from unsettled trades had been received, the complaint said. "It's a very troubled institution in terms of basic business and, apparently, management," said Charlotte Chamberlain, an analyst with Wedbush Morgan Securities in Los Angeles. "What we may have here is our second bank failure in Southern California this year." The bank reported losses through the second half of this year. The charges, filed in U.S. District Court for the Southern District of New York, did not name any individuals from the bank, but the four defendants were Jury Matt Hansen, Fergus Sloan, Nilda Zim, and Robert Rowe.