CHICAGO -- A Texas brokerage firm and one of its former brokers were assessed a total of $15,500 by the National Association of Securities Dealers last week for defrauding an Ohio city.
Englewood, Ohio, had charged Murchison Investment Bankers and its former broker Kenneth Schulte with fraud and misrepresentation in the sale of interest-only stripped mortgage-backed securities. The NASD's July 27 decision found Murchison and Schulte liable. But while the city. had asked for nearly $51,000 to cover its losses, plus another $40,000 to cover other damages, the arbitrator's award totaled only $15,500. Murchison was ordered to pay Englewood $9,000, Schulte was ordered to pay $4,500, with the firm and the broker splitting a $2,000 fee to cover the cost of the NASD hearing.
Michael McNamee, an attorney representing Englewood, called the decision "a moral victory, not a monetary victory." McNamee said that three other of his government clients -- the village of Chardon, and the Strongsville and Vermilion school districts -- have arbitration filings still pending before the NASD against Schulte, Murchison, and Houston-based Hart Securities, where Schulte worked after leaving Murchison. Attorneys representing Murchison and Schulte did not return phone calls.
The Englewood case was the first decision to come out of the NASD since the Ohio auditor announced last year that several local governments in the state had sustained millions of dollars in losses due to investments in high-risk and potentially illegal mortgage-backed securities.
Officials from the Securities and Exchange Commission have interviewed a few local government officials in connection with the investments. However, Bill Hegan, the SEC's deputy regional director in Chicago, would neither confirm nor deny yesterday that the agency is looking into the investment problem.
Meanwhile, Hart Securities and Schulte are fighting the allegations by filing lawsuits against state and local officials. On Friday, the two parties filed a defamation lawsuit in U.S. District Court in Ohio against the Strongsville School District, its school board, and McNamee, its attorney. The suit charges that Schulte and Hart were defamed by statements made and published by McNamee and the board members concerning the district's dealings with Hart and Schulte. The suit asks for at least $5 million in damages.
McNamee said he has not reviewed the lawsuit, but said that in his opinion it appeared to be "frivolous litigation" that attempts to "intimidate, harass, or maliciously injure myself and the Strongsville School District."
Michael Evanson, the school district's treasurer, said yesterday that he could not comment on the lawsuit because the district had not yet received a copy of it.
Also last Friday, Hart and Schulte filed a lawsuit against Ohio Attorney General Lee Fischer and Ohio auditor Thomas E. Ferguson in Franklin County (Ohio) Common Pleas Court. The suit asks the court to throw out an October 1993 opinion by the attorney general that the mortgage securities constituted illegal investments for school districts and non-chartered local governments in Ohio, according to Paul Francis, an attorney representing Hart.
If the opinion is upheld by the court, Francis said the suit then argues that the opinion should not be applied retroactively to the investments sold by his client. He said Hart was given no indication from the auditor's office in 1990 and 1991 that there could be a legal question about local governments investing in the securities.
The suit also claims that Hart and Schulte were improperly -targeted in findings for recovery issued by the state auditor.
So far, the state auditor has issued findings against three school districts -- Strongsville, Vermilion, and Hamson Hills -- and the city of Jackson for having investments that matured beyond a two-year limit set by state statute, according to John Conley, a spokesman for the auditor.
The losses for the three governments, totaling more than $1.3 million, have been assessed against the fiscal officer of the governments and against Hart Securities and Schulte, the firm and broker that sold the investments, Conley said. Now local legal advisers to the governments must determine who pays back the money, he said.
Naming a securities firm and a broker in the findings is not covered by state statute and "goes beyond the authority of the auditor," Francis said.
Bob Biesenbach, Fischer's spokesman, said the attorney general's office is not concerned about the lawsuit, which he said was believed to have "no merit." He said the office is standing behind the opinion it released in October.
Conley said the auditor has not reviewed the lawsuit.
Meanwhile, Conley said the auditor is waiting for the attorney general to issue an opinion regarding the legality of investments by counties in the mortgage securities that also resulted in losses.