Arkansas lost more than $203,000 on seven of the 85 bond trades handled by Steele Stephens between 2008 and 2012, a national bond expert testified Monday at a hearing brought by the Arkansas Securities Department.
The trades were made while Martha Shoffner was the state treasurer. Shoffner was convicted last year of extortion and bribery in connection with accepting six payments of $6,000 each from Stephens for a share of the state's bond business.
Shoffner resigned as treasurer in 2013.
Stephens was given immunity from criminal prosecution and testified against Shoffner in her federal case. Stephens, who worked for St. Bernard Financial Services of Russellville, testified in Shoffner's case that he earned about $2.5 million in commissions from the 85 total bond trades.
Stephens, who is not affiliated with investment firm Stephens Inc., is accused by the department of selling unsuitable securities to the treasurer's office, among other things. The department has the authority to fine an agent up to $10,000 for each violation of the state's securities law.
Estimates that the state made more than $1.5 million on the seven bonds that were traded before they were called back by the issuer failed to take into account how much was lost from future bond-interest payments, said Craig McCann, who has taught at the University of Maryland and Georgetown University and 15 years ago founded Securities Litigation and Consulting Group, which has offices in Fairfax, Va., and Westlake Village, Calif.
"When the bond is sold, it stops receiving interest," McCann testified.
At least seven of the bonds that Stephens sold followed this pattern, McCann said.
Mike Olson, an executive with CL King & Associates, a New York firm that was the clearing agent that sold the state's bonds, gave Stephens the strategy to use to sell the bonds to the state, Scott Freydl, an attorney with the Securities Department, said in an interview.
But it was Stephens' responsibility not to make unsuitable recommendations to Shoffner about how to trade the state's bonds, Freydl said.
Stephens' payments to Shoffner were unethical but not illegal, John Van Kleef, Stephens' attorney, said in an interview.
"All of the 85 trades done between the state and St. Bernard were suitable," Van Kleef said. "And St. Bernard's yields were No. 3 out of all the brokers [working with the treasurer's office]."
Stephens estimated that the total cash flow into the state from all 85 bond trades was more than $26 million.
Last month, St. Bernard and Robert Keenan, the firm's chief executive, agreed to accept a fine of $25,000 in connection with the Securities Department's complaints.
The department found that the firm's supervisory and compliance policy failed to prevent the use of email accounts outside the company to conduct securities business by St. Bernard's agents, such as Stephens.
Keenan said Monday that he decided to settle with the department even though he believed he was innocent, because it would cost him more to defend the case than it did to settle it.
Business on 04/07/2015