Arizona Firm Cited by Spitzer Had Run-Ins With Bank Regulators
2003-09-22 00:35 (New York)
Sept. 22 (Bloomberg) -- In 2002, Security Trust Co. chief
executive Grant Seeger was honored as Arizona's Entrepreneur of
the Year in financial services for creating one of the largest
independent trust and custody companies in the U.S.
The Phoenix firm, founded by Seeger in 1991, processes buy-
and-sell orders in retirement plans, offering investment advisers
an electronic platform for trading as many as 5,000 funds in 200
mutual fund-companies, according to its Web site.
``He had great vision for his company,'' said Kent Mueller,
a Phoenix businessman who voted to recognize Seeger, 41, as the
top entrepreneur because of Security Trust's rapid growth.
Now Security Trust has received unwanted recognition: New
York Attorney General Eliot Spitzer said the firm enabled -- and
profited from -- illegal after-hours trading by hedge fund Canary
Capital Partners LLC. The trades were so profitable that ``STC
ultimately demanded, and received, a percentage of Canary's
winnings,'' according to Spitzer's complaint against Canary.
Canary's managing principal, Edward Stern, who paid a $40
million penalty to settle the civil case, is cooperating in a
widening investigation of the $6.9 trillion mutual-fund
industry's trading practices. A former Bank of America Corp.
broker was charged with criminal counts of grand larceny and
securities fraud for his dealings with Stern.
Security Trust, which hasn't been charged, became a
``partner'' to Stern in 2000, Spitzer said; the company said
revenue rose 56 percent to $16.4 million in 2001, soared 70
percent to $27.7 million last year -- and jumped to $20 million
in the six months ended June 30.
Security Trust denies wrongdoing and is ``cooperating'' in
the investigation, said Seeger. ``Canary was one of thousands of
clients,'' he said in a telephone interview. ``We don't manage
money. We only process transactions.''
Arizonans expressed surprise over the alleged role of
Seeger's company in what Spitzer called ``illegal trading
schemes'' that siphoned millions from mutual fund investors. ``I
don't see how he could be involved in something like that,'' said
Mueller, a Phoenix venture capitalist. ``He seemed like a stand-
The fund industry relies on so-called intermediaries like
Security Trust to process electronic trades and keep records of
the transactions of thousands of banks, financial advisers and
Mutual funds are priced once a day, and all trades made
before 4 p.m. are supposed to get that day's closing price. To
give intermediaries time to pool together orders, fund companies
often let them submit trades after the close of U.S. markets.
Spitzer alleged Security Trust allowed Canary to slip in trades
until 9 p.m. to take advantage of late-breaking news.
``It's a system that has grown over the years for brokers to
submit their trades to the funds,'' said David Ruder, a former
Securities and Exchange Commission chairman. ``It's a positive
economic function. The question is how to prevent abuse.''
Eaton Vance Corp., a Boston-based mutual funds manager, said
it's investigating if any shareholders were harmed by trades
processed through Security Trust. ``There's no way for us to know
that, other than to rely on firms like STC to honor their
obligation,'' said James Hawkes, Eaton Vance's chief executive.
It's not the first time Seeger or Security Trust have run
afoul of regulators. The Arizona State Banking Department has
censured the firm and its chief executive three times since 1995
for harming investors by putting funds into inappropriate
In 1999, the banking authorities said Security Trust failed
to fulfill its duties as a trust, shifted poorly performing
securities between accounts, bought risky securities for clients,
and kept inadequate records. The firm paid a $50,000 fine.
`Unsafe and Unsound'
In August 1995, Arizona bank examiners found that Security
Trust had a ``capital shortage'' of $686,394. Among other
infractions, the company commingled corporate and fiduciary
accounts and violated trust company statutes by ``failing to
adequately disclose to clients the investment of their fiduciary
funds in speculative real estate investments,'' the state banking
Three years later, the Arizona department said Security
Trust was in violation of its earlier ``cease-and-desist'' order.
The firm now was ``acting in an unsafe and unsound manner'' by
putting more than $6.5 million of client funds into ``highly
speculative'' investments, according to the complaint.
The company extended its ``pattern of misrepresentation and
concealment'' to include the state banking department as well as
clients, the Arizona officials said. Security Trust also failed
to exercise due diligence by making complicated transactions that
involved offshore funds or real estate, the examiners ruled.
In addition, ``Seeger misrepresented'' Security Trust's
involvement in soliciting fiduciary clients to invest in what
turned out to be non-performing natural gas wells in Texas, the
bank examiners said.
Security Trust also placed client funds with promoters who'd
been charged with securities fraud and racketeering by the state
attorney general, according to the banking department. Clients
had lost money because of Security Trust's ``self-dealing,
conflicts of interest, and breaches of its fiduciary duties,''
the examiners concluded.
The banking department ordered Security Trust not to place
funds held in trust into investments in which the bank or its
officers held an interest. It was also ordered not to solicit new
clients until further notice.
Seeger didn't respond to numerous phone messages seeking
comment on the Arizona banking department's charges.
Seeger was ``a great rainmaker'' and the firm in the early
1990s was known ``as a place for non-traditional retirement
investments,'' said Mark Chester, a Scottsdale, Arizona, lawyer.
``They were putting money in real estate, in office buildings,
undeveloped land, in private companies. You couldn't go to
Merrill Lynch and get that.''
In January, Security Trust converted its Arizona trust
license to a federal charter, removing the firm from the state
banking department's oversight. It is now under the provisional
supervision of the Office of the Comptroller of the Currency.
``We sought and received a national trust charter because of
the expanding nature of our business,'' said Nancy Murphy, a
Security Trust vice president in an e-mail. ``Our clients are all
over the U.S. and we feel they are best served by a trust company
that maintains the rigorous standards required by a national
Security Trust now has 185 employees and client assets have
grown from $2 billion in 2000 to almost $13 billion, she said.
The firm no longer manages money, she added.
With respect to Spitzer's charges, Security Trust will hire
an independent consultant to conduct an investigation, she said
in a telephone interview. ``We may have made a mistake when we
stepped outside our core retirement business to deal with a hedge
fund,'' she said.
Seeger, who grew up in Grand Forks, North Dakota, graduated
from Arizona State University in 1984. With a classmate named
Hayden K. Holland, he started a financial consulting business in
1987. Four years later they formed Security Trust.
In 1992, Seeger persuaded his 71-year-old aunt to create a
family partnership of her assets, which he supervised, according
to her subsequent complaint with the National Association of
She then deposited $479,445 in cash and securities with
Seeger's firm. Over the next six years, he invested the money in
risky Mexican securities and limited-partnership shares that lost
money, the complaint said, adding that he generated even more
fees by making short-term trades.
By March 31, 1998, the accounts contained $296,075, a 38
percent loss during a period when the Standard & Poor's 500 index
more than doubled. In 1999, she filed the complaint against
Seeger; almost two years later, he agreed to make a payment
without admitting wrongdoing in a confidential settlement.
``I think Grant has the ethics of a python,'' said Geoffrey
Fisher, Seeger's cousin and a plaintiff with his mother in the
case. He declined to discuss the settlement.
Seeger didn't respond to telephone requests for comment on
the arbitration matter.
While his arbitration case was underway, Security Trust was
sold to a Chicago-based private investment firm. Convergent
Capital Management Inc. paid an undisclosed price in November
1999 for a majority stake in the Arizona firm.
Seeger, as chief executive, and William Kenyon, Security
Trust's president, remained as minority shareholders. Hayden
Holland, Seeger's original partner, departed the previous year.
``It was a business divorce,'' said Mark Chester, the
Scottsdale lawyer who represented Holland.
Kenyon, 57, a former executive vice president at the
regional Valley Commerce Bank, handles Security Trust's day-to-
day operations and Seeger focuses on ``strategic alliances and
business development,'' said Murphy.
Kenyon had also worked at Bank One. In his civil complaint,
Spitzer said Security Trust introduced Stern to mutual fund
managers at Bank One to further Canary's trading activities
there. It's not known what role, if any, Kenyon played in
Security Trust's mutual fund transactions. He didn't respond to
repeated calls for comment.
Convergent, which had stakes in 12 money management firms
with total assets of $18 billion, sold most of its holdings for
$49 million in April to City National Corp., a Los Angeles bank.
Security Trust wasn't part of the transaction. City National
wanted to expand in money management and Security Trust's
processing business ``didn't fit the strategy,'' said Vernon
Kozlen, head of City National's investment business.
Convergent's plans to sell its Security Trust stake have
been put ``on hold'' following Spitzer's complaint, said William
Ruh, a principal at Castle Creek Capital LLC, a buyout company
hired to analyze the Arizona firm's value.
Richard Adler, a former principal at Convergent, said his
firm is now part of City National and no longer involved with
Security Trust. He declined further comment.
Security Trust, to be sure, isn't the only company whose
mutual fund practices are under scrutiny, said Barry Barbash, an
attorney and former head of the SEC's fund oversight division.
``Distribution has always been the sore thumb,'' he said,
because ``that's where assets are gathered.'' Still, Barbash
predicted the system will now be improved. ``Fund companies will
work up some kind of standardized due diligence process,'' he
said. ``You'll have the SEC looking hard at intermediaries.''
On his part, Spitzer said the Canary Capital and Bank of
America cases will have further consequences. ``This is a wide-
ranging and continuing investigation which is likely to result in
numerous other charges,'' he said.