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.

Processing Trades

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-

up person.''

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

small brokerages.

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.

Violations

``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

investments.

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

department said.

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.

Conflicts?

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.

Rainmaker

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

charter.''

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.

Family Feud

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

Securities Dealers.

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.

Convergent Enters

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.

Convergent Exits

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.

Probes

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.