The Securities and Exchange Commission today announced charges against four former clearing firm officials for their roles in a series of accounting and disclosure failures stemming from decisions to extend credit to certain customers beyond what is allowed under the federal securities laws.
An SEC investigation found that clearing broker-dealer Penson Financial Services, whose publicly-traded holding company was Penson Worldwide, provided customers nearly $100 million in margin loans secured mostly by risky, unrated municipal bonds such as those funding a horse racetrack in Texas that one of the customers operated. The loans to these customers—some of which were used to fund the racetrack’s operations—became impaired in the wake of the financial crisis. Instead of liquidating the collateral, accounting properly for the loan losses, and disclosing the situation to Penson’s investors, the firm extended more loans to these customers in violation of federal margin regulations in the hope that their financial condition would consequently improve and they could pay back the loans. Penson and the customers were counting on satisfying the customers’ margin calls if and when Texas changed its gambling laws to allow slot machines at horse racetracks. But the laws didn’t change and Penson’s situation never improved. Penson’s eventual accounting and disclosures of the loan losses that reached $60 million contributed to a series of events resulting in Penson’s bankruptcy in 2013.
“Penson took on extraordinary risks as a broker-dealer by making margin loans to certain customers backed by speculative collateral,” said Andrew Ceresney, Director of the SEC’s Division of Enforcement. “When these loans became impaired, Penson’s leadership improperly placed more of Penson’s critical capital at risk to bail out these customers instead of timely recording the losses and disclosing the truth about the loans to investors.”
The Penson officials agreed to settle the charges in administrative proceedings without admitting or denying the SEC’s findings:
- Philip A. Pendergraft, Penson’s co-founder and a director/CEO of Penson Worldwide, was responsible for the improper loans to the customers as well as the improper accounting treatment and lack of disclosures about the loans in Penson’s public filings. He agreed to pay a $100,000 penalty and be barred from the securities industry.
- Kevin W. McAleer, CFO of Penson Worldwide, was responsible for the improper accounting treatment and lack of disclosures about the loans in Penson’s public filings. He agreed to pay a $25,000 penalty and be suspended for one year from appearing or practicing as an accountant for SEC-regulated entities.
- Thomas R. Johnson, a director of Penson Worldwide and also at the company that operated the horse racetrack, was a cause of Penson’s disclosure failures. He agreed to pay a $25,000 penalty.
- Charles W. Yancey, Penson’s president and CEO, failed to supervise Pendergraft in his capacity as a registered representative. He agreed to pay a $25,000 penalty and be suspended for six months from working in a supervisory capacity in the securities industry.
The SEC separately filed a complaint in federal court in Miami against one of Penson’s customers, Christopher J. Hall, who was chairman of the board for the company that operated the horse racetrack. The SEC alleges that Hall lied about the status of his collateral while fraudulently obtaining $6.8 million in loans or credit from Penson. The SEC’s complaint against Hall seeks disgorgement of ill-gotten gains plus interest, penalties, an officer-and-director bar, and a permanent injunction.
The SEC’s investigation was conducted by Melissa Armstrong, Robert Besse, Rachel Nonaka, Mark Oh, and Gary Peters. The SEC’s litigation against Hall will be led by Ms. Armstrong and David Johnson. The SEC appreciates the assistance of the Public Company Accounting Oversight Board and the Financial Industry Regulatory Authority.