The SEC, NASDR and Comptroller of the Currency jointly settled an action in early May against NationsBank's former NationsSecurities unit for improperly marketing two target term trusts to bank customers.
The regulators fined the bank and its securities subsidiary a total of $6.75 million.
The products at issue were the Nations Government Income Term Trust 2003 and the Nations Government Income Term Trust 2004. The Term Trust 2003 was issued in August 1993, and the Term Trust 2004 in February 1994, according to the NASDR.
Although three individuals also were sanctioned, Hugh McColl, NationsBank CEO, and former NationsSecurities chief operating officer Vincent Walls, were not named in the action.
The whistle-blower who helped trigger the investigations, former NationsSecurities rep David Cray, says compliance problems at NationsBank's securities unit grew worse after the formation of a new operation, NationsSecurities, in a 1993 joint venture between the bank and Dean Witter. Walls, a Dean Witter executive, came in as COO of the new firm, which put Charles King, the president of the bank's existing securities unit, into the No. 2 spot.
"In my view [COO Walls] was the person most responsible for escalating the wrongdoing," Cray says. Pressure to sell internal products grew and sales quotas were pushed.
Seemingly smaller infractions also occurred, Cray says. Prior to the formation of NationsSecurities, for example, the bank did not allow red, white and blue colors in marketing materials, and did not allow the use of the bank's name with securities products, Cray claims.
In the recent settlement, the NASDR says NationsSecurities used NationsBank letterhead in massive direct mail campaigns targeted to bank customers pitching the target term trusts.
Daniel Wroble, NationsBank's national mutual fund sales manager, was fined $100,000 and suspended for six months over the use of misleading marketing materials and scripts. The NASDR claims Wroble actively promoted the term trusts in sales meetings and says Wroble held up "a brochure featuring a picture of the U.S. Capitol and told the sales force (a significant number of whom were inexperienced) that as long as the U.S. Capitol was standing in 10 years, investors would receive their original investments back."
Cray says he attended some of those meetings, and the disputed brochure was done in red, white and blue.
Cray also says reps at the bank asked if they could tell their clients that the trusts were guaranteed to return principal, and Wroble reassured them they could, that the firm's top management stood behind the products.
King was fined $50,000 in the May settlement and suspended for three months. The NASDR says King urged the use of a misleading sales presentation within the firm and failed to supervise the firm's sales force.
Houston branch manager Jamie Atkinson was fined $35,000 and suspended for one month for developing the misleading sales presentation that King distributed.
All three Nations officials neither admitted nor denied the findings. They were all ordered to requalify by examination.
"I'm glad [the regulators] have done their job, but I'm a bit disappointed it took them three to four years," Cray says.
Even more disappointing for Cray, however, is his claim that NationsSecurities got away with retaliating against him.
In June 1994, Cray sent a letter to Walls and McColl detailing many of the problems since uncovered by regulators. Eleven days later, NationsSecurities reassigned Cray to a new office, then asked him to turn over the office keys. Cray filed a lawsuit against the firm claiming it had illegally fired him for blowing the whistle. An NASDR arbitration panel ordered the bank brokerage to reinstate Cray a year ago but awarded him no damages, saying the firm had not fired him or retaliated against him (see RR, Nov. '97, Page 38). The panel did note that there may have been some "possible confusion" about Cray's employment status and ordered the firm to pay all arbitration costs.
Cray, who now works at his own financial services firm in Safety Harbor, Fla., near Tampa, claims the bank never made a good-faith effort to rehire him. The panel ordered NationsBank to offer Cray his job back in the same location if possible. That office was the East Bay Drive branch in Largo, Fla. The bank's law firm in a June 1997 letter to Cray, a copy of which Cray provided to the magazine, offered him a position in the Tampa branch claiming that the Largo office "has been closed."
"It has not closed," Cray says, claiming that securities products are also still sold at that location. Cray also claims that NationsBank has refused to respond to his questions about the job offer.
A receptionist at the branch confirms that the location has been open since 1974.
Cray filed a motion last year in the U.S. District Court in Tampa for "clarification" of the award, but NationsSecurities filed a motion to confirm the award, which the court did last October.
This spring, Cray filed a new suit in state court against NationsSecurities claiming the firm never complied with the arbitration panel's order. That suit is pending.
"I've yet to see a regulator show any interest in getting [NationsSecurities] to comply with the [arbitration] order," Cray says.
The troublesome lesson in his fight is don't blow whistles, he adds. "I've gone through three years of gruesome litigation" with nothing to show for it. "Who in their right mind would want to make any effort to make [a wrongdoing] right?"
Previously, NationsSecurities settled two investor class-action claims for $59 million, paid an $850,000 fine to the state of Florida and was ordered by Texas regulators to rescind term trust purchases and pay $275,000 toward investor education efforts.
NationsBank, and its renamed NationsBanc Investments securities unit, say in a statement that they admitted no wrongdoing and settled "to resolve any outstanding questions about practices relating to the sale" of the trusts "and to put this issue behind us." The firms say they have cooperated fully with regulators and have "significantly strengthened our policies and the supervision of our securities subsidiary's sales force."
Regarding Cray's most recent suit pertaining to the job offer, a NationsBank spokesperson says the bank cannot comment on pending litigation.