The SEC has asked the Federal Deposit Insurance Corp. (FDIC) inspector generals office to investigate the SECs handling of an examination begun in late 1996 of a Washington, D.C., Wheat First office, according to the whistle-blower in the case.
The whistle-blower, Ronald L. Brown, a former rep in the Wheat First branch who now works at Capitol Securities Management in McLean, Va., says the SEC has called in the FDIC as a result of a complaint he and his attorney, Randall Steinmeyer of Reinhardt & Anderson in Minneapolis, made to the public integrity section of the Justice Department early this year. The Justice Department referred the matter back to the SECs inspector general in March.
An FDIC spokesperson says the agency can neither confirm nor deny any investigation.
Likewise, the SEC will neither confirm nor deny if an investigation is under way and would not comment further.
But Brown claims hes recently received inquiries from the FDIC.
Brown alleges that the SEC investigation he sparked was shut down shortly after SEC Chairman Arthur Levitt Jr. was contacted by John McElroy, Wheat Firsts chairman emeritus and a friend of Levitts. Brown says the two men spoke about the same time SEC examiners were investigating the Washington, D. C., branch. A Barrons article last summer described the contact between Levitt and McElroy as a general discussion that occurred in December 1996.
McElroy served on the American Stock Exchange board during a period when Levitt was exchange chairman. Levitt ran the AMEX from 1978 to 1989.
One result of McElroys and Levitts discussion was Wheat Firsts sponsorship of an SEC town hall meeting in April 1997 in the firms home base of Richmond, Va.
Brown was fired from Wheat First in February 1997--the same month he says the firm got word the SEC would take no action. He is now suing the firm.
The SEC examination of the branch began when Brown, a $150,000 producer with a clean record--and a former attorney with the Justice Department--provided the SECs Philadelphia office with allegations of current and past wrongdoing at the branch. In a 16-page Nov. 18, 1996, letter to the agency, Brown detailed a number of allegations, including a broker loaning money to a client, and widespread unauthorized trading and churning at the branch.
The SEC followed up with a surprise inspection of the Wheat First office on Friday, Dec. 13, 1996, and left the following Wednesday, according to Brown. But other than some initial contact he had with the agency and two phone calls immediately prior to the SECs in-person audit, Brown says SEC staff never met with him or consulted him.
Brown says the FDICs investigation is the result of a January 1998 letter Steinmeyer wrote to Lee Radek, chief of the public integrity section of the Justice Department. In that letter, Steinmeyer stated that Levitt would have to be investigated by a special counsel regarding the handling of the investigation and Levitts contact with McElroy.
In a March 18 reply, Radek declined to take up the matter, stating the special prosecutor laws applied only to a few high-ranking officials in government (not Levitt), and that Steinmeyer had failed to provide enough information sufficient to warrant a [regular] criminal investigation by the Justice Department. Radek instead referred the matter to SEC Inspector General Walter Stachnik.
But Stachnik had already looked into the matter and found no wrongdoing. In an October 1997 letter to Sen. Jon Kyl (R-Ariz.), Stachnik said Wheat First had received no favors in return of its co-sponsorship. ... The Agency believes that Wheat First Securities co-sponsorship of that event was not intended to and did not, in fact, result in preferential treatment for the firm.
It remains unclear why the SEC may have asked the FDIC to investigate.
Agencies generally investigate their own alleged ethics violations or defer to the FBI in potential criminal cases. In matters involving agency heads, like Levitt, the White House general counsel also would be called upon to conduct inquiries. The SECs Standards of Conduct, federal regulations and criminal statutes all prohibit government officials from receiving anything of value from individuals or companies they regulate.
Meanwhile, the status of the D.C. Wheat office case remains unclear. In July 1997, The Wall Street Journal reported that the case was still open, but cited no source. Brown disputes any notion that the case was open last summer and claims the SEC was simply trying to quell press inquiries. He says he wasnt contacted again by the SEC until he received a Nov. 24, 1997, letter from the SECs Philadelphia office requesting his voluntary testimony--more than a year after he blew the whistle.
Brown has yet to testify before SEC officials, despite being subpoenaed this past March and again in April. Steinmeyer has been in contact with the agency, but has claimed that his own busy trial schedule and chronic health problems suffered by Brown have delayed his clients testimony.
Early this year, Brown filed an arbitration claim against Wheat First Securities, which is now Wheat First Union. The case is still pending but revolves around the circumstances of Browns termination from the firm.
Brown alleges that on Feb. 5, 1997, his regional manager announced to the Wheat Washington, D.C., branch that the SEC would take no action against the firm. The next day, Browns branch manager gave him a cautionary memo that rebuked him for taking his complaints outside the firm before enabling the firm to investigate, the memo says.
But Brown says he first reported the problems to a Wheat First compliance official and his branch manager in October 1996 and was informed the following month by his manager that the matters had been resolved.
On Feb. 18, 1997, Brown was fired. His U-5 says the termination was for low production--not compliance related.
Wheat First Union would not comment on Browns case or confirm the Levitt/McElroy contact.