$700K Closes the Door on A.G. Edwards Fraud Case
Brokerage Firm Settles with State Over Sales Practices at Augusta Branch

By Steven H. Pollak,
April 28, 2004
Fulton County Daily Report

Brokerage firm A.G. Edwards & Sons will pay a $500,000 fine and reimburse the state $200,000 for its investigation into stock fraud, bringing to a close a case that resulted in the largest securities settlement ever in Georgia.

The fines follow a final consent order issued earlier this month between the Secretary of State’s Office and the brokerage regarding sales practices at the company’s Augusta branch.

A.G. Edwards said it would hire an independent consultant to review its sales methods, its hiring and training of employees and its supervisory policies.

A.G. Edwards consented to the government order without admitting or denying the findings of fact or conclusion of law. The brokerage firm would not consent to the secretary of state’s finding that the misconduct was the result of supervisory failures.

Prior to the consent order, the company settled cases with 120 customers from the Augusta office by paying a total of about $28 million, according to the attorneys who represented the customers. Many of those customers were recent retirees from the Proctor & Gamble plant in Augusta.

Only one case has yet to be settled, according to Edward J. Dovin, Sandra L. Malkin and Brian N. Smiley of Gard Smiley Bishop & Dovin who represented the A.G. Edwards customers.

Two Brokers, Millions Lost
The cases centered around two licensed brokers at the Augusta office, William F. Gibbs Sr., who was the office branch manager from 1993 until he retired in January 2002, and his sales assistant, Susan H. Saccone.

The secretary of state’s order describes the following scenario. Gibbs and Saccone touted the benefits of an investment strategy that used fewer than a dozen stocks to obtain an annual return of 12 percent to 21 percent. When the stock market declined in value in 2000, Gibbs and Saccone started placing clients’ money into risky technology stocks even though many investors were either retired or near retirement age.

Gibbs and Saccone also traded stocks in clients’ portfolios without their authorization.

Later, the A.G. Edwards brokers began trading in options of technology stocks rated as “aggressive” and “speculative” by their company’s analysts. Those activities did not conform with many of the retirees’ stated desire to place their money in “conservative/growth” oriented investments.

In one instance cite by the secretary of state, Gibbs and Saccone placed a block order for $9.8 million in PSINet stock. The securities were purchased on behalf of clients participating in a “short-term trading program” who were not told of the trade until after it occurred. Neither Gibbs nor Saccone had authorization to make such a trade without client permission.

By the end of March 2000, the share price of PSINet had fallen more than 35 percent. The Internet service company later filed for bankruptcy protection, and the majority of its U.S. operations were purchased by Cogent Communications for just $10 million.

Efforts to reach Gibbs and Saccone were not successful.

Gibbs has retired and Saccone no longer works at A.G. Edwards. Records obtained from the National Association of Securities Dealers Inc. say she left in October 2003. The attorney who represented the two brokers, Peter J. Anderson of Sutherland Asbill & Brennan, did not return a phone message seeking comment.

A spokeswoman for A.G. Edwards, Margaret Welch, declined to comment on the Augusta case in detail or discuss any resulting changes in company policy, but she offered this statement: “We’re pleased to put the matter behind us. As we previously announced, we have settled the vast majority of claims. It was an isolated incident involving one branch, and those who were involved in those matters are no longer employed by the firm.”

The $28 million settlement represents 17.6 percent of A.G. Edwards’ net earnings of $159 million for the most recent fiscal year. The 117-year-old company employs 6,980 investment advisors in 708 offices in the United States. Total client assets managed by the firm were valued at $300 billion, according to the company’s year-end results announced March 25.

Impetus to Settle
The company began settlement negotiations with investors after the first case went to arbitration before a New York Stock Exchange panel. Last July, the panel found the brokerage and the two Augusta employees liable for fraud and breaches of fiduciary duty and awarded $924,626 to Wendall A. Gresham of Harlem, Ga. The award included $400,000 in punitive damages and $239,718 in attorney fees.

Gresham, who also was represented by Dovin, Smiley and Malkin, retired from Proctor & Gamble’s Augusta synthetic detergent plant in 1999 after working 31 years and acquiring company stock in his Employee Stock Ownership Plan worth about $1.4 million.

He turned over his retirement savings to Gibbs and Saccone, ultimately losing about $265,000, his lawyers said.

Other P&G retirees suffered worse. Some went into bankruptcy and others lost their homes, according to Gresham’s lawyers, who represented all 121 former A.G. Edwards clients. Half of the clients also were represented by the Augusta firm of Fulcher, Hagler, Reed, Hanks & Harper.

In a separate case, the New York Stock Exchange censured A.G. Edwards for supervisory deficiencies just seven months before the Gresham decision.

Without admitting or denying the findings of the NYSE, A.G. Edwards agreed to pay a $400,000 fine as part of a disciplinary action stemming from the marketing and sale of callable certificates of deposit.

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Above represents an article a year ago that shows another STL firm on the hot seat. Where is the forum about this firm. Most firms settle so the lawyers and the press can't have a field day. It's cheaper and cleaner to pay and move on. It sucks but that's the reality.

What is fascinating is the attraction of ex-Jonesers to this forum. It (registered rep) apparently doesn't make the radar screen for the majority of FA's or IR's out there. The scandal at MSDW is far deeper and more dramatic, but it barely makes a ripple. SSB settled a couple of months ago for 750M (10X the Jones settlement) and it makes the back pages of newspapers. The public is used to greed. Maybe numb is a better term.

None of this is good for the industry.

The scam: Edward Jones wasn't telling folks what the effective interest rate or yield was when they were trading bonds held inside their portfolios through their Edward Jones brokers. And the management--from the top down--admitted that it knew about this, dating back as far back as 1995.

I would like to see where this was admitted.  I sold many corporate bonds and muni bonds when at Jones and I recall that we always were to disclose not just the coupon rate but the ytm and current yield.  It may be true that certain reps would not disclose this information to close the sale, but I really don't believe that it was a system wide "Jones practice".  There are bad apples in every industry.

I agree that horror stories about dishonest investment reps do no good for the rest of us that are running ethical businesses. 

The issue here was this:

When a client sold out of a municipal bond their confirm did not state what their actual Yield to "sale" had been. It just stated the amount of current value and accrued interest they were receiving. Jones account statements do show actual/current YTM every month or quarter, and to my knowledge have since at least 2000.

Jones clients were not "trading" bonds.

CIB: You sure? What were the sells for then? Pretty easy to screw the clients when you are selling bonds and you don’t disclose YTM/YTC to switch them into other bonds or better yet…“CIBforeveryone”. 

ha…someone finally got my handle…my take on it, and my own experience has been that the bond liquidations were for cash needs primarily. I can’t vouch for that specifically, that is just my gut feeling. Compliance has never been in favor of swapping bonds for bonds.

[quote=CIBforeveryone]

ha...someone finally got my handle...my take on it, and my own experience has been that the bond liquidations were for cash needs primarily. I can't vouch for that specifically, that is just my gut feeling. Compliance has never been in favor of swapping bonds for bonds.

[/quote]

They encourage it for tax loss purposes.  It might be nice to see the yield you gave up for the great newly minted 30yr year bond you just bought with a YTM of 5%.

Jones IR to client, bend over this will hurt me a lot more than you !  We always do what's right for the client, and we have the best of intentions 

You know Jones has been in business longer than 7-11 even though have the same business plan, over charge on commissions, we don't disclose our lavish trips that you are paying for from excessive fees, and that little fine we received from the SEC, was nothing............and our infamous leader Doug "3 Mil" Hill  is the only Wall Street Leader of a Firm to be forced to resign or go to jail.........but he did nothing wrong, except to try and fall on the sword, only he sat on it instead but, thats better than having Bubba as a room mate, on second thought he might really enjoy that?

Even JD(Junk Dealer)Power even rated us the best at something ....was it cover-up, or deceiving the public, something like that...................

This is a Edward Jones IR day dreaming of better days to come........

Did he fall on his sword, or step on his D*ck.

 Take one more for the firm Doug.