Raymond James head testifies
The SEC has filed accusations, including failure to supervise, in a $16.5-million fraud by a former broker who's in prison.
By HELEN HUNTLEY
Published February 16, 2005
TAMPA - Thomas James admitted only one mistake as he took the witness stand Tuesday to defend the way Raymond James Financial Services supervised a rogue broker who bilked investors of $16.5-million.
"In retrospect, we would all say we might have acted faster," he said. James, who is chairman and chief executive of the parent company, Raymond James Financial Inc., testified as part of U.S. Securities and Exchange Commission proceedings against the company's independent contractor subsidiary and its former parent, J. Stephen Putnam.
James said Putnam "followed the normal chain of command, relying on the manager."
"He took reasonable steps to see things were being handled properly," James said.
But the SEC says Raymond James and Putnam didn't do enough, accusing them of failure to supervise and charging Raymond James with fraud and record-keeping violations.
What's clear is that the steps they took didn't stop former broker Dennis Herula from cheating investors who dealt with him through Raymond James' Cranston, R.I., office.
Herula was sentenced Friday to more than 15 years in federal prison and ordered to pay more than $13-million in restitution. Wearing a tan prison jumpsuit, he testified briefly in the Tampa proceedings Tuesday by video conference from a prison in Englewood, Colo.
Herula and others carried out their scam through Brite Business, a company that had an account at Raymond James. Top Raymond James officials, including CEO James, became aware of Brite Business in 1999 because the company proposed a complicated tax shelter transaction that would include a $100-million loan.
Several top company executives criticized the proposal and one questioned whether it might be a scam. James said he didn't understand how it would work and was highly skeptical.
"I am strongly biased to not do any trade or participate in any strategy that we do not understand," James said in an e-mail introduced as evidence. "Mysterious transactions, even when valid, involve too much work on our part."
Raymond James did not go along with the proposed transaction, but it did lend Brite Business the money to buy $115-million worth of Treasury bills on margin, a transaction designed to dress up its balance sheet. That trade also raised concerns at top levels of Raymond James. However, Brite Business gave the appearance of being a legitimate business, bringing in a consultant from Arthur Andersen Consulting and a lawyer from Holland & Knight.
The SEC's lawyers say there were more than enough red flags for Raymond James to target Brite Business and Herula for closer scrutiny, but that didn't happen. Putnam learned in July 2000 that Herula had made serious misrepresentations to clients on Raymond James letterhead, but took no disciplinary action until December, when he was fired. The SEC says that failure allowed Herula to mislead other investors and to transfer money out of the Brite Business account.
A ruling in the case is not expected until June.
Helen Huntley can be reached at huntley@sptimes.com or 727 893-8230.