The head of the state Division of Securities is resigning, following allegations of mismanagement and misuse of authority and a continuing state audit.
Division director Wayne Klein said Monday that he has submitted his resignation to his state Commerce Department chief Francine Giani. He plans to step down at the end of this month.
Klein's decision come amid controversy surrounding a case his agency investigated involving four employees with First Western Advisors Inc., a stock brokerage and investment firm.
Rep. Jim Bird, R-West Jordan, was concerned about the handling of the First Western case and requested the audit late last year. The Legislative Auditor General's Office began the audit in early November and plans to complete its work by the end of the legislative session.
"The division does important work," Giani said Tuesday. "Unfortunately, sometimes they do investigate people that are known by people that can call for audits."
Klein said Tuesday that his resignation would take pressure off the division so that its important work can go forward without him being a lightning rod for criticism. The controversy traces back to last March, when the Utah Division of Securities alleged that First Western Advisors, along with two current and two former brokers, were part of securities fraud involving nine Utahns who invested more than $20.6 million.
The division had filed a petition to revoke and bar licenses and impose fines against First Western and brokers Gary W. Teran, Carl A. Page, David A. Russon and Brian G. Kasteler. Teran is the company's president, and Russon and Kasteler are former First Western brokers.
Specifically, the division said the agents invested in Class B shares, which have higher costs and higher commissions for the agents than Class A shares of the same fund. However, some clients thought they owned Class A shares based upon Morningstar "Snapshot" reports that the agents sent, reflecting mutual fund performance for Class A shares, the division said.
The division also said that the nine investors testified to the U.S. Securities and Exchange Commission, but the agents tried to contradict their statements by having them sign "mutual-fund disclosure statements" and "declarations" suggesting the investors were always aware of the brokers' actions.
The filing also charged First Western with failing to maintain accurate books and records and failing to supervise the activities of the four brokers. The division accused the firm of violating the Utah Securities Act, saying First Western failed to disclose material facts to clients, recommended unsuitable investments, gave false account information to clients and attempted to change client testimony to the SEC.
The division later dismissed the fraud claims after the men signed settlement agreements with orders to comply with state requirements of the Utah Uniform Securities Act. The division also issued news releases expressing regret for any potential harm their allegations may have caused to First Western's business.
Giani and Klein said the division never claimed First Western bilked clients out of money, but the division did raise questions about the firm's practices and fee structures, which were eventually addressed and resolved between the division and the company in the settlement agreements.
In the consent order, the company also agreed to change its policies in exchange for the agency dismissing fraud charges.
Klein said the division issued the apology because of the potential damage to the company's reputation caused by media reports stating First Western had de-frauded clients, which he said the division never claimed.
Klein also came under fire for a 2005 case involving broker Richard Mack. The division filed a petition against Mack that accused him of failing to adequately supervise a broker who was selling unregistered securities. A judge ruled the case should be dismissed, but the division is appealing that ruling to the Utah Supreme Court.
The criticism regarding Klein came to the forefront during a hearing last week before the House Business and Labor Committee, when four people testified about his perceived failings or the unfair practices within the agency, he said. During the committee meeting, Bird introduced HB83, which would give the state Securities Advisory Board, which oversees the division, the ability to decide which cases to pursue.
The board is made up of independent advisers and now only provides recommendations on what fines the division should levy.
Bird has been a strong critic of Klein's agency and, according to Giani, was a former business associate of Mack.
Klein said the controversy, combined with the legislative audit, has made him feel it would be better for the division if he leaves, to avoid further conflict.
"It just seemed best to for me to step aside before the audit comes out and they make recommendations," he said. "Then someone can come in with a clean slate and implement the recommendations without the baggage that I bring."
Commerce director Giani hired Klein in October 2005. A lawyer with two decades of experience in securities law, he had served in the Utah Attorney General's Office since 1996.
Giani said she considers Klein to be one of the most knowledgeable, competent, and highly regarded people in the field of securities law, and she is sad to see him step down from his post. She attributed much of the controversy to "mischaracterization over what has occurred." But she said she will abide by any and all of the recommendations that come from the auditor's office.
Giani also said she is cautiously optimistic Klein's work and reputation will be vindicated by the audit. "That's my hope," she said.
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