Page 2 of 5Make it hurt
Bird feels the audit validates his rage. “The whole [division] is a huge mess, and it needs to be fixed,” he says, citing references in the audit that UDS lacked guiding rules. During their investigation, auditors found the most recent book of division policies and procedures was a discarded 1993 manual. Bird believes the dearth of guidelines allowed Klein to run wild with the division.
Bird brought “Case No. 1” of the audit to a House committee last session. It dealt with Gary Teran, president of First Western Advisors, a longstanding Utah brokerage firm. Teran claims Securities ambushed his business in 2007.
“For two years, our company was under [UDS] investigation without our knowledge,” Teran testified last year. Teran says he first heard of the investigation when a reporter called for comment on fraud charges leveled against him in a UDS press release. The division alleged First Western misled investors into mutual fund options that gave fat commissions to Teran and his agents when there were better options available for investors that weren’t disclosed to them.
“They were trying to take my license away completely without notice,” Teran said. After 27 years in the business, Teran said he would fight the division to the end. On March 30, 2007—shortly after issuing its announcement—UDS dropped charges against Teran and apologized publicly for any damage the publicity caused.
“These guys weren’t upfront when they sent out the press release,” Bird says. “Well, when push came to shove, what did we find out? That [First Western was innocent], and the division issued a very rare apology. That’s a bitter pill to swallow.”
The Teran case was a black eye for UDS. In retrospect, Klein says, “I wish it had been handled differently.” But his regrets wouldn’t please his critics; Klein only wishes his agency had brought the case earlier.
“[Teran] talks about how wrong it was for First Western to be investigated,” Klein says “Yet, they all consented to orders to change their practices and offer refunds.”
While critics alleged Securities ran a “secret investigation” that flaunted all due process by not interviewing victims or suspects, Klein says UDS operated off evidence the federal Securities and Exchange Commission had collected in its own investigation of First Western.
That evidence included sworn testimony from an investor who told the SEC that Teran never disclosed different share options available for the $1.5 million he was placing with First Western. The investor wasn’t informed that Class A shares would have been a better deal over Class B shares, documents state. Teran netted $11,900 more in commissions by failing to inform the investor of the Class A option, according to documents. Teran disagrees with the SEC’s math on B shares versus A shares and says there wasn’t any clear industry standard to show he had done wrong.
Teran and three of his brokers did eventually settle with UDS without admitting any guilt. In turn, the division dropped charges and First Western agreed to offer investors their money back. Almost one year later, Klein would be forced out as UDS director over the ensuing furor, even though the Teran case had been with the agency prior to Klein’s employment.
Klein says that during his transition to the division the SEC’s evidence was lost in the shuffle for nearly a year and a half. When UDS pushed to revoke Teran’s license, the agency’s own hearing officer dropped the charges because investigators had failed to file the suit within a required 120 days of renewing Teran’s license. The option to fine and censure First Western was still available until the settlement, Klein says. Klein changed UDS policy after the Teran case to require investigators conduct their own interviews—even if they had evidence from another agency.
Teran emphasizes that some evidence went back to 1998. “They should have limitations on how long they let these things go before they bring an action.”
Klein was still sure of his evidence—confident enough to publish charges on UDS’s Website. “Our credibility in the government is that we don’t make allegations that we’re not sure we’re right on,” he says.