CHICAGO – Grigsby & Associates Inc. owner Calvin Grigsby faces a December hearing on accusations leveled by Illinois Secretary of State regulators that the firm failed in its fiduciary duty when it advised the Illinois Student Assistance Commission to invest in ShoreBank Corp., which later failed.
The complaint also alleges other securities violations against Grigsby and the San Francisco-based firm, including that Grigsby failed to properly oversee the former public finance banker in the firm’s Chicago office who obtained the ISAC advisory business.
Secretary of State Jesse White’s Securities Department filed its formal complaint alleging securities violations in what’s known as a “notice of hearing” over the summer. The firm breached its duties by “failing to prepare a complete and accurate offering analysis that fairly and objectively analyzed the rewards and risks of the SBC offering,” and for recommending an “unsuitable” investment, the complaint reads.
Grigsby – who in October pulled his 31-year-old broker-dealer license to focus on financial advisory work -- initially faced an October hearing but the independent hearing officer that will consider the case put it off to Dec. 19.
The hearing officer – Jon K. Ellis -- sided with Grigsby in his argument that regulators hand over requested documents. After reviewing the state’s evidence, Grigsby last month asked the hearing officer to dismiss the case.
He argued that state regulators failed to show he and the firm violated securities laws and that the firm’s role in performing due diligence on the investment was limited. Grigsby, who is also an attorney, is representing himself and the firm.
The case stems from ISAC’s $12.8 million investment for its pre-paid college tuition program in a 2008 public offering in ShoreBank. .
Grigsby’s firm advised ISAC on the investment. Federal authorities seized the bank in 2010, rendering the commission’s investment worthless.
The pre-paid tuition program’s fiscal struggles and aggressive investments have been the subject of several regulatory and legislative probes and prompted Gov. Pat Quinn to overhaul the agency.
White’s office temporarily suspended former Chicago-based Grigsby public finance banker Alvin Boutte Jr.’s license in 2011, charging a breach of fiduciary duty and accusing him of providing misleading advice that led to the private placement.
White’s securities department later entered a consent order imposing various penalties, including a $15,000 fine against Boutte. At the time, Boutte had moved on to another firm, M.R. Beal & Co., but he later resigned amid the allegations. Several other Grigsby bankers in Chicago – finding it difficult to conduct business in Illinois-- also quit to join another firm.
State regulators then turned their attention to the firm and its leader. They allege that the firm failed to provide ISAC with a complete and accurate offering analysis and prudence opinion that fairly and objectively evaluated the prudence of the investment based on ISAC’s goals.
Regulators contend that the documents did not disclose the latest bank failure information or the latest information on ShoreBank’s financial position at the time of the investment and that there was no record that a principal of the firm has reviewed the analysis submitted to ISAC as required.
Regulators – who conducted an audit of the firm’s Chicago office in June 2011 -- charge that Boutte had not properly documented or kept records of due diligence he had said was conducted, including interviews with key bank personnel and bank branch visits.
The audit also faulted the company for not keeping records on its contract with a subcontractor who was paid $50,000 to help with the investment analysis and did not keep proper records of sporting event tickets provided to ISAC officials. The Chicago office also is accused of not keeping proper documentation of office emails and communications. The firm was paid a contingent fee for its work by ISAC of $256,000.
Regulators allege Grigsby and firm failed to conduct adequate due diligence, and breached their fiduciary duties by omitting and misrepresenting some information over the soundness and safety of the investment.
Grigsby in his motion to dismiss challenges the allegations.
“No facts are alleged in the notice reflecting [securities] violations,” Grigsby argued. The motion contends that certain violations don’t apply because that bank offering was not a public securities offering but a private stock placement.
It also argues that the opinions submitted to ISAC were not public documents but for private and confidential use by ISAC officials. Grigsby also contends that its information was accurate at the time it was submitted –laying out the risks and benefits – and that other legal advisers and ISAC had the ultimate responsibility to conduct due diligence.
“There are risks in all investments and financial institutions are no exception. ISAC should thoroughly examine the risk components prior to making a final decision,” the motion to dismiss says, citing documents submitted by the firm to ISAC.
Grigsby also asserts that information Boutte submitted to ISAC staff was not forwarded to its board.
At the hearing in December, Ellis will hear testimony from both sides. If he sides with the department, Ellis could impose monetary fines of up to $10,000 per securities violation on Grigsby and his firm, and Grigsby’s dealer and sales license could be suspended or revoked and the firm prohibited from offering or selling securities or providing investment advice in Illinois.
In October, Grigsby pulled his broker-dealer registration with the Financial Industry Regulatory Authority to do securities business in Alabama, California, the District of Columbia, Illinois, Kentucky, Mississippi, New Jersey, New York, and Texas. The firm has been in business since November 1981.
In an interview, Grigsby said he began moving the firm in its current direction over the last year and began shuttering all but its San Francisco and Shreveport, La. offices. Its former staff of 12 is down to four.
The loss of the Chicago staff and bad publicity from the ISAC case have hurt his business, but Grigsby said his age and sufficient work on the advisory side also drove his decision. “It’s affected us,” he said of the case’s impact. He declined to comment any further as he intends to eventually file a lawsuit over the case.
Grigsby said he also has been kept busy in the Jefferson County, Ala. bankruptcy case. He represents as an attorney a group of elected officials and residents in Birmingham who have filed a $1.63 billion claim seeking class action status on behalf of all of Jefferson County’s sewer system customers.
