CHICAGO — A former Grigsby & Associates Inc. public finance banker must pay a $15,000 fine for his role in advising the Illinois Student Assistance Commission to invest in a Chicago bank that later failed.
The fine was among the penalties included in a final consent order entered by Illinois Secretary of State Jesse White’s office earlier this month.
The office last October temporarily suspended former Grigsby banker Alvin J. Boutte Jr.’s license, accusing him of providing misleading advice to ISAC that led to its $12.8 million investment in a 2008 public offering in ShoreBank Corp.
Federal authorities seized the struggling bank in 2010.
The temporary order charged Boutte with violating his fiduciary duties and recommending an unsuitable investment in violation of state securities rules. Boutte worked as a managing director in Grigsby’ Chicago office from early 2007 until last September.
He resigned to a take a position at M.R. Beal & Co but left over concerns that the secretary of state’s investigation would hurt that firm’s local business.
The final consent entered by White earlier this month concludes that Boutte and Grigsby breached their fiduciary duty to ISAC by “failing to prepare a complete and accurate offering analysis and prudence opinion that fairly and objectively evaluated the prudence” of the investment based on ISAC’s goals.
Boutte and the firm also should have disclosed that a subcontractor had performed a substantial amount of work on the analysis and was to be paid $50,000, the order reads.
Grigsby & Associates is not charged with any securities violations.
Under the order, Boutte’s securities registration was suspended from Sept. 21, 2011, through Jan. 2 and he was required to pay $15,000 in fines. He will face heightened supervision by his next employer through Jan. 6, 2013. Boutte said Friday he has not taken a new position but is speaking with several firms. He also must retake the Series 7 and Series 63 exams.
Boutte agreed to the order without admitting or denying the allegations. The order concludes the office’s investigation into Boutte’s actions on the ISAC investment, but the secretary of state’s securities department’s probe remains open with regard to other entities. “We cannot comment on the other entities because it’s an open investigation, but we anticipate additional regulatory action,” a spokeswoman said.
The order does not address an allegation leveled in last year’s temporary order that Boutte had solicited other potential investors whose participation would be contingent on ISAC’s investment and withheld that information from commission.
Boutte first floated the potential investment in the privately held SBC in January 2008. At the same time, Grigsby submitted a proposal as part of a competitive selection process undertaken by ISAC to establish a pool of bond underwriters. Grigsby was the only broker-dealer to submit a proposal offering financial advice, investment banking, and analysis services related to investment of assets held by ISAC’s 529 prepaid college tuition program.
At the time, ISAC’s rules did not allow for investments in private placements or offerings of restricted stock, but the commission eventually adopted changes that paved the way for the bank investment.
The order outlines Boutte’s role at Grigsby in assessing the “value and risks of participating in” the Shorebank offering and offered up a new disclosure that substantial portions of the firm’s analysis were prepared by a third-person party that was to be paid a $50,000 fee.
After several revisions to the firm’s report, the ISAC board in August 2008 approved an investment to be completed in two installments. The first, for $12.8 million, was completed in September. After the August vote several “significant events” took place that the secretary of state found should have prompted Boutte to advise against completion of the investment.
Those events include Boutte’s receipt of information from ShoreBank executives that the bank had missed its financial performance projections, and the fact that more banks had failed since Grigsby’s last analysis. The last analysis had reported that three banks failed between 2005 and 2007. By September 2008, that number had risen to 13.
The order notes that Grigsby and Boutte submitted two prudence opinion letters calling the investment sound and that they did not account for their time or services in invoices seeking their contingent fee of $255,000.
Grigsby president Calvin Grigsby, who was not directly involved in reviewing the private-placement transaction but who Boutte reported to, has pointed to dozens of documents in defense of the firm’s work.
In an interview, Grigsby said that ISAC had hired on its own an independent firm, Dykema Gossett, to conduct due diligence on its behalf, and that ISAC knew the firm’s fee was based on a percentage of a completed transaction.
“Our firm worked as a consultant to ISAC as stated in the prudence opinion: Lender has requested this opinion to assist in their analysis and to provide additional comfort and the undersigned is in no way a guarantor of the performance of this investment … ISAC acknowledged in their stock purchase agreement that they did their own analysis,” according to Grigsby & Associates’s filing with the Financial Industry Regulatory Authority.
The firm pointed to ISAC’s acknowledgment in the stock purchase agreement that it had evaluated the investment and knew the investment involved “significant risks, including the risk of a total loss.”
Ongoing losses suffered by ISAC’s pre-paid college tuition program led Gov. Pat Quinn last year to overhaul its board and leadership.
