Legislature(1997 - 1998)
03/23/1998 01:35 PM Senate JUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SB 201 - PROHIBIT RECOVERY BY WRONGDOER
MR. WILLIS KIRKPATRICK, Director of the Division of Banking,
Securities and Corporations (BSC) came forward and CHAIRMAN TAYLOR
asked if he would like to make an opening statement. MR.
KIRKPATRICK said he had no opening statement but did say he was
somewhat reluctant to talk about the involvement of the Division
due to the class action lawsuit currently under litigation against
BSC regarding the World Plus Incorporated (WPI) investment scheme,
as he had not yet been advised by counsel in this matter.
CHAIRMAN TAYLOR acknowledged that the committee was aware of the
suit and believed that there had been no suggestion of criminal
action nor liability on the part of BSC, and the only possible
criminal action would be against those personally involved in
perpetuating the scheme itself. CHAIRMAN TAYLOR asked MR.
KIRKPATRICK if he was aware of anything beyond that. MR.
KIRKPATRICK asked for clarification and CHAIRMAN TAYLOR asked if he
was aware of any concerns with possible criminal prosecution of
BSC. MR. KIRKPATRICK replied he was not.
CHAIRMAN TAYLOR asked MR. KIRKPATRICK if he was aware of any
criminal cases pending against anyone at the state level and WILLIS
KIRKPATRICK said he was not. CHAIRMAN TAYLOR wondered if MR.
KIRKPATRICK had ever imagined he would be in the situation of
reviewing the biggest fraud scheme ever perpetrated in Alaska, one
in which not a single state charge had been filed.
MR. KIRKPATRICK remarked that he does not know the scope of the
federal investigation in this case. He said the federal government
does have more resources to conduct an investigation but he is not
privy to the results of that inquiry. MR. KIRKPATRICK said he can
only assume that if there is a cause for action that they would act
appropriately. MR. KIRKPATRICK pointed out this was only his
assumption and CHAIRMAN TAYLOR would have to ask the federal
authorities for their comments.
CHAIRMAN TAYLOR asked if MR. KIRKPATRICK had spoken to anyone about
the decision to prosecute in these cases.
MR. KIRKPATRICK said that as a securities dealer, he was taught to
record his actions. He keeps desk notes, telephone logs, call back
slips and other such documents in order to create a paper trail to
explain his actions in any given case, should that become
necessary. He said historically this has been useful for him and in
the process of a large transaction he would accumulate quite a bit
of information, he indicated he had gathered a lot of information
surrounding WPI. MR. KIRKPATRICK said he would hate to imply what
his records would indicate, but believed they would show he did
everything necessary in this case. CHAIRMAN TAYLOR clarified that
it was MR. KIRKPATRICK's habit to keep any records including memos,
phone logs and other such documents at the time they occurred for
future reference, and he had done so in this instance. MR.
KIRKPATRICK agreed he had.
CHAIRMAN TAYLOR asked about the date inquiries had first been made
regarding WPI. MR. KIRKPATRICK replied that he could not expound on
the specifics without reviewing his notes. He said he is not
generally directly involved with the more specific tasks of the
division such as these inquiries.
CHAIRMAN TAYLOR asked when he recalled having concerns with World
Plus and WILLIS KIRKPATRICK recalled a phone call had been made to
his office by a Fairbanks man who expressed his concern over "a
ponzi coming apart." MR. KIRKPATRICK said the matter was referred
to a securities examiner. CHAIRMAN TAYLOR asked if that was a
federal securities examiner or someone from the state and MR.
KIRKPATRICK replied it was a state examiner by the name of Dennis
Salveson. CHAIRMAN TAYLOR asked MR. KIRKPATRICK if the examiner
reported back to him and MR. KIRKPATRICK indicated he did. CHAIRMAN
TAYLOR asked when this occurred and MR. KIRKPATRICK said he would
have to consult his notes. CHAIRMAN TAYLOR asked if MR. KIRKPATRICK
thought it was before the actual collapse of WPI and MR.
KIRKPATRICK suggested it was probably approximately that same time.
CHAIRMAN TAYLOR asked about discussions conducted with Ms. Lori
Otto and asked MR. KIRKPATRICK if he had been party to those
discussions. MR. KIRKPATRICK indicated he had been involved in some
discussions, probably about the time that Mr. Ed Watkins retired.
CHAIRMAN TAYLOR asked about an e-mail sent to Mr. Watkins and Mr.
Salveson that expressed concern over the situation, and seemed to
indicate that someone was aware, as early as 1993, that this woman
[the owner of WPI] had prior convictions. CHAIRMAN TAYLOR asked MR.
KIRKPATRICK if he recalled a meeting with Ms. Otto and LARRY
CARROLL, and if he would comment on the substance of that meeting.
MR. KIRKPATRICK did recall the meeting and said there was a bit of
a personality conflict in play. MR. KIRKPATRICK said as soon as he
found that any action might be taken he referred the case to the
Department of Law, and asked Ms. Otto to come and discuss the
matter with him. CHAIRMAN TAYLOR said according to some notes he
had received, when Ms. Otto came to discuss the matter she also
listened to a recording made of an interview conducted by Mr.
Wilkins with Mr. Goldman [from Fairbanks]. Apparently, Ms. Otto was
critical of the interview and criticized the interview technique.
Ms. Otto then advised them that due to a lack of documentation, the
Department would be unable to prosecute the case.
MR. KIRKPATRICK objected, saying he thought that CHAIRMAN TAYLOR
had just read into the record part of an investigatory file.
CHAIRMAN TAYLOR responded that he had received the notes as part of
the record, and they were not confidential.
MR. KIRKPATRICK stated that he remembered a meeting with Ms. Otto,
LARRY CARROLL and Dennis Salveson and CHAIRMAN TAYLOR asked if Mr.
Salveson was the same person who had much earlier been talking to
Mr. Watkins about this matter. MR. KIRKPATRICK replied that Mr.
Salveson took over Mr. Watkins' position when he retired.
CHAIRMAN TAYLOR noted that it appears that MR. KIRKPATRICK had
advised Ms. Otto that he would proceed. MR. KIRKPATRICK said he was
under the impression that Ms. Otto had some questions as to the
responsibility of BSC. He thought she felt they were merely a
registration entity, and he attempted to make clear to her what
their responsibilities were under the Alaska Securities Act.
CHAIRMAN TAYLOR asked if he received any memos with instructions to
do otherwise and MR. KIRKPATRICK replied that he had received a
memo from Ms. Otto that advised she had talked with the U.S.
Attorney and the Justice Department who had apparently said that it
may be detrimental for them to investigate if the state was also
involved, so they would not proceed. CHAIRMAN TAYLOR asked MR.
KIRKPATRICK if he ever had any indication that BSC's actions would
jeopardize any other state or federal investigation. MR.
KIRKPATRICK replied that Ms. Otto had said that. CHAIRMAN TAYLOR
asked whose investigation would be jeopardized and MR. KIRKPATRICK
answered she had indicated the federal investigation would be
jeopardized, particularly as affected by tainted evidence and
questions of immunity. CHAIRMAN TAYLOR asked MR. KIRKPATRICK if he
felt there was any truth to this statement and MR. KIRKPATRICK
replied that he personally had never had any problems of this sort.
CHAIRMAN TAYLOR ascertained that MR. KIRKPATRICK had worked closely
on this case MR. KIRKPATRICK affirmed he had.
CHAIRMAN TAYLOR said it seemed, at some point in the conversation,
that there was a difference of opinion regarding BSC's role and the
perception of that role from the Attorney General's office. MR.
KIRKPATRICK said he believed a reference was made to a federal
authority but could not recall if it was the Justice Department or
the U.S. Attorney or even the IRS.
CHAIRMAN TAYLOR wondered how we end up two years later with no
case; the state playing Pontius Pilate and washing their hands of
it, saying the feds will do it. He wondered why the state did not
do the same thing as the feds did when they found some of their
people involved: that is, recuse them and bring in new
investigators. CHAIRMAN TAYLOR wondered how Ms. Otto could conclude
"it wasn't our job" to protect investors. MR. KIRKPATRICK again
remarked that he believed Ms. Otto did not realize the scope of the
Division's authority and viewed them as a registration office
without enforcement powers. He suggested CHAIRMAN TAYLOR could ask
LARRY CARROLL for his impression of the conversation also.
CHAIRMAN TAYLOR said he understood that BSC has independent
enforcement authority; he asked if any enforcement action had been
taken and MR. KIRKPATRICK said there was action taken against one
party to this case and there may be more coming. MR. KIRKPATRICK
did not have an answer for CHAIRMAN TAYLOR's question as to why
there was no prosecution in the case.
CHAIRMAN TAYLOR asked MR. KIRKPATRICK if he was aware of any
matters the committee should be aware of that could not be
discussed publicly. MR. KIRKPATRICK said he had been careful
speaking of things regarding the class action lawsuit, but did not
believe he was aware of anything confidential that would be germane
to their inquiry. He indicated he had no additional information.
CHAIRMAN TAYLOR asked if MR. KIRKPATRICK had discussed whether or
not to prosecute the case with Attorney General Bruce Bothelo and
MR. KIRKPATRICK replied he had not. CHAIRMAN TAYLOR then inquired
if members of the division had discussed it and MR. KIRKPATRICK
said that there had been some contact between the two agencies but
he did not believe prosecution was the topic.
CHAIRMAN TAYLOR asked if there were questions from the other
committee members, seeing none, he remarked that he had no further
questions at this time, but believed that there are other matters
that the committee is not aware of due to the restrictions imposed
by the current class action lawsuit. CHAIRMAN TAYLOR said that the
evidence that has come before them indicates there is a problem,
but does not go very far in pinpointing the guilty parties.
CHAIRMAN TAYLOR said if there is a legislative change that would
assist future prosecution of this type of case, whether it is a
tightening of the language of our current statutes or any other
action, the committee would be eager to pursue it. MR. KIRKPATRICK
responded by saying the Alaska Securities act is a good, uniform
act that works for Alaska and is employed in 16 other states as
well.
MR. KIRKPATRICK encouraged the committee to remember that BSC is
like a cop on the street; they can only refer a crime to the
District Attorney, not take action on it themselves. He added that
in this type of white collar crime it is sometimes difficult to
identify the victims. MR. KIRKPATRICK said the prosecutors must be
the ones to delegate the resources and make the decision to
prosecute, his office can only intercede sometimes. MR. KIRKPATRICK
said he knows several federal authorities have been involved and
believes they have substantially looked at all aspects of this
case. MR. KIRKPATRICK does not know how the situation could be
improved by a change to state law, and restated the idea that white
collar crime is difficult to combat.
[TAPE RECORDING BEGINS]
TAPE 98-22, SIDE A
Number 001
CHAIRMAN TAYLOR asked MR. KIRKPATRICK to comment on a legislative
structure that would invoke an independent prosecutor on behalf of
an agency when the Attorney Generals office refused to prosecute.
MR. KIRKPATRICK had no comment.
CHAIRMAN TAYLOR asked if MR. KIRKPATRICK had reviewed the auditors'
statements and had any comments on them. MR. KIRKPATRICK said he
had reviewed the statements and had no comments on them.
CHAIRMAN TAYLOR said he wanted to give MR. KIRKPATRICK the
opportunity to comment since some of the statements within the
audit are quite strong. CHAIRMAN TAYLOR said he has known MR.
KIRKPATRICK for years and has a high regard for him. He said it
appears in this case that BSC relied on letters and comments
received from several investors, some of them state employees.
CHAIRMAN TAYLOR commented that sometimes we trust people too much.
CHAIRMAN TAYLOR thanked MR. KIRKPATRICK for his testimony and asked
LARRY CARROLL if he would come forward.
CHAIRMAN TAYLOR asked LARRY CARROLL if it was fair to say he (or
others in his department) had spoken with the U.S. Attorney, the
Attorney General and others regarding information in this case that
can't be discussed publicly due to the class action suit. LARRY
CARROLL responded that he had met with those people and there may
be portions of the conversation that may be confidential. Other
specifics about individual investors were also discussed and may
require privacy.
CHAIRMAN TAYLOR noted that MR. DEAN GUANELI from the Department of
Law had been listening to the testimony during the entire hearing
and had not stood and voiced any objection. CHAIRMAN TAYLOR
remarked that if MR. GUANELI did have any objections he would like
him to stand up and voice them. MR. GUANELI replied that he is not
in the position to state any objection to what MR. CARROLL might or
might not say, as he has not talked with him. MR. GUANELI said it
is difficult to state an objection regarding conversations he was
not a party to and which have not been discussed with him. MR.
GUANELI stated that CHAIRMAN TAYLOR should not take his silence to
indicate that the state has no objection, he is simply not in a
position to state an objection one way or another.
CHAIRMAN TAYLOR indicated he did not want to jeopardize the state's
defense, only to discuss matters of public record. He said he did
not know if it was fair to place MR. GUANELI in that position as he
does not know what his role is in either defending the class action
suit or being involved in decisions about prosecution. MR. GUANELI
replied that he couldn't say much more as it was CHAIRMAN TAYLOR's
hearing. He said he appreciated CHAIRMAN TAYLOR's concern about the
state's liability but that CHAIRMAN TAYLOR should not look to him
to be jumping up with objections as he might in a courtroom, as he
is not in a position to do so.
CHAIRMAN TAYLOR said, according to the noted provided by MR.
CARROLL, it appears BSC's investigation into this matter began in
1992 or 1993, though the scheme did not collapse until 1996.
CHAIRMAN TAYLOR asked MR. CARROLL if that was correct and MR.
CARROLL said that seemed about right. He said BSC was aware Ms.
Bonham was selling some notes. He said they took action to close
out everything before considering an exempted transaction.
CHAIRMAN TAYLOR asked for confirmation that the notes MR. CARROLL
had provided were taken at the time the events occurred, not
constructed later from memory. LARRY CARROLL said the notes were
made within a day of the time the events occurred.
CHAIRMAN TAYLOR asked if he recalled a conversation with the
Attorney General and an agent of the FBI or another federal agency.
MR. CARROLL said he knows the bureau talked to the Attorney
General, but he had not been present.
CHAIRMAN TAYLOR asked if MR. CARROLL had talked to the Attorney
General about this and, if so, approximately when. Mr. CARROLL
replied he had spoken to the Attorney General about the same time
Ms. Otto visited their office. CHAIRMAN TAYLOR asked how this
related to the time frame of the WPI collapse and MR. CARROLL said
it came toward the end, after the bankruptcy filings.
CHAIRMAN TAYLOR asked LARRY CARROLL about the substance of his
conversation with the Attorney General. MR. CARROLL recalled he had
expressed concern with the federal investigation due to the
problems they had encountered and urged him to allow BSC to
continue their investigation. MR. CARROLL said he received
assurance from the Attorney General that if the feds were not
successful in concluding the case, he would revisit it.
CHAIRMAN TAYLOR asked what the actions referred to by MR.
KIRKPATRICK were and who had taken them. LARRY CARROLL said he had
taken actions including the subpoena of records and transactions,
during the same period of time. MR. CARROLL said he also
interviewed other individuals who were registered with them after
their names appeared in the newspaper as possible investors, and
took actions in those cases as well.
CHAIRMAN TAYLOR asked if this was the only state action MR. CARROLL
knew of and MR. CARROLL replied that was correct, but said he did
not have any particular basis to know of any other action.
CHAIRMAN TAYLOR asked what impact the letters BSC received from
investors who were state employees (including prosecutors, police,
and others) had on BSC's investigation. MR. CARROLL said they
probably had more impact than letters from convicted criminals or
con men, but does not think BSC overemphasized their importance. He
remarked that having people endorse a company does lend
credibility. MR. CARROLL said this, coupled with other regulatory
steps taken by BSC led to the exemption being granted. He commented
that, in retrospect, he saw that having refused the exemption
wouldn't have mattered, as WPI was way outside the bounds of their
exemption as it was.
Number 200
CHAIRMAN TAYLOR asked if there was a phrase to describe the
letters BSC received and MR. CARROLL explained that the term was
"lulling."
CHAIRMAN TAYLOR remarked that it appeared obvious from MR.
CARROLL's memo that the FBI and the U.S. Attorney's office felt
strongly enough about the involvement of some of their employees
that they recused them and brought in a new team of investigators.
CHAIRMAN TAYLOR asked LARRY CARROLL if he knew of anyone in Alaska
who has been recused. LARRY CARROLL replied he did not.
CHAIRMAN TAYLOR asked MR. CARROLL if he had a chance to review the
recommendations made by the legislative auditors and if he believed
there should be a change in the law to provide for a situation like
this. MR. CARROLL agreed with WILLIS KIRKPATRICK, saying it is hard
to legislate specifics to combat white collar crime. MR. CARROLL
pointed out that there is an office of special prosecutions and
appeals within the Department of Law that has previously been
utilized by BSC on white collar projects. MR. CARROLL said he would
think the Department of Law would dictate the course of action for
the Attorney General. CHAIRMAN TAYLOR agreed, but indicated that,
unfortunately, that was not the case.
CHAIRMAN TAYLOR asked MR. CARROLL if he was aware of any further
information that might prove helpful to the committee but could not
be discussed publicly. MR. CARROLL replied that the only further
information he might provide would simply fill in the gaps with
names, accounts, and other personal information. He said CHAIRMAN
TAYLOR knows the thrust of what happened and he does not believe
this additional information would help. MR. CARROLL said there is
no "dirty little secret" that is being hidden.
CHAIRMAN TAYLOR said he understood that BSC has been cooperative in
providing information. He asked again how it could be that no one
has been charged by the state.
CHAIRMAN TAYLOR indicated he was prepared to take any testimony the
Department of Law may wish to offer. He said this could happen at
any time convenient to the Department.
MR. DEAN GUANELI advised CHAIRMAN TAYLOR that he had testified
previously to the reasons there were no state prosecutions. Given
the pending audit, he indicated he'd prefer to wait and see what
they come up with before the Department makes a final response.
CHAIRMAN TAYLOR said there may not be time once the session goes
into "close out" mode. He remarked that he would like to discuss it
(in an executive session if necessary) and he'd like to see the
memos and notes that have been referred to and receive an
explanation of how someone can get away with the criminal behavior
Ms. Bonham did and elude charges.
MR. GUANELI indicated that the letter from Lori Otto had been
provided to Mr. Jensen. CHAIRMAN TAYLOR said he had been told this
was a confidential document. He said he is unwilling to wait until
the end of the session to receive an explanation about this, as he
is concerned right now. MR. GUANELI said he did not believe he had
told MR. JENSEN the letter was confidential. MR. GUANELI said he
had given previous testimony to the committee and would wait until
the audit was finalized before making further comments. He said,
assuming the audit process is objective, he thinks the department
would like to see the results of the audit and then respond, since
only then would they be able to ascertain whether or not the
pending lawsuit would be jeopardized.
CHAIRMAN TAYLOR argued that MR. GUANELI's office holds the answers
to his questions and he did not see any reason to wait and see what
the auditors determine. MR. GUANELI replied again that he had
previously testified to the reasons the department did not proceed
and again stated his wish to view the completed audit before making
a second response. CHAIRMAN TAYLOR asked why DEAN just wouldn't
come sit down and talk to them, saying the auditor may miss
information if they do not have the cooperation of the department.
CHAIRMAN TAYLOR indicated he would take all the necessary
precautions with any confidential information. He expressed concern
to MR. GUANELI that the department's action might have been related
to the termination and rehire of Ms. Otto or the transfer of Mr.
Goldman, which occurred about this same time. MR. GUANELI
interjected that CHAIRMAN TAYLOR had just put forth a speculative
allegation that he had never heard before; he said it is unfair to
have new allegations thrown at him when there is an ongoing audit.
MR. GUANELI stated he is unprepared to respond to these
suggestions.
CHAIRMAN TAYLOR declared that these are questions the victims want
answered and they will not wait for the auditors when the answers
could be provided by MR. GUANELI. CHAIRMAN TAYLOR indicated he was
willing to have an open or closed meeting at the department's
convenience. MR. GUANELI repeated that he has given the committee
more than a general statement but would schedule a hearing to
provide additional information if the committee felt so inclined.
MR. GUANELI added that he still felt the results of the ongoing
audit should be revealed so he would be better prepared to discuss
any rumors or innuendo the committee might be hearing.
CHAIRMAN TAYLOR said they would meet whenever he was able, in order
for MR. GUANELI to explain what went wrong and what could be done
to correct it. He asked if the state needs an independent
prosecutor process for when the Attorney General's office fails to
prosecute. CHAIRMAN TAYLOR said the apparent significant
involvement of employees of the Department of Law casts doubt on
why certain decisions were made. MR. GUANELI said CHAIRMAN TAYLOR
had indicated in a prior meeting that a preliminary audit would be
the next step, so he had not expected to be called to testify
before that process was complete.
CHAIRMAN TAYLOR said he only asked if MR. GUANELI wanted the
opportunity to speak, MR. KIRKPATRICK had appeared to testify today
only because he was unable to attend an earlier hearing at which
LARRY CARROLL testified.
MR. GUANELI asked CHAIRMAN TAYLOR if he anticipated the audit
process to be completed before the end of the session and CHAIRMAN
TAYLOR did not think it would be done, but said he wanted to get to
the bottom of this.
MR. GUANELI said the fact that the audit is in progress will change
the way things will proceed and said they should just set up an
additional hearing. CHAIRMAN TAYLOR indicated the committee would
arrange a meeting at MR. GUANELI's convenience.
SENATOR PEARCE commented she remembered MR. GUANELI's prior
testimony and asked what that date was. MR. GUANELI did not recall,
but said it was well before MR. CARROLL's testimony.
SENATOR PEARCE said the auditors were asked very specific questions
and this may explain why none of MR. GUANELI's testimony was
incorporated into their findings. MR. GUANELI said he believed this
was a shortcoming of the audit report, he said the cancellation of
a scheduled meeting and the lack of communication with his
department prior to the release of findings were other shortcomings
on the part of the auditors and he hoped they would be addressed in
the final audit. SENATOR PEARCE commented that the auditors are
always thorough, sometimes tediously so, and she'd like to know
what exactly CHAIRMAN TAYLOR asked them.
CHAIRMAN TAYLOR and MR. GUANELI agreed they would schedule a
meeting soon and CHAIRMAN TAYLOR again indicated he'd like MR.
GUANELI to provide the committee with any pertinent documents,
including interdepartmental memoranda relating to the decisions
that were made. MR. GUANELI again stated that the letter in
question can be released to the committee, and added he believed it
had already been released in response to a public information
inquiry.
CHAIRMAN TAYLOR announced, with nothing further to come before the
committee, they were adjourned.
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