Doing the “right thing” can be very difficult. This is particularly true when the world seems to be saying otherwise. Such is the case of Ted Urban, who served for years as the General Counsel of regional broker Ferris Baker Watts, Inc. after public service on the staffs of the SEC and the CFTC. Facing a difficult and complex situation which ultimately resulted in a Ferris broker and client pleading guilty to federal criminal charges and the firm being sold, Mr. Urban did what he thought was the right for the firm. Ferris rewarded this by pushing him out as it struggled to survive. The U.S. Attorney’s Office investigated him. The SEC Enforcement division named Mr. Urban as a Respondent in an administrative proceeding, claiming he failed to properly supervise.

Perseverance pays. After years of struggling, an ALJ dismissed the charges against him – Mr. Urban had done everything he could for his firm – that is, the right thing. In the Matter of Theodore W. Urban, Adm. Proc. File No. 3-13655, Initial Decision (Sept. 8, 2010).

The difficulties Mr. Urban confronted at Ferris trace to January 2003 when Stephen Glantz was hired as a registered representative. Mr. Glantz was a big producer. He also had a history of customer complaints. Stephen Glantz brought a number of clients to the firm, including David Dadante and his IPOF Fund. Mr. Dadante was ultimately found to be running a Ponzi scheme. Prior to being transferred to Ferris, and after, his account traded heavily in the shares of Innotrac, a provider of order processing and fulfillment services.

Difficulties with Messrs. Dadante and Glantz began almost immediately. By April 2003 there were compliance concerns about their trading. Mr. Dadante was accumulating large positions in Innotrac, as were other accounts of Stephen Glantz. Eventually, IPOF had such a large position it triggered the poison pill at the company. The Fund also accumulated millions of dollars in margin debt, which at one point exceeded $18 million. The Ferris compliance department was concerned about possible manipulation.

While IPOF Fund built its position, Mr. Glantz traded shares of Innotrac in his other customer accounts. Through these accounts, he controlled a substantial block of Innotrac stock. The customers knew little about the trades, but did not object. While these positions were being built, the trading, at times, appeared to be manipulative.

As the firm reviewed the activities of Messrs. Glantz and Dadante, margin and trading restrictions were imposed on the IPOF account. Reviews of Mr. Glantz’s accounts were undertaken. At one point, Mr. Urban halted IPOF trading in Innotrac until the schedules required by Exchange Act Section 13(d) were prepared and filed. At another point, Mr. Urban prepared a memorandum expressing concern about what appeared to be a lack of supervision over Mr. Glantz and his accounts. The trading continued.

In December 2004, Mr. Urban wrote a memorandum to the senior management of the firm recommending that Mr. Glantz be terminated. Louis Akers, Vice Chairman of the Board of Directors and the Director of the Private Client Group, recommended that Mr. Glantz be put on special supervision. Mr. Akers was the unquestioned authority with respect to trading accounts. Mr. Urban withdrew his recommendation. The trading continued.

Mr. Glantz remained at the firm until December 2005. By that time, several shareholders in IPOF Fund filed suit. The case named Ferris as a defendant. The firm eventually settled the damage suit, paying $7.2 million to the IPOF shareholders. Messrs. Glantz and Dadante later pleaded guilty to securities fraud charges. Mr. Glantz was sentenced to 33 months in prison while Mr. Dadante received a thirteen year sentence. See, e.g., U.S. v. Glantz, No. 1:07-CR-464 (N.D. Ohio). The SEC filed a parallel case, SEC case. SEC v. Dadante, Case No. 1:06-cv-0938 (N.D. Ohio).

In the administrative proceeding, the Division argued that Mr. Urban was the supervisor of Stephen Glantz. Once he became involved with addressing the red flags raised by his conduct Mr. Urban was obligated to respond vigorously and failed to do so, the Division argued. In the end Mr. Urban should have taken his concerns to the board of directors. He did not and thus violated his obligations according to the Division.

Chief Administrative Law Judge Brenda P. Murray rejected the Division’s arguments. There is no doubt that Stephen Glantz violated the antifraud provisions of the federal securities laws based on his guilty plea. Although Mr. Urban did not have “any of the traditional powers associated with a person supervising brokers . . .,” the case law dictates that he be considered a supervisor of Mr. Glantz. His position differed significantly from that of others who faced similar situations however. Here, the Judge concluded that “almost all the business leaders at FBW either lied to Urban or kept information from him, and people with clear supervisory responsibility over Glantz did not carry out their supervisory responsibilities. The undisputed evidence is that managers at FBW told Urban that Glantz was being supervised.”

Throughout the time period, the Judge found that Mr. Urban acted reasonably when confronted with a “red flag,” taking the appropriate follow-up action. Based on the information available to him, Mr. Urban had every reason to believe that the appropriate steps were being taken. For example, when told by the firm’s Vice Chairman and head of Retail Sales that he would ensure proper supervision over Mr. Glantz, the Judge concluded that “it was reasonable for Urban to expect that . . . [Akers] would follow through on his commitment to supervise a broker he hired and for whom he was responsible. The evidence in the record indicates Urban has a reasonable basis for relying on Akers’ representations.”

Alternatively, Mr. Urban had few other options. He knew that other senior officials at the firm would not interfere with Mr. Akers, who had unquestioned authority over brokers. Likewise, going to the board of directors was not, as the Division argued, a viable option. Without the support of other executives, which he could not obtain, challenging Mr. Akers at the board level would be futile.

FBW had established supervisory procedures in place during the 2003 through 2005 period of this case, the Judge concluded. Mr. Urban believed those procedures were being followed. Thus the Judge found “the evidence is that Urban performed his responsibilities in a cautious, objective, through and reasonable manner. He believed people were carrying out their responsibilities and he repeatedly prodded them to do so to assure that Glantz was being adequately supervised.” Stated differently, the Judge found that Mr. Urban did the right thing. Standing in the ashes of his career, this is undoubtedly a bitter sweet finding for Mr. Urban.

Ted Urban’s well crafted, successful defense was lead by John Sturc and his team from Gibson Dunn.

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