Republic brokerage took on client it later regretted
By Jack Reerink
NEW YORK, Oct 4 (Reuters) - Republic New York Corp.'s (NYSE:RNB - news)
fledgling futures brokerage in early 1995 reeled in a big-ticket client whom the New York
bank now would rather forget about.
The client, New Jersey commodities trader and money manager Martin Armstrong, promptly deposited $185 million in his
account, a huge amount by futures brokerage standards, court documents show. Armstrong immediately became the Republic
brokerage's main client and in recent years has accounted for 90 percent of its business.
But Armstrong now stands accused of defrauding Japanese investors of close to $1 billion. The scandal has spurred criminal
and regulatory investigations, and has stalled Republic's planned $10.3 billion merger deal with Britain's largest banking group,
HSBC Holdings (quote from Yahoo! UK & Ireland: HSBA.L).
Armstrong, through his lawyer, has maintained he is innocent and suffered unfortunate but noncriminal trading losses.
Armstrong previously had an account at Prudential Securities, the securities firm owned by the No. 1 U.S. life insurer,
Prudential Insurance Co. of America. The firm, which had the account for some years, in early 1995 dropped it after
Armstrong's heavy trading triggered a routine account review, said Prudential spokesman Charlie Perkins.
''Our review of the background of the company and Armstrong revealed a number of regulatory issues,'' Perkins said. ''When
we went to ask him about those, his answers were evasive and contestant.''
Armstrong in the mid-1980s became embroiled in a dispute with the Commodities Futures Trading Commission (CFTC) over
inadequate risk disclosure and misrepresentation of trading results.
''We just didn't have a good feel about it, so we closed the account,'' Perkins said. ''We called this one right.''
Armstrong's account executive, William ''Bill'' Rogers, quit shortly after Prudential dropped Armstrong as a client, Perkins said.
Armstrong then opened an account for one of his companies, Princeton Global Management, at Republic New York Securities
and wired $185 million into the account, according to court documents filed by the CFTC.
The account, which Republic labeled ''speculative'' with ''very high volume'', was introduced to Republic by Rogers, the
documents show. Rogers by that time had joined Republic, which was then run by another former Prudential executive, James
Curley.
Curley, who formerly was in charge of Prudential's futures division, had joined Republic in late 1994. Curley, currently on the
board of directors of the Chicago Board of Trade, in 1996 left Republic to head the U.S. operations of one of Armstrong's
companies, Cresvale International.
Rogers became Republic's head of futures trading but was replaced this summer. The executive provided some of Armstrong's
Japanese investors with account statements that overstated the value of their investments, prosecutors have charged.
Neither Curley nor Rogers have been charged with any wrongdoing. They have not returned repeated phone calls seeking
comment, and were not immediately available on Monday. A Republic spokesman declined to comment.
Armstrong came to the Republic brokerage at a pivotal point in its short-lived existence. Republic had just downsized the unit
and replaced its former management, which included the former chairman of Shearson Lehman, Peter Cohen.
The unit since its inception in 1992 had focused on hedge funds, proprietary trading and the so-called soft-dollar business, in
which a brokerage flips back part of its investment income to investment advisors that bring in client business. But Republic in
1994 had a change of heart and decided to focus on brokerage services only.
In time, Armstrong basically became the unit's sole client, accounting for around 90 percent of its business, regulators have said.
Armstrong paid $27.6 million in commissions in the period Nov. 3 1997 through Aug. 31 this year, according to court
documents filed by the Securities and Exchange Commission (SEC).
Armstrong racked up $476.5 million in trading losses over the same period, the brunt in ill-fated bets against the Japanese yen,
according to the SEC. Prosecutors in their criminal case against Armstrong have put the trading loss at $367.8 million, but have
declined to comment on the discrepancy.
Republic earlier this year decided to pull the plug on the brokerage unit, saying its return on equity did not achieve the bank's
targeted annual 15 percent growth rate. That's why the bank viewed the probe into unit's dealing with Armstrong as especially
''unfortunate,'' as Republic spokeswoman Melissa Krantz has put it.
|
