The Securities and Exchange Commission today charged a Houston-based broker with engaging in unauthorized and unsuitable trading on behalf of two Florida municipalities, putting them at risk of losing millions of dollars while he reaped commissions of more than $14 million for himself.
The SEC's complaint alleges that Harold H. Jaschke, while associated with the brokerage firm First Allied Securities, Inc., churned the accounts of the City of Kissimmee, Fla., and the Tohopekaliga Water Authority and lied to both customers about his trading practices on their behalf. Churning is a fraudulent practice that occurs when a broker engages in excessive trading in order to generate commissions and other revenue without regard for the customer's investment objectives.
"Jaschke was unscrupulous with the municipalities' funds and ignored their interests for his own personal gain," said Rosalind Tyson, Director of the SEC's Los Angeles Regional Office. "He lied to his customers, took advantage of their trust, and risked their financial well-being."
The SEC's complaint, filed in federal court in Orlando, Fla., alleges that Jaschke engaged in a high-risk, short-term trading strategy involving zero-coupon U.S. Treasury bonds that were very sensitive to interest rate changes. For example, if interest rates were to increase by only 1 percent, the value of a 30-year bond could drop by 25 percent.
According to the SEC's complaint, Jaschke's risky trading strategy involved buying and selling the same bond within a matter of days, and sometimes within the same day. Jaschke exposed the municipalities to greater risks when he leveraged their accounts using repurchase agreements to finance the bond purchases that they otherwise would not have been able to afford. This strategy dramatically increased the risks as Jaschke caused the municipalities to borrow large sums of money to hold larger bond positions.
The SEC alleges that Jaschke knew the municipalities' ordinances prohibited his trading strategy and required that their funds be invested with the paramount consideration to be safety of capital. Jaschke also knew that the municipalities' ordinances prohibited the use of repurchase agreements for investment. According to the SEC's complaint, had the bond market not swung sharply in Jaschke's favor allowing the municipalities to close their accounts with a modest profit, they could have lost approximately $60 million over a two-year period as a result of his misconduct.
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