SEC Chief Warns More Securities Dealers May Fail: Shad Says Investors Are Shying Away from Small, Local Operations after ESM, Bevill

By Albert, Andrew | American Banker, April 18, 1985 | Go to article overview

SEC Chief Warns More Securities Dealers May Fail: Shad Says Investors Are Shying Away from Small, Local Operations after ESM, Bevill


Albert, Andrew, American Banker


More small government securities dealers may fail because of extensive publicity on the recent collapse of several brokerage firms, the chairman of the Securities and Exchange Commission said Wednesday.

Other small dealers will feel the pinch as investors move their business to major government securities dealers, John Shad said in testimony before a subcommittee of the Senate Banking Committee.

"A real reaction of enormous proportions is going on right now" in the market, he said.

"People are pulling from the small local dealers to primary dealers" after the well-publicized failures of E.S.M. Government Securities, Fort Lauderdale, and Bevill, Bresler & Schulman Asset Management Corp., Livingston, N.J., Mr. Shad said.

Meanwhile, receivers fro Bevill and its affiliates, also closed now, said Wednesday they had uncovered 16 corporate entities and at least 14 limited partnerships that were also controlled by all or some of Bevill's five principal owners.

Saul Cohen, the New York attorney appointed as receiver for Bevill's asset management unit, said the unit was owed more than $12 million from six of the newly revealed entities. He also said documents indicated a number of asset transfers among Bevill's units and the newly discovered entities.

Mr. Cohen also said accountants have uncovered preferential treatment of certain customers of Bevill in which the customers received below-market rates on repurchase agreemtns -- apparently in Bevill's drive to raise cash during its waning days.

"It certainly raises question about dealings between parties that we are looking into," Mr. Cohen said at a press conference Wednesday.

Bevill's problems, in fact, are blamed at least partly on the reaction of securities investors to news of E.S.M.'s collapse in early March. E.S.M. customers lost about $300 million. Losses at Bevill are estimated at about $200 million.

Losses from E.S.M.'s failure led to budget cutbacks at various municipalities, the closing of a large savings bank in Ohio, and a lingering crisis in that state involving 70 formerly privately insured thrifts.

Bevill's customers included a number of thrifts and banks whose potential losses would drain their reserves.

Before the failures of E.S.M. and Bevill, the public largely ignored the possibility for losses from dealing in repurchase agreements that involve government securities,. Mr. Shad said.

In these transactions, an institution typically buys securities from a dealer with an agreement to sell them back on a later date at a higher price. The transaction essentially represents a loan to the dealer, with the difference in the purchase and repurchase prices providing the interest on the loan.

But the dealer often does not actually deliver the securities in the typically short-term transactions. Instead, they are held in a third-party trustee institution. Officers at both Bevill and E.S.M. stand accused by the SEC of covering their own trading losses by selling the securities held on behalf of customers. …

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