Bentonville Brokerage Accused of ?Bait and Switch?

Southmark of Bentonville, a brokerage firm, and its Tulsa parent company were shut down Nov. 1 by the Securities and Exchange Commission for operating what the agency called a “fraudulent scheme.”

According to an Oct. 29 securities fraud action filed by the SEC in U.S. District Court in Oklahoma, Southmark has defrauded at least 400 investors, most of them elderly, since 1996 with a “bait and switch” gimmick using advertisements for high-yielding certificates of deposit.

Customers seeking the safety of CDs would inquire, the suit says, then Southmark agents would aggressively pitch to them “a purportedly personalized managed mutual fund investment program.” The agents described the program as “as safe or safer” than CDs. But principal invested in mutual funds may depreciate, unlike CDs which guarantee a set return.

Investors were also sold Class “B” mutual fund shares that carry deferred sales charges (loads) and higher internal expenses than Class “A” shares.

One customer, a retired commercial airline pilot, invested his $2.1 million retirement savings with Southmark and quickly incurred more than $84,000 in commission charges and fees, according to court records.

Bruce Bokony, chief counsel of the Arkansas Securities Department, said his agency had not yet received any complaints about Southmark. The Oklahoma Department of Securities, however, has issued a cease-and-desist order against Southmark Inc., an SEC-registered broker dealer, and its sister firm Southmark Advisory Inc., an SEC-registered investment advisor.

Following the Oct. 29 federal complaint, U.S. District Judge James Ellison granted a temporary restraining order and ordered Southmark’s assets frozen. He also appointed Tulsa lawyer John Dowdell as “temporary receiver” for Southmark.

In that capacity, Dowdell will oversee all operations and assets of the firm until the matter is resolved. Dowdell did not return repeated telephone calls from the Northwest Arkansas Business Journal.

Southmark and its owner, Wendell D. Belden, became registered brokerage agents in Arkansas on May 8. The Arkansas Securities Department said Southmark never notified the state that it would also operate here as a federally chartered investment advisor, indicating that the Bentonville office was just a brokerage arm of the company.

In September, Southmark leased about 5,000 SF of upscale office space at 1703 Phyllis St. in Bentonville. Lindsey-Green Commercial Properties is its landlord. Gertrude Margaret Edwards became the local branch’s principal broker on Oct. 23.

But Southmark’s doors in both states are locked for now.

The SEC said that since 1996 Southmark sold Class “B” mutual fund shares worth $82.8 million and “fraudulently earned at least $5 million in advisory management fees and undisclosed brokerage commissions.” That included $3.3 million in brokerage commissions.

The SEC alleges that Belden defrauded clients by lying about the safety of mutual funds, by failing to tell them about more advantageous investment options; by failing to tell them that Southmark would earn a 4 percent commission off investments in the “managed” program, and by failing to tell the clients about previous disciplinary actions the state and National Association of Securities Dealers had imposed against him.

On Aug. 12, Belden was fined $40,000 by the NASD, ordered to pay $55,567 in restitution to clients and was suspended for a year from associating with any NASD member. On Aug. 29, the Oklahoma Department of Securities barred Belden and fined him $50,00.

Belden and Southmark declined comment. But during a phone call to Belden’s residence, a woman who variously identified herself as being “with Southmark” and as “the housekeeper,” appeared to have an extensive knowledge of high finance and the firm’s business dealings.

“Just wait until our hearing Nov. 15,” she said. “The other side forgot to tell the judge that we have $70 million in CDs, and all this is about is the [Oklahoma Department of Securities] trying to scare people into thinking we ran off with their money.”