Municipalities Affected by Collapse of Securities Firm

FORT LAUDERDALE, Fla. —  The billion-dollar collapse of a Fort Lauderdale securities company may affect municipalities throughout the country that did business with the firm, a Securities and Exchange Commission official said.

“We’ve never seen anything like this before,” Charles Harper, director of the SEC office in Miami, said of the court-ordered shutdown of ESM Government Securities Inc.

Beaumont, Tex., officials were forced to postpone a $32-million bond sale set for next week when the city was placed on credit watch by Standard & Poor’s because Beaumont had $21 million invested with ESM.

Pompano Beach, Fla., could lose $11 million, or one-third of its total investments, while Tamarac, Fla., has $7 million invested, or 40% of its total.

“There are some municipalities that can’t meet payroll or face other horrible situations,” said ESM’s court-appointed receiver, Thomas Tew. “It’s a tragic situation.” He did not specify the cities.

He told the Miami Herald that, while ESM ran up extensive trading losses since 1977, it was loaning $30 million to company officers.

Officers also made more than $250,000 a year, gave themselves a million-dollar bonus last year and leased Jaguar and Mercedes Benz automobiles, the newspaper reported Thursday.

A federal judge ordered the company closed Monday after auditors found that ESM had borrowed $1.6 billion from its customers, loaned out $1.3 billion and did not have the $300-million difference.

The SEC said the company had given incorrect and incomplete information to its customers, shifting its losses around to affiliates to avoid detection.

“This could be bigger than Drysdale,” said Harper, referring to the $300-million collapse of that New York securities dealer in 1982.

Also among possible creditors of ESM were the Arizona Retirement System; the Memphis, Tenn., City School Board Retirement System; Atlanta-based Bank of the South; Ohio State University; and the cities of Tempe, Ariz.; Birmingham, Mich.; Tulsa, Okla., and Toledo, Ohio, the Herald said.

The Home State Savings Assn. of Cincinnati had borrowed $670 million from ESM in a complicated repurchase agreement, forcing Ohio Commerce Director Kenneth Cox to reassure worried depositors Wednesday and avoid a run on the bank.

Cox said deposits are guaranteed by the Ohio Deposit Guarantee Fund.

Many agencies were caught because they had bought securities through the respected New York dealers Bradford Trust Co. and Security Pacific.