Criticisms of M. Russell Ballard

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Criticisms of M. Russell Ballard

Did President Ballard commit fraud with Keystone Securities Corporation?

Introduction

The United States Securities and Exchange Commission (SEC) is an organization that monitors financial market activity to ensure compliance with United States law. In 1962, the SEC charged M. Russell Ballard with "engag[ing] in activities which operated as a 'fraud and deceit.'" In 1963, the SEC declared as part of a settlement that President Ballard "aided and abetted [a company] in making false and misleading statements." Was President Ballard guilty of fraud and deceit? The history of the issue clearly shows no.

Background

M. Russell Ballard's father owned a car dealership, and Russell worked at the dealership in his late teens and early twenties. While working at the dealership, he met Kay Stoker, a businessman. In 1954, Russell left employment at his father's dealership in order to pursue other business opportunities. His first business venture was with Kay Stoker when they organized the Tatro Uranium Company, a company focused on mining uranium. Russell and Kay founded other mining companies together.

Shasta Mineral and Chemical Corporation

One of these other mining companies—Shasta Mineral and Chemical Corporation—filed a registration statement with the SEC in 1961, declaring their intent to offer public stock in the company. As the request was being processed, staff at the SEC "suggested that an independent underwriter be procured so that the company would not be in the position of selling its own stock. So a company called Keystone Securities [Corporation] was formed as a separate broker." Russell Ballard served as president of Keystone Securities. "After some 200 days of negotiation and attempting to comply completely with all of [SEC] requirements," the SEC stopped the proceedings and issued a news release that Shasta Corporation was engaging in fraud by, among other things, making false statements in order to influence people to buy stock. The SEC conducted an investigation in which 18 people testified on the issue, and the transcript of their testimony was 1,756 pages long. No concluding decision was made by the SEC, and eventually in 1964 the company and the SEC negotiated a settlement in which Shasta withdrew its request to offer public stock and the SEC proceeding was discontinued.

Charging Russell Ballard with Fraud

During the SEC investigation of Shasta, Russell Ballard "concluded as a responsible businessman, a civic leader in Salt Lake City, that he could not be affiliated with anything that was having this claim of 'fraud' and 'misleading statements' associated with it," so in June of 1962 he submitted an application of withdrawal that would remove Keystone Securities from any stock broker connection with Shasta. Instead of approving the application, the SEC charged Keystone Securities and Russell with many of the same charges they had made against Shasta, stating that Keystone and Russell "were vicariously liable for the alleged prior violations charged to Shasta . . . even though Keystone had not participated in the preparation of the registration statement or sold any stock pursuant to the proposed public offering." The lawyer representing Russell later stated that, in his opinion, this was an attempt by the SEC "to determine whether an underwriter can be charged vicariously with any wrongdoing of the issuing company" (in this case, Shasta). In any case, the lawyer argued that the SEC was "not even charging [Russell] with it [fraud and deceit] except because of his relationship with the proposed issuer," who was alleged to be engaging in fraud.

The SEC charges were announced in newspapers, and the next morning Russell met with his stake president to explain why the newspapers were claiming he was engaged in fraud. The stake president did not take any action against Russell. A year later, a settlement was agreed upon between Keystone Securities/Russell and the SEC in which the SEC "withdrew all of the charges of fraud and deceit and illegal sales, but still coerced a settlement of aiding and abetting such conduct, which later [the SEC] never even substantiated." (In the settlement, Keystone and Russell did not admit or deny the allegations of aiding and abetting.)

The Issue of Press Releases

The press releases by the SEC about Shasta and Keystone were only some of several similar types of press releases in which the SEC attempted to use "adverse publicity" to impact public opinion, and this had been occurring for many years. In 1963, the SEC sent a 2,100 page document to Congress alleging that the SEC had found numerous "abuses" and "serious inadequacies" in publicly traded companies. "Millions of people, casually scanning the headlines or hearing the drone of radio bulletins, were yesterday left with the impression that some responsible Government body had found all manner of evils in the wicked world of Wall Street." Unusually, when sending the document to Congress, the chair of the SEC said that "the judgments, analyses, and recommendations are not those of the [SEC]." A news report stated that "we have not yet found in the document specific examples of corrupt practices . . . [and] it is hard to identify the allegedly serious weaknesses." As a result of continued questioning by courts and others, in 1964 the SEC changed their policy on press releases such that press releases would be limited in information.

Regarding the SEC press releases related to Shasta and Keystone, in 1966 a U.S. District Court found that the press releases were "not justified by any pending judicial or administrative proceeding and constituting under the circumstances unwarranted, arbitrary, capricious and unreasonable publicity for the purpose of bringing pressure to bear upon those involved in administrative or judicial proceedings and without reference to any actual violation of the Securities and Exchange Act or other justification, to the irreparable injury of the plaintiffs." The court then enjoined the SEC from issuing any more press releases on the cases (meaning the court ordered the SEC to stop issuing press releases) because the releases had no justification and were arbitrary and capricious.

No Fraud

The history of the case clearly shows that M. Russell Ballard did not engage in any fraud or other illegal activity:

• The supporting company he led as president was formed at the suggestion of the SEC.
• The supporting company was charged with fraud, but that charge was later withdrawn and substitute for "aiding and abetting" such activity in the original company. In consenting to this charge, Russell did not admit or deny the charges.
• The charges against the original company were eventually dropped.
• Russell met with his stake president immediately after the charge of fraud to explain the situation. The stake president did not take any action against Russell.
• A district court found the SEC guilty of issuing press releases about these charges in an "arbitrary and capricious manner" and without any justification for the press releases.

Notes