GREENVILLE, S.C. - Attorney General Henry McMaster testified Thursday that he couldn't stop Carolina Investors Inc.'s sale of securities because it was registered properly with his office and there was no evidence of fraud before the company collapsed.

"You can't stop somebody from doing business as long as they are complying with the law by providing the filing and paperwork that is required," McMaster said, adding he couldn't intervene "just because a company appears to be unhealthy."

McMaster, who is also the state's securities commissioner, testified Thursday during former lieutenant governor Earle Morris Jr.'s securities fraud trial in Greenville.

Morris, Carolina Investors former chairman, has said HomeGold officials kept him in the dark about the company's true financial condition.

Prosecuting attorneys, who all work for McMaster in the criminal division of his office, had argued against having McMaster as a witness. But Judge James Johnson allowed it as long as questioning remained limited to the attorney general's role as securities commissioner.

McMaster took office in January 2003, two months before Pickens-based Carolina Investors shut its doors, leaving more than 8,000 investors out $278 million.

He was called by the defense to explain why his office didn't stop Carolina Investors from selling securities to the public when the company was in dire financial condition. The notes and debentures sold by the firm weren't insured by any federal or state agency.

"In the proper case, there could be a cease-and-desist order if the Securities Commission felt that someone was lying to them, misrepresenting things and that it was about a material matter," McMaster said. "But the more likely thing, unless there was whopping lie, would have been to initiate a formal investigation. That is the first step. Issuing a cease-and-desist order is pretty strong medicine. But it could be done."

"Even the first step wasn't reached. Even that investigation, the civil investigation, wasn't reached," said defense attorney Kathleen Devereaux Schultz.

"But the point is they (securities commission) didn't know they were being misrepresented, at least that's what I'm informed," McMaster said.

Prosecutors have said securities commission officials reviewed Carolina Investors' formal written offers to sell securities and wrote letters to Morris before Carolina Investors closed expressing concern about the possible adverse impact of HomeGold's mounting losses on Carolina Investors account holders. They also met with officials of both companies, including Morris, according to prosecutors.

McMaster said the Securities Commission staff "asked questions, they raised issues and they were given information and representations were made to them that satisfied them - although they had concerns - that satisfied them enough not to go to the next level."

Former Carolina Investors employee Lisa McCall also testified Thursday that Morris seemed unaware of the company's dire financial situation. She said company president Larry Owen had on occasion told her not to repeat negative information or rumors to Morris, "Because he gets it kind of confused and turned around."