McMaster says he couldn't stop Carolina Investors from raising money

South Carolina Attorney General Henry McMasters is called to court to testify for the defense in the trial of former Carolina Investors CEO Earle Morris Jr. Staff/Ken Osburn e-mail this story to a friend Related Photo gallery • McMasters takes the stand

"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 for four hours during the 10th day of former lieutenant governor Earle Morris Jr.'s securities fraud trial in Greenville.

McMaster was called by Morris' defense lawyers to explain why McMaster didn't take action to prevent Carolina Investors from selling securities to the public when the company was in perilous financial condition. The notes and debentures sold by the firm weren't insured by any federal or state agency.

Securities for sale are registered under the state's Uniform Securities Act. Government attorneys have said that McMaster's office doesn't approve the sale of securities and only reviews securities issues to make sure they fully disclose their risks. Defense attorneys argued McMaster should have issued a cease-and-desist order because, under state law, it would have been in the public's interest and a potential fraud was being imposed on investors.

Meanwhile, Circuit Judge James W. Johnson Jr. on Thursday prohibited testimony from an expert witness for the defense. Johnson ruled Desa Ballard, a Columbia attorney whom prosecutors said planned to testify about a Greenville law firm's potential conflict in representing both Carolina Investors and its parent company, HomeGold Financial Inc., couldn't testify before the six-man, six woman-jury hearing the case. Prosecutors had argued her testimony would be irrelevant and unnecessarily confuse the issues of trial. Defense attorneys said not allowing her to testify about the law firm of Wyche, Burgess, Freeman and Parham would be prejudicial against Morris, who is facing 22 counts of securities fraud in connection with Carolina Investors' sale of notes and debentures between 1998 and March of 2003, when the company closed.

According to court records, Greenville attorney Tommy Wyche was secretary and legal adviser for Columbia-based HomeGold and its predecessor, Greenville-based Emergent Corp., from 1991 until April 2002. Wyche's firm was securities counsel for HomeGold and Carolina Investors, according to court records.

In objecting to Ballard's testimony, Assistant Attorney General Robert Hood, said, "Whether or not the Wyche law firm had a conflict of interest between HomeGold and Carolina Investors doesn't belong in this courtroom. It has nothing to do with whether or not Mr. Morris lied or misrepresented things or set about on a course of conduct to deceive investors."

Joel Collins, a Columbia attorney representing Morris, said any conflict could have prohibited Morris from getting advice he needed, and Ballard would have offered "fair testimony."

Johnson agreed with prosecutors, but said she can submit a written summary of her planned testimony to the court.

Wyche has denied any wrongdoing on his part or that of his firm.

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

Johnson on Wednesday said he wouldn't prevent McMaster, who enforces the state's Uniform Securities Act, from taking the witness stand. McMaster waited outside a courtroom at the Greenville County Courthouse for about three hours Wednesday, but did not testify.

McMaster took his elected office in January 2003, two months before Pickens-based Carolina Investors failed.

After he took the witness stand Thursday, defense attorney Kathleen Devereaux Schultz asked him if HomeGold had provided assurances to the Securities Commission and it had suspected those assurances were misleading or inaccurate, would the agency then have issued a cease-and-desist order to prohibit Carolina Investors from selling additional securities.

"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," Schultz said.

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

It isn't against the law to offer a risky investment for sale, McMaster said.

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

The Securities Commission staff, McMaster said, "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."

Carolina Investors failure last year cost about 12,000 people, many retired and mostly from the Upstate, an estimated $278 million. They can expect to recoup about 18 cents for every dollar invested once the company is liquidated, bankruptcy officials have said. Investors have testified Morris never warned them the company was sliding toward bankruptcy or that he had met with HomeGold officials, including former HomeGold Chairman Jack Sterling and former Carolina Investors President Larry C. Owen, to discuss the possibility of seeking a conservatorship, which prosecutors said would have frozen investors assets. Owen, 61 pleaded guilty in July to 22 counts of securities fraud related to accounts at Carolina Investors, and is awaiting sentencing. Sterling has denied wrongdoing.

Owen's wife, Anne, 51, former Carolina Investors senior vice president of investments, faces similar charges and is awaiting trial. She has pleaded not guilty.

Also Thursday, Lisa McCall, a former Carolina Investors investment counselor from Easley, testified Morris seemed optimistic about the company's future until just days before it closed. There was no indication he expected the worst before the company closed in March 2003 and Larry (Owen) is the one we looked to for answers."