State begins investigation of Carolina Investors

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"There are just too many unanswered questions surrounding recent events with Carolina Investors and Home Gold (Carolina Investors' parent company)," said McMaster. "As a result, I have determined that a thorough investigation is now warranted."

A Carolina Investors board member said he welcomed the investigation and was certain the company would be cleared.

"From my point of view, Carolina Investors has operated within the law and above board, so there's nothing for us to be concerned about from a Carolina Investors standpoint for any investigation," said Dan Sharpe, a Carolina Investors director and executive director of the Behavioral Health Services of Pickens County.

McMaster's office had been reviewing the situation since Monday, when Carolina Investors suddenly closed its Upstate offices. The attorney general said Friday it would be inappropriate to speculate on possible civil or criminal violations.

The attorney general said more than 1,000 investors have contacted his office to complain or express concerns about being able to retrieve their investments, which in some cases amount to life savings.

Carolina Investors failed to open for business Monday, leaving its investors with a note on its door that it was financially unable to continue operations.

McMaster said after reviewing information provided by the investors' family members, "along with a rapidly declining confidence in the company and parent company Home Gold's future," he ordered an official investigation.

McMaster said under state securities statutes, his office has requested information from company officials and vowed "to be very vigorous in finding out" if Carolina Investors properly disclosed the investment risk of its notes and debentures. Those investments are not insured by private or public organization, and they are not secured by company assets.

"Like everyone, I'm holding out hope that someday investors may recover some of their money," McMaster said. "In the meantime, we must move quickly to establish whether anything improper, unethical or illegal was or was not done."

Neither Larry Owen, Carolina Investors' president and chief executive officer, nor Earle Morris Jr., Carolina Investors' board chairman, could be reached for comment. Forrest Ferrell, HomeGold's president and chief executive officer, also could not be contacted.

The chairman of HomeGold Financial Inc. until late last year told The Greenville News Thursday he had no idea what's wrong at Carolina Investors, which has frozen approximately 8,000 customer accounts.

Ronald Sheppard, formerly HomeGold's chairman, president and chief executive officer, directed all questions about the publicly traded company and its subsidiaries to the current management.

Morris said Thursday he and other Carolina Investors officials, including Owen, have met with a Columbia attorney to discuss a move to conservatorship, which would install new, court-appointed leadership and possibly allow business to continue.

"I and the other board members desperately want to do that and keep people informed," Sharpe said. "We're just waiting to get something substantive that won't change on us. As soon as we do, we'll make that available."

He said the plan has not been completed and he does not know when it will be.

According to documents filed with the Securities and Exchange Commission, HomeGold for the 11 months ended Nov. 30, 2002 reported a net loss of $41.9 million, or $2.48 a share. The company said it had total assets of $198.8 million, including $57.5 million in net loans receivable, $22.1 million in property and equipment and $11.3 million in cash and cash equivalents.

HomeGold also said it had $325.2 million in liabilities, including $227.8 million in notes payable to investors and $42.5 million in subordinated debentures, or debt secured only by the issuer's general credit or promise to pay. That debt also is payable only after other debts with a higher claim have been satisfied.

HomeGold said in documents filed with the SEC that its "losses are being financed primarily" by notes and bonds sold by Carolina Investors.

Carolina Investors' investments offerings were reviewed by the Attorney General's Securities Division, McMaster said.

Securities examiners noticed in 2001 the statements of risk seemed inadequate and because of that, the company updated information to more fully disclose the risk involved, he said.

"The question is was that adequate. That is, is there more to the story than that?" McMaster said. "Our hope is to have a very thorough investigation to answer as many questions as we can and then decide what, if anything, should be done.

He added, "No one is happy. Most of the people are expressing their fears that they're going to lose their money, some or all of their money."

The Carolina Investors case could be referred to a state grand jury under computer crimes laws, "which may not apply to this situation," McMaster said.

He added the company could face individual investor lawsuits.

"I can't speak as to what should or could be done at this point because we don't know what happened," he said.