With Earle E. Morris Jr.’s conviction this month on 22 counts of securities fraud, Attorney General Henry McMaster has reached the top of Carolina Investors’ management.

“The investigation continues,” McMaster said immediately after Morris’ trial. But the state’s top prosecutor wouldn’t say whether that means he’s looking further up the chain of command to Carolina Investors’ parent company, HomeGold Financial Inc.

McMaster’s criminal investigation to date has yielded indictments against Morris, former chairman of Carolina Investors; Larry Owen, the former president; and Owen’s wife, Anne, a company vice president. Morris and Larry Owen will serve jail time. A trial date has not been set for Anne Owen.

Repeatedly during Morris’ trial, witnesses pointed to HomeGold officials as the source of faulty financial information given to investors.

More than 8,000 people lost more than $277 million in early 2003 when HomeGold was unable to repay hundreds of millions of dollars in loans made by Carolina Investors, its subsidiary. The collapse is one of the biggest securities scandals in state history.

Former employees, board members and investors testified during Morris’ trial about the relationship between the two companies.

Morris’ attorneys repeatedly tried to shift blame to HomeGold officials.

Morris told investors that Carolina Investors was solid, the defense acknowledged, but only because he believed that in good faith, based on information he received from the parent company, such statements were true.

“We’d always been told HomeGold had money to repay Carolina Investors,” Morris testified. “I didn’t know any better.”

Larry Owen, former president of Carolina Investors, supported this claim in his testimony.

Owen, who pleaded guilty to securities fraud in July, is cooperating with the state’s prosecution. In his deposition, Owen said he expected his testimony would be used against HomeGold officials.

Three former HomeGold officials frequently were identified during the 2½-week trial as the source of financial information that Morris said he trusted. They are:

• Jack Sterling, HomeGold’s chairman, who orchestrated the 1991 deal that made Carolina Investors his company’s wholly owned subsidiary

• Karen Miller, who at various times served as HomeGold’s chief technology, administrative and financial officers

• Ronald J. Sheppard, former chief executive of HomeGold.

Attorneys who represent Sterling and Miller declined to comment about references to their clients made during the trial.

‘HE WAS MISLED’

Sheppard’s attorney, James Griffin, said the way his client’s name was tossed around during the trial ultimately will aid in deflecting any alleged wrongdoing on Sheppard’s part.

Griffin pointed to the closing statement made Joel Collins, Morris’ lead defense attorney.

“Ronnie Sheppard is a name you heard throughout this trial,” Collins told the jury. He then called attention to the perks Sheppard received, given the company’s history of losses. The perks included an average annual salary of $1.9 million, a $1 million motor home, the use of charter jets and a personal trainer, and the use of company funds to build a private residence.

Griffin said the fact that Collins knew those details shows that Sheppard properly disclosed his compensation.

“This is not a situation where you hear the company was cooking the books,” Griffin said. “What you will not hear is Ronnie Sheppard spoke to an investor or misrepresented the condition of the company.”

Griffin said his client, like the thousands of investors who lost millions of dollars, was also misled, especially during the months leading up to the 2000 purchase of Sheppard’s mortgage company by HomeGold.

“It’s been consistent with our view that it was a mess before he got there,” Griffin said. “He was misled about the situation.”

The attorney said Sheppard has talked voluntarily to the state securities commission and has not been asked to appear before the state grand jury.

However, Sheppard is still waiting to hear what his punishment will be in federal court for destroying documents related to a civil suit filed against former directors, officers and outside consultants of HomeGold and Carolina Investors.

‘HE ALWAYS HAD A PLAN’

Clarence Gibson Jr. testified during the Morris trial that even as the company’s stock price plummeted, he continued to buy HomeGold shares based on his conversations with Sterling.

Gibson bought 42,000 shares of HomeGold in 1998 and continued making buys even as the company teetered on the verge of ruin. Gibson eventually lost roughly $87,000 in what turned out to be worthless HomeGold stock.

Why?

“It was based on my conversations with Jack,” he said, referring to Sterling, then chairman of HomeGold.

Don Bobo, a former Carolina Investors board member, echoed the view that Sterling, when asked about the financial health of HomeGold, promoted upbeat visions of the future.

“He always had a plan that was going to bring about profitability,” said Bobo, who lost $2 million when the company failed.

Attorneys for Sterling declined to comment on the testimony.

‘AWARD-WINNING PERFORMANCE’

Bobo and Gibson, though, testified that Sterling was not alone. They said Karen Miller, chief financial officer, often accompanied her boss and offered equally positive predictions for the doomed companies.

Dan Sharpe, another Carolina Investors board member, testified about one presentation made by Miller and deceased HomeGold official Forrest Ferrell in February 2003, just weeks before bankruptcy.

“They told us HomeGold was no longer relying on Carolina Investors for cash flow,” Sharpe said.

The truth was that for years, HomeGold survived by borrowing heavily from its subsidiary. As early as March 2002, outside auditors indicated that even if every asset of HomeGold were sold, there still would not be enough money to pay back Carolina Investors.

Recalling Miller’s presentation 11 months later, Sharpe testified, “My impression, in retrospect, (is) it was an Academy Award-winning performance.”

For Miller, such interaction with board members and investors would have come only during the seven months leading up to HomeGold’s bankruptcy on March 31, 2003.

For most of her tenure with the company, which started in 1996, Miller was in charge of administrative and technology matters, according to documents filed with the Securities and Exchange Commission.

She was in charge of such back-office jobs as overseeing HomeGold’s personnel hiring and electronic equipment purchases. She also was in charge of the company’s Y2K plan.

SEEKING JUSTICE

State securities laws allow the attorney general to pursue individuals with criminal charges or companies and individuals with civil charges.

After Morris’ conviction, McMaster repeated that his office’s best chance at bringing officials to justice was pursuing criminal investigations.

McMaster, or individual investors, also could seek justice in civil courts by proving fraud, but that path will be costly, said John Beach, an attorney with Ellis, Lawhorne & Sims.

The tricky part, he said, is proving fraud and deciding whether the expenses to prove it are worth the outcome, he said. This is especially hard to do with outside consultants, such as attorneys and accountants. But a civil case is also often the only option to punish a firm for wrongdoing.

Beach has not worked for clients involved with either Carolina Investors or HomeGold Financial Inc.

With HomeGold and Carolina Investors, one civil action has been settled. Ralph McCullough, the bankruptcy trustee handling the Carolina Investors and HomeGold estates, agreed to a nearly $42 million settlement to his lawsuit against more than two dozen former officers, directors and consultants.

Because HomeGold and Carolina Investors never emerged from bankruptcy and their assets have mostly been auctioned, it is not clear what other action will be taken or how much money, if any, is left. Answering those questions, Beach said, is an expensive undertaking for individuals, as well as prosecutors.

“That’s an expense,” Beach said. “A lawyer is not going to tee that up.”

Reach Werner at (803) 771-8509 or bwerner@thestate.com.