Close gaps in protection

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behavior, the state must make its

concerns public to educate investors.

The 8,000 retirees, small business owners and working-class Pickens and Greenville county residents who lost $275 million in deposits in Carolina Investors deserved better corporate behavior than what is alleged in findings by an independent examiner appointed by U.S. Bankruptcy Court to unravel the collapse of Carolina Investors.

In hindsight, those investors could have benefited from knowing alarmed state regulators had raised red flags as early as 1999 about the ability of Carolina Investors' parent company, HomeGold Financial, to repay investors. Carolina Investors closed its doors in March. It filed for bankruptcy in April, and holders of the company's uninsured subordinated notes will likely only recoup pennies on the dollar.

Carolina Investors problems began in 1998 with massive losses sustained by HomeGold, an originator and seller of subprime mortgages that used Carolina Investors' deposits as its operating capital. The market for those mortgages collapsed. And in the years leading up to bankruptcy, the examiner alleges that "misleading and deceptive means" were used to continue attracting Carolina Investors' note and debenture holders.

The report also concludes that the company's accountants, the Elliott Davis firm, and its attorney, the Greenville-based Wyche, Burgess, Freeman & Parham, should have done more to fully disclose the escalating risk to those investors as HomeGold barreled into bankruptcy.

Former Carolina Investors Chief Executive Larry Owen has been indicted by the state grand jury on 23 counts of fraud that allege Owen actively courted new investors and discouraged account holders from withdrawing money despite knowing that the company's collapse was imminent and the loss of money almost certain. Many of the individuals or firms named in the examiner's report are the target of civil lawsuits.

Government bears some responsibility for insuring that corporate earnings reports and prospectuses that outline the risk of investment products are clear and truthful. But that burden increases for state regulators when companies such as Carolina Investors, which sells securities only to state investors, answers only to the state's Securities Commission.

The state met its duty in ordering changes to Carolina Investors' prospectus and, in 1999, asking HomeGold to detail how its dwindling business was going to cover the investors who had become increasingly exposed to HomeGold's losses. But the state's Securities Commission, which operates under the Office of the Attorney General, should be free to make such official inquiry public. In February, the state was so concerned it asked Carolina Investors to stop sending money to HomeGold. By March Carolina Investors was closed.

Investors were still mostly in the dark. They would not have been had the attorney general, as a matter of routine, been able to make public his inquiries about the truthfulness of financial reports and the fitness to do business public. Such an accessible public record would surely have compelled some investors to withdraw sooner.

Investors were obviously drawn in by a track record of success. According to the report, Carolina Investors was fit and profitable for many years. But when HomeGold began to lose money, the report says it leaned more heavily on the Carolina Investors "cash cow."

It was, or should have been, clear to officials within Carolina Investors and HomeGold that HomeGold's massive losses made repayment to Carolina Investors' depositors all but impossible, the report alleges. Yet the company continued to sell its securities and did not fully disclose the risk that was by then an almost certain loss of funds. The report also says the company transferred assets and liabilities to "create the illusion of a sound balance sheet." Both the Wyche law firm and Elliott Davis deny any wrongdoing.

South Carolina has invested needed money into securities enforcement, making it easier for this state to file criminal charges against rouge brokers and investment firms if malfeasance is likely and apparent.

But this report, a harrowing account of alleged bad judgment and injury to unsophisticated investors, makes clear how important it is that the state become a more vocal regulator, too. Questions that arise from routine corporate reports should be made public so investors stay educated. Perhaps then the next corporate implosion won't have such a wide and painful fallout.