ESM Government Securities

ESM Government Securities, Inc. was a Fort Lauderdale, Florida-based dealer in government securities that specialized in repurchase agreements and reverse repurchase agreements. Founded in 1975 by Ronnie Ewton, Robert Seneca, and George Mead, the company took the name ESM from the initials of its founders' surnames. Robert Seneca left the business in 1978, while Alan Novick joined the firm soon after its establishment and later became its president. Novick died of a heart attack in November 1984, only a few months before the company failed. The firm operated in the institutional government-securities market, where repurchase transactions involve the temporary sale and repurchase of securities and are commonly used as short-term financing instruments. ESM became closely connected to Home State Savings Bank of Cincinnati, Ohio, whose owner Marvin Warner was introduced to ESM through Stephen Arky, an attorney who had met ESM founder Ronnie Ewton while serving with him in the National Guard. Home State became ESM's largest customer and had substantial exposure to the firm's transactions. ESM's business deteriorated as it accumulated major operating losses. Investigators later found that the company had pledged identical collateral to more than one lender, a form of collateral duplication that materially overstated the security supporting its obligations. The Securities and Exchange Commission shut ESM down on March 4, 1985, and placed it into receivership after uncovering extensive fraud. Initial estimates put the firm's losses at more than $300 million. Home State was ultimately exposed to an estimated loss of approximately $150 million through its dealings with ESM. The consequences spread rapidly beyond ESM itself. Depositors withdrew more than $100 million from Home State within a few days, and the institution was closed on March 9, 1985. Because Home State was protected by the Ohio Deposit Guarantee Fund, the bank's failure also exposed the fund's inability to meet the claims of all affected depositors. Depositor runs then extended to other Ohio institutions covered by the fund, prompting the governor to declare a bank holiday for participating institutions. ESM's other reported victims included public entities and financial institutions in Texas, Ohio, Florida, Nevada, and Washington. The collapse generated criminal, civil, and regulatory proceedings. Investigators concluded that Jose Gomez, a partner at the accounting firm Alexander Grant & Company, had accepted bribes to falsify ESM's financial statements. In April 1986, seven people connected with ESM pleaded guilty, including Ewton, Mead, and several other company executives. Ewton and Mead received prison sentences of 15 and 14 years respectively, while Gomez received 12 years. Stephen Arky died by suicide in July 1985, and ESM controller Henry Earl Riddel died by suicide in November 1986. Marvin Warner was convicted in March 1987 on nine fraud-related counts connected with Home State and served 28 months in prison. Alexander Grant & Company later paid $173 million in damages and legal fees. ESM did not survive the 1985 shutdown and is therefore a historical example rather than an active financial-services brand. Its failure, together with other government-securities dealer scandals, contributed to the enactment of the United States Government Securities Act of 1986. The episode is remembered both as a securities-market fraud and as a catalyst for a broader savings-and-loan crisis in Ohio.

ESM Government Securities was established in 1975 in Florida by Ronnie Ewton, Robert Seneca, and George Mead. Its name was formed from the first letters of the founders' surnames. The company operated as a government-securities dealer and focused on repurchase agreements and reverse repurchase agreements, transactions used by financial institutions to obtain or provide short-term funding against securities. Seneca left the company in 1978. Alan Novick joined ESM relatively early and eventually became president. Novick died of a heart attack in November 1984. During its operating period, ESM developed a close relationship with Home State Savings Bank in Cincinnati, Ohio. Stephen Arky, an attorney who had met Ewton through service in the National Guard, introduced Ewton to his father-in-law Marvin Warner, the owner of Home State. Home State subsequently became ESM's largest customer. The company later sustained significant operating losses and engaged in fraudulent practices to conceal its financial condition. An investigation found that ESM had pledged the same collateral to multiple lenders. The company also relied on falsified financial statements; investigators determined that Jose Gomez, a partner at Alexander Grant & Company, had received bribes to falsify ESM's accounts. On March 4, 1985, the Securities and Exchange Commission shut down ESM and placed it into receivership. Initial estimates placed the losses at more than $300 million. Home State Savings Bank faced an estimated loss of approximately $150 million as a result of its ESM transactions. Depositors responded with a run that withdrew more than $100 million in several days, and Home State was closed on March 9, 1985. The failure quickly became a systemic problem in Ohio. Home State was associated with the Ohio Deposit Guarantee Fund, which lacked sufficient resources to reimburse all affected depositors. Runs spread to other institutions covered by the fund, and the governor declared a bank holiday for those institutions. ESM's reported victims also included municipalities and financial institutions in Beaumont, Texas; Toledo, Ohio; Pompano Beach, Florida; Clark County, Nevada; Clallam County, Washington; and American Savings & Loan of Miami. The aftermath included criminal convictions, civil litigation, and regulatory reform. Seven people pleaded guilty in April 1986, including Ewton, Mead, four other ESM executives, and Gomez. Ewton received 15 years in prison, Mead 14 years, and Gomez 12 years. Arky died by suicide in July 1985, while controller Henry Earl Riddel died by suicide in November 1986. Warner was convicted in March 1987 on nine fraud-related charges connected with Home State and served 28 months. Alexander Grant & Company paid $173 million in damages and legal fees. ESM ceased to be an operating business after the 1985 intervention. Its failure formed part of a wider series of government-securities dealer failures and savings-and-loan scandals. Congress responded by passing the Government Securities Act of 1986, making the ESM episode an important event in the development of federal oversight of the government-securities market.

• 1987

  Marvin Warner is convicted

  [1]ESM Government Securitiesen.wikipedia.org

  Warner is convicted on nine fraud-related charges linked to Home State Savings Bank.

• 1986

  ESM-related guilty pleas

  [1]ESM Government Securitiesen.wikipedia.org

  Seven people connected with ESM plead guilty in April in the resulting fraud proceedings.

• 1986

  Congress passes the Government Securities Act

  [1]ESM Government Securitiesen.wikipedia.org

  Federal legislation is enacted in response to ESM and other government-securities dealer failures and scandals.

• 1985

  ESM is shut down and placed into receivership

  [1]ESM Government Securitiesen.wikipedia.org

  The Securities and Exchange Commission closes ESM on March 4 after uncovering massive fraud and duplicated collateral pledges.

• 1985

  Home State Savings Bank is closed

  [1]ESM Government Securitiesen.wikipedia.org

  After suffering major exposure to ESM and experiencing a depositor run, Home State closes on March 9.

• 1984

  President Alan Novick dies

  [1]ESM Government Securitiesen.wikipedia.org

  Alan Novick dies of a heart attack in November, several months before ESM's collapse.

• 1978

  Robert Seneca leaves the company

  [1]ESM Government Securitiesen.wikipedia.org

  One of the original founders resigns from ESM.

• 1975

  ESM Government Securities is founded

  [1]ESM Government Securitiesen.wikipedia.org

  Ronnie Ewton, Robert Seneca, and George Mead establish the government-securities dealer in Florida.

A specialized institutional dealer in U.S. government-securities financing transactions. The company is now defunct and is primarily significant for the consequences of its 1985 fraud and failure.

• Securities financing

  Repurchase agreements

  ESM specialized in repurchase agreements involving government securities. These transactions generally involve one party selling securities with an agreement to repurchase them later, functioning as short-term secured financing. ESM's business was directed toward institutional counterparties rather than retail consumers.

• Securities financing

  Reverse repurchase agreements

  The company also handled reverse repurchase agreements, the counterpart transaction in which an institution acquires securities temporarily and later resells them. These transactions formed part of ESM's government-securities dealing activities before the firm's 1985 shutdown.

• 1986

  Falsified financial statements and bribery

  Jose Gomez, a partner at Alexander Grant & Company, was found to have accepted bribes to falsify ESM's financial statements. Gomez and several ESM-connected individuals later pleaded guilty.

  Source

• 1985

  Fraud and duplicated collateral

  Investigators found that ESM had suffered large operating losses and had pledged the same collateral to multiple lenders. The SEC shut down the company and placed it into receivership; initial estimated losses exceeded $300 million.

  Source

• 1985

  Collapse of Home State Savings Bank

  Home State, ESM's largest customer, faced an estimated loss of about $150 million. The resulting depositor run led to the bank's closure and helped set off a wider Ohio deposit-guarantee crisis.

  Source

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• 1986

  Congress responds with the Government Securities ActOther

  Background

  ESM's failure occurred amid other government-securities dealer failures and broader savings-and-loan scandals.

  Action taken

  The United States Congress enacted the Government Securities Act of 1986.

  Aftermath

  The legislation became part of the federal regulatory response to problems exposed by ESM and comparable dealer failures.

  Source

• 1985

  SEC orders shutdown and receivershipOther

  Background

  The company had accumulated major losses and investigators discovered fraudulent reporting and collateral pledged to more than one lender.

  Action taken

  The Securities and Exchange Commission shut ESM down on March 4, 1985, and placed it into receivership.

  Aftermath

  The failure contributed to Home State Savings Bank's collapse, runs on other Ohio institutions, and the eventual end of ESM as an operating business.

  Initial estimated ESM losses. over $300 million (1985 initial estimate)

  Source

1. 1ESM Government Securitiesen.wikipedia.org