On September 17, 2015, the Securities and Exchange Commission announced that it was charging four former Penson Financial Services officials for their roles in a series of accounting and disclosure failures related to decisions to extend credit to certain customers beyond what is allowed under the federal securities laws.
Through the SEC’s investigation, it was found that Penson Financial Services provided customers nearly $100 million in margin loans secured mostly by risky, unrated municipal bonds, including some funding a horse racetrack in Texas. The loans to the customers, including the ones used to fund the racetrack’s operations, became impaired in the wake of the financial crisis. Instead of following industry standards and liquidating the collateral, accounting properly for the loan losses and disclosing the situation to its investors, Penson officials extended more loans to the same customers in hopes that their financial condition would improve and they could pay off the loans. By doing so, Penson violated the federal margin regulations. Penson’s eventual accounting and disclosures of the loan losses that reached $60 million contributed to the firm’s demise and bankruptcy filing in 2013.
The Director of the SEC’s Division of Enforcement said in a statement “Penson took on extraordinary risks as a broker-dealer by making margin loans to certain customers backed by speculative collateral…When these loans became impaired, Penson’s leadership improperly placed more of Penson’s critical capital at risk to bail out these customers instead of timely recording the losses and disclosing the truth about the loans to investors.” The Penson officials involved in the loans agreed to settle the charges in administrative proceedings without admitting or denying the SEC’s findings.