PHOENIX – State regulators spent the first part of this week building their case against the Prescott-based Chamber Group.
In the summer of 1999, the Arizona Corporation Commission's securities division began investigating the local investment firm. This past January, the division issued a temporary cease-and-desist order against it.
In the order, the division alleges that the firm and its three principals – Joseph, Travis and Tyson Hiland of the Prescott area – were selling unregistered securities and committing securities fraud.
Although it does not have specific numbers, the division suspects that hundreds of residents from the Prescott and Mesa areas have invested millions of dollars through the group. And, according to this week's testimony, at least some of those investors have lost substantial portions of their principal investments.
During the past three days, Jamie Palfai – an attorney with the ACC's securities division – called on numerous witnesses to testify against the Hilands and their Chamber Group. Meanwhile, David Jordan – the Hilands' Scottsdale-based attorney – attempted to chip away at their testimony and credibility.
The testimonies among the witnesses who invested – and lost – money through the Chamber Group reflected similar experiences.
The witnesses (most of whom are retired women living in the Prescott area) claim they first learned about the Chamber Group through newspaper and radio advertisements touting high-return certificates of deposit (CDs) and other types of investments.
All of the witnesses who put their money in CDs claim they thought they were investing in one-year investments that had guaranteed fixed rates of return, and which the Federal Deposit Insurance Corp. (FDIC) had insured.
In other words, they thought they were buying CDs that were similar to short-term CDs they had previously bought from banks or credit unions – except for the fact that the Chamber Group's CDs paid significantly higher interest rates (between about 7 percent and 9 percent).
What the witnesses did not know, according to their testimony, is that they actually were buying "brokered" CDs with maturation terms ranging from between 15 and 20 years.
Moreover, they testified, the Hilands – in their roles as investment advisers – failed to disclose that information. In addition, the witnesses said, the Hilands failed to make many other disclosures about themselves, their company and the investments they were selling (see adjacent story).
In his opening statement Monday morning, Palfai said the Hilands first began selling "dubious products to unsuspecting buyers" in 1998 and that as unregistered salesmen marketing investment pro-ducts – such as brokered CDs – the Hilands demonstrated "egregious lack of disclosure."
Rather than resembling traditional CDs marketed by banks, the brokered CDs can result in a fluctuation or loss to an investor's principal, and they are callable only by the issuing bank – not the individual investor.
Furthermore, in the Chamber Group's case, the brokered CDs actually were fractionalized pieces of a larger "master CD" held by another entity. In some cases, later testimony revealed, it was unclear if FDIC insurance even passed on to cover the individual investors.
In addition to the brokered CDs, the Hilands also sold other products, including viatical contracts (i.e., products in which investors buy an interest in life insurance policies owned by terminally ill people who need the money to pay for medical bills), tax lien settlements and money voucher machine investments.
Despite what the defense will say, Palfai told the court, the ACC deems those products to be securities, which fall under the regulatory authority of the commission.
In his opening statement, Jordan introduced his clients as well-respected, upstanding members of their community who fully disclosed benefits and risks to their clients.
"No fraud ever occurred," Jordan said. "These investors knew what they were getting into."
Prior to selling the products in question, he said, the Hilands consulted with industry experts, who told them they need not register with the securities division to sell the products, which were not securities.
In addition to taking testimony from several investors and one disgruntled employee during the first part of this week, Stern listened to the testimonies of two expert witnesses from the securities division staff who investigated the Chamber Group's activities.
At times during the first few days of the hearings – while Palfai built his case – the Hilands, who were all dressed in crisp white shirts, appeared to be shell-shocked by some of the testimony against them.
At a break during Tuesday's hearing, Joe Hiland spoke briefly to The Daily Courier.
"I've never had a blemish in 37 years," he said, adding that the securities division never told him or his two sons that they were doing anything wrong. If they had known they were breaking any rules or regulations, he explained, they would have readily adhered to them.
"We never knowingly disobeyed any rule or regulation," he said.
Jordan will mount his defense of the Hilands – including calling on several witnesses – today and tomorrow. After the two sides rest, Stern will make a recommendation to the commissioners, who will make a final decision.
Contact Chad Simpson at firstname.lastname@example.org