Federal investigators accuse the former president of S.G. Donahue & Co. of bilking investors out of $6 million — and using much of the money to buy a Florida condo, for land to build a home and for other personal expenses, including his own taxes and investments.

        The U.S. Securities and Exchange Commission filed a civil complaint late Monday against Stephen G. Donahue, who resigned as president of his prominent downtown financial-services companies Thursday in the midst of an investigation.

Donahue

        No criminal charges have been filed. While both the FBI and U.S. attorney's office are involved, both declined comment.

        Mr. Donahue's attorney, Don Mendelsohn, also declined comment.

        But the SEC's civil complaint, obtained by the Enquirer Tuesday, accuses Mr. Donahue of orchestrating an elaborate, fraudulent scheme for the past 12 years involving up to 250 investors.

        The complaint also accuses Mr. Donahue of covering up the scheme in the last few weeks, creating false account statements and destroying documents.

        In response to the filing, Judge Sandra S. Beckwith issued a permanent injunction against Mr. Donahue, barring him from further securities-law violations. His personal assets and Donahue Securities' assets also were frozen.

        Bill Holzmann, Donahue director of corporate services, said Tuesday that the SEC eased the freeze on the company, allowing Donahue Securities to resume trading in its qualified plans department. Such pension and other retirement-plan operations are not involved in the allegations, he said.

        Mr. Holzmann also said several more firms came forward Tuesday offering to buy Donahue Securities and S.G. Donahue & Co. from Mr. Donahue. One of the eight unidentified firms issued a letter of intent to buy the company. Mr. Holzmann said any such deal needs to be approved by the SEC and the Securities Investor Protection Corp.

        According to the SEC complaint, Mr. Donahue started in 1989 — when he opened the broker-dealer arm of his operations — taking client funds and promising to hold them until the clients decided how they wanted the money invested.

        Instead of holding the money, however, Mr. Donahue deposited it in his personal account at PNC Bank, the complaint says. It accused him of mingling the funds with his accounts and his companies' accounts — using the money to pay company expenses and personal expenses, including his own taxes.

        As the firm grew, the complaint says, he told clients that their money was put into a money-market fund paying 5 percent to 6 percent interest. The fund, however, did not exist.

        Instead, he then used the co-mingled monies to pay more company and personal expenses — including taxes, a condo in Florida, and renovations for that condo. Client money also was deposited in his personal account at Provident Bank, the complaint says.

        The SEC says that after Donahue Securities did develop a legitimate money market fund in 1998, Mr. Donahue would tell clients a portion of their money was invested in a tax-free bond fund paying interest of 5 percent to 6 percent. But this fund also did not exist, the complaint says.

        Again, the money was mingled with the companies' and his own, paying business expenses and personal expenses — which this time included $275,000 for land and his own mutual-fund investments, according the complaint.

        The SEC accuses Mr. Donahue of repaying some clients their principal and interest over the years by using other clients' misappropriated money.

        Overall, the SEC says Mr. Donahue used at least $580,000 to pay personal expenses; an additional $50,000 for the down payment on the Naples, Fla., condo; another $275,000 for the vacant lot; and $160,000 for building materials. The rest is unaccounted for, the complaint says.

        The SEC says investigators became suspicious during an audit in mid-February. It is unclear whether the exam was a routine examination that comes every two or three years or whether it was prompted by a complaint.

        Mr. Holzmann says the firm's last SEC audit was in late winter 1999.

        The complaint says the scheme was hidden from clients through false account statements, telling them that they held shares in nonexistent funds.

        Once the audit started Feb. 12, Mr. Donahue destroyed files related to the scheme, the complaint says. It also accuses him of having employees move and hide files from examiners, and delete computer records to cover up the scheme.

        The SEC would not comment on whether those other employees were subject to further investigation or federal sanctions.

        The complaint says that Mr. Donahue referred investigators to his attorney on Feb. 19 and made a statement to the SEC, FBI and U.S. attorney two days later. He resigned the following day, last Thursday.

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