Federal authorities are asking 30 former clients of an ex-Cincinnati financial adviser to pay back $325,000, saying the funds are “false profits” and proceeds from an illegal pyramid scheme.

Donahue

        Stephen G. Donahue's former clients thought they had withdrawn the money from a tax-free bond fund, but the fund never existed. Federal authorities shuttered Donahue Securities in March 2001 after accusing him of using the phony fund to bilk investors out of more than $6 million.

        But since the bond fund didn't exist, neither did the deposits or interest that Mr. Donahue told clients he'd paid into the fund for them. Though federal authorities are working to repay clients' principal, they say the clients don't have a right to the proceeds created by Mr. Donahue's fraud.

        “But it's my money,” said Bonnie Brock, a former Donahue client who received notice that she owed $20,000.

        Federal authorities say otherwise, noting that because Mr. Donahue essentially operated a pyramid scheme, the $20,000 withdrawal that Mrs. Brock made in March 2000 was paid for by another clients' deposit.

        Investigators from the Securities and Exchange Commission discovered the phony fund during a routine audit that began in late February 2001. At the time, they filed civil charges that later resulted in the firm's liquidation. The fund had about 130 clients and a $6 million balance.

        Mr. Donahue also is facing a criminal investigation, which is expected to be resolved “within weeks,” Fred Alverson, a spokesman for the U.S. Attorney's Office, said Wednesday.

        Glen Whitaker, Mr. Donahue's lawyer, said his client is continuing to cooperate with the government. “It was his intention to repay every penny” to investors, Mr. Whitaker said.

        To date, federal authorities have repaid about $4.5 million to 43 former clients and are in the process of returning another $480,000 to five more. Those 48 clients thought they had deposited their own money into the tax-free bond fund, but federal authorities say Mr. Donahue spent the money largely on himself and his business.

        The remaining 82 clients thought they held $1.6 million, which federal regulators now say were “false profits” and cannot legally be paid back to customers.

        Mr. Donahue is accused of building up those fraudulent balances by promising to rebate customers the fees they paid when they rolled over their annuities, a transaction that created commissions for himself. But the rebates — along with the 5 percent to 6 percent interest he promised — were nothing more than accounting tricks, authorities say.

        The Securities Investors Protection Corp. (SIPC), the insurance company created by Congress to repay wronged investors, covers losses from theft, not fraud.

        After more than a year of working to determine how many clients and how much money is eligible to be repaid, SIPC attorneys say the 30 people sent letters this week are the last of the 130 bond fund clients to be contacted.

        About 52 former clients have already been told they are not eligible to receive any repayment because their balances consisted entirely of the rebated fees and interest.

        And SIPC's court-appointed attorney says that if those clients aren't eligible for that money, neither are clients who took withdrawals before the firm closed.

        “We wanted to treat everybody equally — people who took money out and people who didn't take money out,” said Gerald Baldwin, one of the SIPC attorneys.

        That still doesn't make sense to Mrs. Brock, 60, who said she trusted Mr. Donahue when he hold her and her husband, Larry, that he was depositing thousands of dollars of rebates into a tax-free bond fund for them.

        “He was having us make rollovers left and right,” she said. “We just totally trusted him.”

        The Brocks started investing with Mr. Donahue when he founded his financial planning firm in 1981 in the garage of his Green Township home. Federal authorities say he started bilking clients in 1989 when he founded the broker-dealer part of his financial network.

        By 2000, the Highland Heights couple had accumulated $23,000 entirely from the rebates and interest. They took a $20,000 withdrawal to help their daughter buy a house.

        By 2001, more rebates of annuity rollover fees and more interest had built the balance of the Brocks' fund back to $18,000. Now they are told that money is gone, and the $20,000 withdrawal must be repaid.

        “I guess I understand it, but I thought this was my money,” she said.

        SIPC's letter says the Brocks have until July 15 to respond. Although it says the agency could sue to recover the $20,000, SIPC attorneys say they are open to negotiation, depending on what is more economical.

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