By Amy Higgins
The Cincinnati Enquirer

Donahue

A former Cincinnati stockbroker convicted of pocketing $10 million in client funds will spend as much as 46 months in prison.

Stephen G. Donahue also was ordered to pay $5,100 in fines, serve 500 hours of community service and spend three years on supervised probation after his prison term.

"Society cannot tolerate any compromise of the integrity of the securities industry," said U.S. District Court Senior Judge Herman J. Weber, who said he would recommend Donahue, 54, serve his time in the minimum security prison in Ashland, Ky.

The sentence comes almost a year after the former president of Donahue Securities pleaded guilty to a federal fraud charge and more than two years after federal investigators discovered that he was operating a bogus tax-free bond fund.

Money that clients thought was earning up to 6 percent in tax-free bonds was instead spent on Donahue's businesses and himself, including buying property in Clermont County, refurbishing a Florida condo and investing in his own accounts.

A quasi-governmental insurance agency has repaid more than $4.1 million to Donahue's former clients, but another $1.6 million is likely lost forever. That amount comes from rebated fees and interest that Donahue promised to deposit on his clients' behalf into the fund.

But since the tax-free bond fund didn't exist, neither did the $1.6 million. Since the $1.6 million was nothing more than an accounting trick, it cannot to be paid to investors even though they believed their balances were real.

Although almost everything Donahue owned has been sold, proceeds first repay $4.1 million to the insurance company, then cover the $6 million accrued in expenses to attorneys, accountants and other administrators working on the case. Nothing is expected to be left to pay other claims, such as those fraudulent balances or even commissions still owed to his former financial advisers.

Seeing Donahue sentenced to 46 months in prison came as some relief to former clients and colleagues in court Tuesday, although some were disappointed that Weber didn't levy the maximum five-year sentence. They also were disappointed that the judge allowed Donahue another 90 days of freedom before turning himself over to federal authorities.

Donahue requested the 90-day stay to settle the estates of his mother, who died in February, and of his wife's mother, who died last week. He also wants to finalize the sale of his longtime home on Gaines Road in White Oak - currently listed for $564,900.

"It will be nice to end it," said Tom Wingo, a financial planner formerly with S.G. Donahue & Co., the sister advisory firm to Donahue Securities. "It will be nice to get it behind us."

Although Assistant U.S. Attorney Ralph Kohnen also argued for a five-year prison term, he said he was satisfied with the outcome of the case.

Defense lawyer Glenn V. Whitaker said he doesn't know yet if Donahue will want to appeal the sentence. Appeals must be filed within 10 days of sentencing.

"I'm sure that Stephen Donahue would have liked to have had a lesser sentence, but that's the way it goes," Whitaker said.

Whitaker had argued that Donahue should spend little to no time in prison because of Donahue's sincere remorse and contrition. Whitaker also said most clients could have been repaid when his companies were liquidated, setting the "loss" from Donahue's scheme at zero.

But Weber denied Whitaker's defense motions asking for leniency, tallying the ultimate loss from Donahue's scheme at more than $2.4 million. Although Donahue took $10 million from 1989 to 2001, most had been paid back by the time examiners from the U.S. Securities and Exchange Commission uncovered the bogus fund in February 2001.

Weber also agreed with Kohnen's argument that Donahue's scheme endangered a financial institution and added time to Donahue's sentence according to federal guidelines. Some months were subtracted for Donahue's remorse.

"To all my former clients, employees, independent contractor financial planners, family and friends: I regret and apologize for all my improper acts," Donahue said Tuesday just before Weber announced the sentence. "In the last two years, I've done everything humanly possible to try to correct these acts."

E-mail ahiggins@enquirer.com.