The Securities and Exchange Commission charged several companies and individuals with conspiring to defraud the University of Houston of millions of dollars from its investment portfolio.
An unpublished audit by Arthur Young & Co. shows that University of Houston lost $17 million from Harwell's dealings, the Wall Street Journal reported yesterday.
Two of the defendants already have pleaded guilty to criminal fraud charges. Nevertheless, the SEC has pressed its civil case because most of the alleged fraud involved trading in Federal National Mortgage Association securities, over which the SEC seeks regulatory authority.
The suit, filed yesterday in U.S. District Court in Houston, said that one of the defendants, Patrick Harwell, was in charge of the university's investments. The suit alleges that he directed the university funds to the defendant companies in which he was a silent partners.
Most of the university's investments, at Harwell's direction, were put through Covington, Knox Inc., which allegedly was formed by the defendants in May 1977 as part of the scheme. The university accounted for 70 percent of CKI's retail business and gross revenues, the suit says.
In 10 months, CKI made $500,000 in brokerage commissions and mark-ups on securities trades for the university. CKI, a Houston firm, is now under temporary receivership the SEC said.
Roger K. Knox, a defendant, operated his own securities firm called Gouche & Co. prior to the formation of CKI. From November 1976 to February 1977, Gouche had one customer - the University of Houston - which paid $128,000 in commissions.
Howell directed this business to Knox, the SEC charged. When Knox moved to another firm, Lynn Associates, that firm billed the university for $1.3 million in brokerage fees. That amount represented 70 percent of Lynn Associates' gross revenues in 1976 and 50 percent in 1977.
According to the SEC, Harwell, Knox and another defendant, Audrey M. Covington:
Sold securities on behalf of the university to CKI at below-market prices.
Bought government securities on behalf of the university and sold those securities to CKI at cost for the benefit of CKI if the market rose.
The SEC said that Harwell owned one-third of CKI while handling the university's investments. His half-brother, Patrick Sullivan, acted as a front man for Harwell. Harwell's share of the profits of CKI were paid to Sullivan under the guise of a consulting agreement between CKI and a company called Pat Sullivan & Associates Inc.
From July 1 through Nov. 29, 1977, CKI acted as principal in some 118 securities transactions with the university involving about $224 million in government securities.
One SEC allegation is that the defendants regularly charged as much as five times the "normal industry mark-up" for handling these transactions.
Harwell and his half-brother, Sullivan, have pleaded guilty in Houston to federal fraud charges.