ESM Government Securities, Inc. was a

Fort Lauderdale, Florida Fort Lauderdale () is a coastal city located in the U.S. state of Florida, north of Miami along the Atlantic Ocean. It is the county seat of and largest city in Broward County with a population of 182,760 at the 2020 census, making it the tenth ...

-based

government securities A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...

dealer, specializing in

repurchase agreements A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities. The dealer sells the underlying security to investors and, by agreement between the two par ...

and reverse repurchase agreements. The failure of the company in March 1985 precipitated the collapse of

Home State Savings Bank Home State Savings Bank was a Cincinnati, Ohio based savings and loan. Its failure in March 1985 led to a bank holiday for 70 other savings institutions that were insured by the Ohio Deposit Guarantee Fund, a private organization. Background Hom ...

, deposit runs on dozens of other banks in

Ohio Ohio () is a state in the Midwestern region of the United States. Of the fifty U.S. states, it is the 34th-largest by area, and with a population of nearly 11.8 million, is the seventh-most populous and tenth-most densely populated. The sta ...

, and the downfall of the private Ohio Deposit Guarantee Fund.

History

ESM was started in 1975 by Ronnie Ewton, Robert Seneca and George Mead, taking the name of the company from the first letter of their last names. (Seneca resigned from the company in 1978.) Alan Novick joined soon afterwards and would later become president (but died in November 1984 of a heart attack). Stephen Arky, an attorney, met Ronnie Ewton in his

National Guard National Guard is the name used by a wide variety of current and historical uniformed organizations in different countries. The original National Guard was formed during the French Revolution around a cadre of defectors from the French Guards. Nat ...

unit, and introduced him to his father-in-law Marvin Warner, the owner of Home State Savings Bank in

Cincinnati Cincinnati ( ) is a city in the U.S. state of Ohio and the county seat of Hamilton County. Settled in 1788, the city is located at the northern side of the confluence of the Licking and Ohio rivers, the latter of which marks the state line wit ...

, Ohio.

Fraud shutdown

ESM was shut down on March 4, 1985, by the

Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...

and placed into

receivership In law, receivership is a situation in which an institution or enterprise is held by a receiver—a person "placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights"—especially in ca ...

after massive fraud was discovered. ESM had suffered large operating losses and had pledged the same collateral to more than one lender, with initial estimated losses of over $300 million.

Impact on Home State Savings Bank

Home State Savings Bank was the biggest customer of ESM and it was revealed that Home State would suffer a loss of about $150 million from their transactions with ESM. A run on the bank ensued with over $100 million withdrawn in a few days. The bank was closed on March 9, 1985.

Bank run A bank run or run on the bank occurs when many clients withdraw their money from a bank, because they believe the bank may cease to function in the near future. In other words, it is when, in a fractional-reserve banking system (where banks no ...

s ensued on other institutions insured by the Ohio Deposit Guarantee Fund after it was revealed that the fund had insufficient funds to pay off Home State depositors. A bank holiday was declared by the governor of Ohio for those banks covered by the Fund. Other major victims of ESM included the cities of

Beaumont, Texas Beaumont is a coastal city in the U.S. state of Texas. It is the county seat, seat of government of Jefferson County, Texas, Jefferson County, within the Beaumont–Port Arthur, Texas, Port Arthur Beaumont–Port Arthur metropolitan area, metropo ...

;

Toledo, Ohio Toledo ( ) is a city in and the county seat of Lucas County, Ohio, United States. A major Midwestern United States port city, Toledo is the fourth-most populous city in the state of Ohio, after Columbus, Cleveland, and Cincinnati, and according ...

;

Pompano Beach, Florida Pompano Beach ( ) is a city in Broward County, Florida, United States. It is located along the coast of the Atlantic Ocean, just north of Fort Lauderdale. The nearby Hillsboro Inlet forms part of the Atlantic Intracoastal Waterway. As of the 2020 ...

;

Clark County, Nevada Clark County is located in the U.S. state of Nevada. As of the 2020 census, the population was 2,265,461. Most of the county population resides in the Las Vegas Census County Divisions, which hold 1,771,945 people as of the 2010 Census, across ...

;

Clallam County, Washington Clallam County is a County (United States), county in the U.S. state of Washington (state), Washington. As of the 2020 United States census, 2020 census, the population was 77,155, with an estimated population of 78,209 in 2021. The county seat ...

; and American Savings & Loan of Miami, Florida.

Legal proceedings and legislative response

An investigation showed that Jose Gomez, a partner in the

Certified Public Accountant Certified Public Accountant (CPA) is the title of qualified accountants in numerous countries in the English-speaking world. It is generally equivalent to the title of chartered accountant in other English-speaking countries. In the United Sta ...

firm of Alexander Grant & Company, was given bribes to falsify the financial statements. Seven people involved with ESM pleaded guilty in April 1986, including Ronnie Ewton, George Mead, four other executives of the firm, and Jose Gomez. Ewton received 15 years in prison, Mead received 14 years, and Gomez received 12 years. Stephen Arky committed suicide in July 1985. Henry Earl Riddel, the company's controller, committed suicide in November 1986. Marvin Warner was convicted in March 1987 of nine counts of fraud-related charges relating to Home State Savings Bank and served 28 months in prison. Alexander Grant & Co. paid out $173 million in damages and legal fees. The

United States Congress The United States Congress is the legislature of the federal government of the United States. It is bicameral, composed of a lower body, the House of Representatives, and an upper body, the Senate. It meets in the U.S. Capitol in Washing ...

enacted the Government Securities Act of 1986 in response to the failure of ESM and other similar government dealer failures and scandals.

References

* Ohio Savings and Loan Crisis and Collapse of ESM Government Securities, Inc. - Hearings Before a Subcommittee of the Committee on Government Operations, House of Representatives, Ninety-ninth Congress, first session, April 3, 198

History

Fraud shutdown

Impact on Home State Savings Bank

Legal proceedings and legislative response

References

Further reading