FORT LAUDERDALE, Fla. -- Former ESM Government Securities Inc. Chairman Ronnie Ewton testified in federal court Tuesday that as early as 1979 ESM officers had devised a sophisticated method of hiding the company's massive losses.
Ewton headed ESM until a month before the securities dealer was shut down March 4, 1985 by the Securities and Exchange Commission. ESM owed creditors $315 million dollars. Its collapse led to the failure of the Home State Savings Bank of Cincinnati and prompted Ohio officials to close S&L's throughout the state to prevent them from failing.
Ewton's testimony, his first public testimony about the massive fraud, came at the criminal trial of two former ESM officers. He has pleaded guilty to felony charges in Ohio and Florida and agreed to testify against former ESM officers Nicholas Wallace and Stanley Wolfe. His sentencing has been delayed until after their trial ends.
Ewton said he feared as early as 1978 that federal investigators would discover ESM's fraudulent accounting procedures. The pressure was eased in 1979 when the firm began paying off its independent auditor, Jose Gomez, who worked for Alexander Grant & Co. at the time, not to disclose its practices.
Ewton said he personally approved payments disguised as 'home improvement loans' of $60,000, $10,000, $15,000 and $100,000 for Gomez. The only other person in ESM who knew about the payoffs was Alan Novick, the chief financial officer, who died three months before ESM's troubles came to light, he said.
The trial, which began Monday and is expected to last about three weeks, was interrupted briefly by an apparently unrelated bomb threat.
By 1980, ESM was losing millions of dollars a year, Ewton said.
'The pressure on us to come up with money was horrendous,' he said.
The company then began aggressively pursuing the sale of non-delivery repurchase agreements to investors, mainly municipalities and banks.
'I learned ESM had an enormous capacity to raise money. I learned we could take money from our new customers to repay our old customers,' he said.
Ewton resigned from ESM in January 1985, he said, adding that Wallace 'implored me not to.'
'I told him I was out and I was going to stay out,' he said. Ewton said he earned $8 million in salary, took out $8 million in personal loans and another $7 million in other loans during his tenure at ESM.
He implicated Wallace in several decisions about the way the company was run. But only once did he mention that Wolfe had been involved in a decision. The defense claims Wolfe and Wallace knew nothing about the fraud while they were officers at ESM.
Earlier Tuesday, former ESM officer Timothy Murphy testified that he and Wolfe were both just 'figureheads' who were not privy to decisions on how the company was run. Murphy was promoted to vice president of the finance division within a few years after joining ESM. He said his salary went from about $32,000 per year in 1980, with a $7,250 bonus, to $37,500 for just over two months of work in 1985, and a $225,000 bonus.
He testified that Ewton was seldom at the offices in the last two years the company was in existence.
Jane Moscowitz, assistant U.S. attorney, said in opening arguments that Wallace was paid $2.3 million a year in salary and bonuses to keep ESM afloat and owed ESM $4 million worth of personal loans. She said Wallace, when he realized ESM was falling apart, said, 'We've got to find a way to keep ESM operating. It's the greatest money-maker ever.'