UNITED STATES DISTRICT COURT 

FOR THE SOUTHERN DISTRICT OF OHIO 

WESTERN DIVISION 

 

UNITED STATES SECURITIES ) 

AND EXCHANGE COMMISSION, ) 

 ) 

 Plaintiff, ) 

 ) CASE NO. 1:01-cv-116 

v. ) 

 ) Judge Sandra S. Beckwith 

STEPHEN G. DONAHUE and ) 

DONAHUE SECURITIES, INC., ) 

 ) 

 Defendants. ) 

____________________________________) 

PLAINTIFF SECURITIES AND EXCHANGE COMMISSION’S MOTION TO 

SET AMOUNT OF DISGORGEMENT, DISTRIBUTE RECEIVERSHIP ASSETS

AND DISMISS CERTAIN CLAIMS

 Plaintiff United States Securities and Exchange Commission (“Commission”), 

by its attorneys, hereby moves this Court for an Order setting the amount of Defendant 

Stephen G. Donahue’s (“Donahue”) disgorgement, finding that the amounts collected 

by the Receiver and the Securities Investor Protection Corporation (“SIPC”) Trustee 

fully satisfy Donahue’s disgorgement obligation, allowing the Receiver to distribute the 

assets held in his client trust account and dismissing the Commission’s claim for civil 

penalties against Donahue and all of the Commission’s remaining claims against 

Defendant Donahue Securities, Inc. (“DSI”) . In support of its Motion, the Commission 

states as follows: 

1. On February 26, 2001, this Court entered an Order permanently 

enjoining Donahue and preliminarily enjoining DSI from violating Section 17(a) of the 

Securities Act of 1933 (“Securities Act”) [15 U.S.C. §77(q)(a)], Sections 10(b) and 

15(c) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. §78j(b) and 

Case 1:01-cv-00116-SSB-TSH Document 109 Filed 08/03/2005 Page 1 of 5
78o(c)] and Rules 10b-5 and 15c1-2 thereunder [17 C.F.R. §240.10b-5 and §240.15c1-

2] for misappropriating their customers’ funds by representing that the funds would be 

invested in a fictitious DSI tax free bond fund. This Order also required Donahue to 

disgorge his ill-gotten gains, with the specific amount to be set in a separate hearing, 

and found that the imposition of civil penalties against Donahue may be appropriate. 

2. Also on February 26, 2001, the Court entered an Order providing for the 

appointment of a SIPC Trustee over DSI. [SIPC v. Donahue Securities, Inc., Case No. 

1:01-cv-117]. On March 6, 2001, the Court appointed Douglas S. Tripp, Esq. of Frost, 

Brown, Todd as the SIPC Trustee.1

 At this time, SIPC removed the case to the U.S. 

Bankruptcy Court for the Southern District of Ohio. [In re Donahue Securities, Inc. and 

SG Donahue & Company, Inc., Debtors, Case No. 1:01-ap-1027] 

3. On March 6, 2001, the Court also appointed Michael R. Barrett, Esq. as 

the Receiver over Donahue and his other company, SG Donahue & Company, Inc. 

(“SG Donahue”). 

4. Since their appointments, both the SIPC Trustee and the Receiver have 

marshaled all of Donahue, SG Donahue and DSI’s assets. The SIPC Trustee also 

ceased DSI’s business operations and withdrew its registration with the Commission as 

a broker-dealer. 

5. Through the liquidation of Donahue’s personal assets, the Receiver 

collected approximately $1,427,959. After settling with certain of Donahue’s lienholders and collecting the Receiver and his counsel’s fees through December 2003 as 

 1

 On May 16, 2002, the Bankruptcy Court entered an order substituting Douglas L. Lutz as the new SIPC

Trustee. 

2

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approved by this Court, the Receiver currently holds approximately $927,675 in his 

trust account.2

6. Through the liquidation of DSI and SG Donahue, the SIPC Trustee 

collected $3,641,883.37 in assets from DSI and SG Donahue. 

7. During his review of DSI’s client files and records, the SIPC Trustee 

determined that over the course of Donahue’s fraud, investors actually invested more 

than $10 million in the fictitious DSI tax free bond fund that is the subject of the 

Commission’s Complaint. Prior to the filing of the Commission’s Complaint, Donahue 

redeemed some of the funds invested. Thus, as of the time the Commission filed its 

Complaint, Donahue owed money to 133 investors and was unjustly enriched by 

$4,894,108.77. 

8. During 2002 and 2003, SIPC paid $4,113,443.70 to resolve the claims of 

50 investors who made claims for actual investments of funds in the fictitious DSI tax 

free bond fund, which SIPC designated as “cash claims” under the Securities Investor 

Protection Act (“SIPA”). 

9. During this same time period, SIPC denied the claims of, among others, 

64 investors in the fictitious DSI tax free bond fund who made claims for repayment of 

$780,665.07 in promised surrender charges for not being “cash claims.” 

10. In January 2003, SIPC received a default judgment against Donahue in 

the Bankruptcy Court for $7 million as repayment of SIPC’s expenses and the money 

SIPC paid to satisfy investor claims. 

 2

 The Receiver estimates that his and his counsel’s remaining fees and expenses to wind up this matter 

will total approximately $15,500. 

3

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11. In December 2004, the Commission and SIPC reached a tentative 

agreement for distribution of the funds collected and held by the Receiver in this 

matter. Specifically, the Commission proposed and SIPC accepted a pro rata

distribution of the remaining funds between SIPC and the 64 investors whose claims for 

repayment of promised surrender charges were denied by SIPC. Under this 

distribution, SIPC would receive a pro rata share of the shortfall between the money it 

collected and the money it paid to certain investors in the DSI tax free bond fund 

($471,560.33) which would total approximately $344,446 after payment of the 

Receiver’s remaining fees and expenses. The remaining unpaid investors in the DSI 

tax free bond fund would receive approximately $570,228 after payment of the 

Receiver’s remaining fees and expenses as repayment for the $780,665.07 in unpaid

surrender charges. SIPC further agreed that if it recovers more than the amount of its 

$7 million judgment against Donahue through other pending and proposed litigation in 

the Bankruptcy Court, SIPC will distribute back to investors any money that it receives

through the pro rata distribution in this case. 

4

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WHEREFORE, for the reasons stated herein and in the Memorandum in 

Support of this Motion, the Commission requests that the Court enter an order: 1) 

requiring Donahue to pay disgorgement in the amount of $4,894,108.77; 2) finding that 

the amounts previously collected by the Receiver and the SIPC Trustee fully satisfy 

Donahue’s disgorgement obligation; 3) authorizing the Receiver to distribute the funds 

in his trust account, after payment of his remaining fees and expenses, pro rata between 

the remaining unpaid investors and SIPC; 4) dismissing the Commission’s claims for 

civil penalties against Donahue; and 5) dismissing all remaining claims against DSI. 

Respectfully submitted, 

 

 s/ Anne C. McKinley 

 Anne C. McKinley, IL Bar No. 6270252 

 One of the Attorneys for Plaintiff 

 U.S. Securities and Exchange Commission 

 175 West Jackson Boulevard, Suite 900 

 Chicago, Illinois 60604 

 Telephone: (312) 353-7390 

 Facsimile: (312) 353-7398 

Dated: August 3, 2005 

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