By Amy Higgins
The Cincinnati Enquirer
A Cincinnati stockbroker who pleaded guilty after the embezzlement of as much as $10 million from his clients might learn today whether he will go to prison for the 12-year scheme.
In Wednesday's opening phase of his sentencing hearing, Stephen G. Donahue sat silently for six hours in U.S. District Court - with family and victims filling gallery rows - as lawyers presented witnesses and argued points.
Senior Judge Herman J. Weber will resume hearing arguments at 9:30 a.m. today on whether Donahue should spend up to five years, or any time at all, in prison.
Donahue - once president of Donahue Securities and its financial-planning sister firm, S.G. Donahue & Co. - pleaded guilty last July to one count of "fraud and deceit by an investment adviser."
His once-prominent downtown financial network was shut down in March 2001 after federal investigators discovered that Donahue operated a bogus tax-free bond fund. Instead of investing clients' deposits, authorities say Donahue spent the money on his businesses and himself - including paying his own taxes, making investments in his own name, buying Clermont County land and refurbishing a beachfront Florida condo.
The U.S. Probation Department recommended to Weber that he sentence Donahue to 51 to 63 months in prison, mostly because of the large amount of money lost in his scheme.
Investigators testified Wednesday their examination of Donahue's books show that from 1989 to 2001, he took $10 million from clients who thought they were investing in money market or tax-free bond funds. But they also found $6 million had been returned to clients - through what they thought were "withdrawals" from the funds - before the scheme was detected.
That left a $4 million loss in principal to clients. Most clients thought they held much more in the bogus tax-free bond fund because of interest and other deposits they thought Donahue had made on their behalf. But that money never existed, so investigators do not count it as "loss" for the sentencing purposes.
Donahue and his defense attorneys dispute the $4 million amount, saying that Donahue and his company had the funds to repay all clients. Their argument on that point will continue today.
Defense lawyers also have filed motions arguing that Donahue deserves leniency because of his contrition and cooperation through the investigation. They say Donahue came forward to investigators to confess the scheme on his own.
But government investigator George Javocus testified Wednesday that the U.S. Securities and Exchange Commission started its examination of Donahue's books in February 2001 because of a tip from a confidential informant. That informant questioned why deposits were going into a private, off-the-books account held and controlled solely by Stephen Donahue.
Authorities previously have not said whether investigators detected Donahue's scheme in a routine exam or whether they were specifically looking for it.
Javocus said Donahue confessed only after investigators, acting on the informant's tip, requested certain documents that might have incriminated him.
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