HOUSTON -- A Houston-based broker has been charged with defrauding two Florida municipalities while reaping millions of dollars in commissions, KPRC Local 2 Investigates reported Monday.

According to a complaint filed in federal court by the U.S. Securities and Exchange Commission, Harold Jaschke made more $14 million in commissions "by engaging in unauthorized and unsuitable trading on behalf of the City of Kissimmee, Fla., and the Tohopekaliga Water Authority, and by churning their accounts." The SEC defines "churning" as a practice where a broker engages in excessive trading to generate commissions without regard for a customer's investment goals.

The SEC accused Jaschke of "churning" the municipalities' accounts while working as a broker for First Allied Securities, Inc.

The SEC claimed Jaschke's "high-risk, short term strategy" involved U.S. Treasury Bonds, known as "STRIPS."

Treasury bonds are normally considered low-risk, safe investments because upon maturity the bonds pay out face value regardless of market factors, interest rates or volatility in the bond market. However, SEC investigators claimed Jaschke would buy and sell the same bonds "within a matter of days, and sometimes the same day," generating commissions.

Court documents show between June 2005 and March 2008, Kissimmee's account bought $2.8 billion worth of "STRIPS" and made $4.3 million, while Jaschke's commission on the trades was $6.1 million, 10 percent of which was paid to First Allied.

Similarly, the SEC wrote that the Tohopekaliga account purchased $3.1 billion worth of "STRIPS," making $5.5 million, while Jaschke generated $8.1 million in commissions.

Federal investigators said in 2006, this trading strategy began failing because of a downturn in the bond market. SEC officials wrote at one point, both accounts had unrealized losses of $60 million dollars.

Federal investigators further accused Jaschke of continuing this trading strategy by using the equity in the accounts to take out short-term loans to buy more bonds. SEC investigators wrote that at one point, the Water Authority's account was leveraged as high as $7 borrowed for every $1 of equity. Court records read that Kissimmee's account was leveraged as high as $20 borrowed for every $1 of equity. Both municipalities have ordinances strictly prohibiting such risky investments.

Federal officials wrote when both fund managers started receiving notices that an infusion of cash was needed to bring up the funds' equity and outside audits questioned the unrealized losses, Jaschke blamed the problems on mistakes made by Bear Stearns.

Even though Jaschke was not allowed to make such trades without permission from the funds' managers, SEC officials wrote both were "unsophisticated" and "had very little experience." The SEC wrote as a result, both managers relied on Jaschke's advice.

Eventually, both funds recouped all losses and made an aggregate profit of $9.8 million during this time. However, SEC officials wrote, "Had the market not swung in Jaschke's favor, the Municipalities could have lost millions of dollars as a result of Jaschke's misconduct."

Both funds stopped using Jaschke as a broker in 2008 and, according to SEC filings, he was terminated by First Allied for "failure to follow firm policy and industry standards of conduct, including those related to the use of approved e-mail accounts and accurate communications with customers."

Jaschke has since founded HHJ Capital Partners, L.P., an investment adviser business in Houston.

Local 2 Investigates tried to speak with Jaschke at his office. Instead, we received a statement from his attorney, Don DeGabrielle. "Mr. Jaschke has been a professional in the investment business for over 26 years and has never had any complaints filed against him for the conduct of his business. The two municipal clients actually made a profit as a result of Mr. Jaschke's investment strategy in a volatile market. He most certainly denies the allegations contained in the SEC's injunction complaint. We will be filing our answer with the Court and are confident that this matter will be successfully defended."