A state audit confirmed Thursday what some have alleged about the Utah Division of Securities: that it's lake of codified policies and procedures made for an environment in which employees decided on the fly how to pursue cases, leading to allegations of impropriety and internal conflict.

The Legislative Auditor General's Office released a 43-page report detailing its audit of the division, which is responsible for protecting Utah's investors. The report cited a lack of clear direction within the division regarding how to perform an array of duties, including publicizing and pursuing administrative action, obtaining information and negotiating settlement agreements. Audit Manager Tim Osterstock said a failure to set protocol led many of the division's staffers to make bad decisions -- not just former Director Wayne Klein, who resigned in February amid allegations the department was acting improperly.

"It's not just a director, it's an organization," Osterstock said. "An organization without procedural control will do something different every time they do it."

The audit focused on several cases in which parties being investigated by the division complained.

In one case, the division undertook an investigation into the actions of a company and four brokers who were suspected of misleading investors about where their money was going. The company wasn't notified until the division levied securities fraud charges against it -- charges that were dropped two weeks later with an apology to the investigation's subjects for potential harm done to their reputations.

In another case, a broker and supervisor were charged with fraud. Several courts dismissed the charges against the supervisor, saying "failing to supervise" didn't constitute fraud. The division investigated and filed a lawsuit against the supervisor anyway. The supervisor countered with a lawsuit of his own and won. The division later admitted it should not have filed its suit in the first place.

Audit Supervisor Susan Verhoef told the Legislative Audit Subcommittee on Thursday morning that many division employees were involved in some level in the poor decisions, but the former director was also involved where he should not have been.

"There were concerns that the director was actively involved in case management," she said. "Written policies and procedures are needed to help ensure that the relationship between administrative and adjudicative responsibilities is not compromised."

A lack of clear instructions often made for friction within the division and engendered a hostile workplace, the report said.

"Much of the confusions that you see down there is a direct result of a lack of procedural control," Osterstock said. "Nobody knows exactly how they're supposed to be doing things."

Those problems only contributed to the division's difficulties in doing its job, Verhoef said.

"Personnel conflicts have been an ongoing problem at the division and have resulted in employee turnover and changes to the division's organizational structure," she said.

Francine Giani, executive director of the Utah Department of Commerce, which oversees the securities division, said she thinks the audit was "good," and said many of the recommended changes are already being imposed. The division's press release policy has been changed to allow more notice to investigation subjects, a policies and procedures manual should be finalized within the next month, and there's talk of changing the securities advisory board into a commission, giving it more oversight over the division's case management.

"We are going to look at doing a commission form where we bring our cases to them for hearing," she said. "We're on board. We got the message. We were on our way toward making many of those changes."

Giani said a crucial element in transforming the division will be its new director, who started Monday. Keith Woodwell spent the last six years with the CIA and was the state Legislature's associate general counsel for five years. Giani said she's optimistic about what Woodwell can do to restore the division's reputation.

"He'll now need to bring this group together," she said. "He's actually kind of excited about it, and I told him, 'That's kind of sick.'"

The division is not out of the woods yet. The Legislative Auditor General's Office will conduct a follow-up in a year -- but, Giani said, that's plenty of time for the division to clean up its act.

"We'll do it way before then," she said.

• Ace Stryker can be reached at 344-2556 or astryker@heraldextra.com.