A LONG REACH. They've also managed to get around Ohio's own investor safeguards. According to a class action filed by attorney Dennis E. Murray Jr., Worthington-based Dublin
Securities Inc. evaded state rules governing public stock offerings. The lawsuit says Dublin
put together a private group--primarily consisting of brokers--that paid $1 a share for
500,000 shares of Environmental Safety First Industries Inc. Dublin, the suit alleges, later
bought back those same shares for $1 to $2 each before reselling them to the public for as
much as $5.75 a share. This tactic allegedly allowed brokers to skirt state rules requiring
them to give investors prospectuses and limiting the markup on shares sold in public
offerings. In May, after two and a half years without any revenues, ESFI filed for Chapter 7
liquidation. Dublin officials could not be reached.
Other firms are looking far beyond U.S. shores. More and more, penny-stock dealers are
pitching foreign stocks to U.S. investors--a ploy that regulators feel is ripe for fraud.
While the sale of foreign stocks in the U.S. is governed by SEC rules, regulators are
finding it's much harder to investigate claims about obscure, far-flung foreign companies.
"The internationalization of markets has a dark side," says Colorado's State Securities
Commisioner Feigin. "How do we check out Indonesian companies with a $3 million float?"
Take First Choice Securities Corp. Colorado regulators spent weeks calling various European patent offices just to investigate claims made by First Choice brokers that a company called Rephex had obtained patents valid in 11 European countries. Brokers also claimed the tinyIrish manufacturer of electrodes was about to be listed on a U.S. stock exchange and thatFirst Choice was waiving commission charges except for a $20 "ticket fee." After investigators determined those claims were all false, Colorado regulators filed suit last August against First Choice, accusing the firm of using high-pressure sales and
misrepresentations to defraud more than 300 investors who bought $1.1 million in Rephex
shares. First Choice is contesting the charges and says claims made by its brokers are
accurate. First Choice officials could not be reached.
NO BLANK CHECKS. Regulators are once again betting that rule changes can stem the new
abuses. Under an SEC rule scheduled to take effect in January, 1993, brokers will be barred
from selling penny stocks without first disclosing to investors the current "bid" and "ask"
prices and the broker's commission. The broker must also provide a monthly update on the
value of investors' holdings.
The SEC also would restrict promoters of so-called "blank check" offerings--in which
interests are sold in a limited partnership that invests in a chosen industry. Promoters
would have to notify investors when an acquisition is made. Investors would then have up to
45 business days to demand their money back.
But this time around, regulators have more realistic expectations. They realize that,
considering the strained resources of the SEC and the states, the new rules can only go so
far. Regulators are also cautious about imposing regulations so severe they would impair
legitimate efforts to raise capital for small businesses. Their biggest hope is that
requiring greater disclosure could save some investors from scam artists. But, says Maryland
Securities Commissioner Ellyn Brown, "There's a point at which you can't save people from
themselves." That chastened attitude is quite a change from regulators' victory declarations
just a few years ago.NEW SKIRMISHES ON THE PENNY-STOCK FRONT
STRATTON OAKMONT INC.
In a Mar. 20 suit, the SEC charged New York-based Stratton with illicitly
promoting and manipulating stocks. According to the SEC, Stratton executives
goaded its brokers to act like "phone terrorists" and to "take customers to
the mat." Stratton is challenging the charges
J.W. GANT & ASSOCIATES
The NASD on June 18 suspended Colorado-based Gant from making markets in stocks
for 30 days. The NASD said Gant sold shares of Bali Jewelry Inc. at excessive
markups--as much as 77% above Bali's prevailing market price. Gant is appealing
the sanctions
ATFIELD DEAN & CO.
In January, NASD fined Chatfield $1,000 for entering NASDAQ quotations with
excessive spreads. It also censured and fined the firm for failure to supervise
brokers, guaranteeing returns on investment, and unauthorized trading in its
Chicago branch office. Chatfield is appealing
HIBBARD BROWN & CO.
Delaware officials this February barred the New York firm from selling stocks
but stayed the order pending Hibbard's appeal. Regulators allege that Hibbard
brokers put investors in unsuitable stocks and made misrepresentations about
the stocks' future prospects
DATA: BW
Dean Foust in Washington
.