BUSINESS
SEC Bans 3 Brokers From Industry Work : Securities: They worked in Orange and San Diego counties for Stuart-James, a penny stock brokerage.
November 10, 1993 | SCOT J. PALTROW, TIMES STAFF WRITER
The Securities and Exchange Commission's chief administrative law judge has taken the
unusually harsh action of permanently banning from the securities industry three Southern
California brokers who had been affiliated with a now-defunct penny stock brokerage. All
three had worked in Orange County or San Diego in the late 1980s for Stuart-James Co., a
penny stock brokerage. Stuart-James folded in 1990 after paying $1.9 million to settle civil
charges of defrauding customers. Judge Warren E.
Further Articles in the nineties referring to the game I beat for 10 years and many of the
firms that existed then and led to the now promoted penny game of the 1990’s and the Wolf of Wall Street movie:
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The Penny Stock Boys Are Back
July 19, 1992
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Finance
THE PENNY-STOCK BOYS ARE BACK
When state and federal regulators launched a crackdown on penny-stock fraud during the
1980s, they aimed straight at the top. One by one, penny-stock kings such as Meyer Blinder,
chairman of Blinder, Robinson & Co., were forced out of the industry, their brokerage
empires dismantled. With the most prominent boiler-room operations shuttered, regulators
preened. And they enacted new rules they expected would forestall future scams. One
Securities & Exchange Commission official last year boasted that the crusade was "one of our great successes."
But the gloating was premature. During the past year, authorities concede, they have
detected a disturbing upsurge in penny-stock activity. Enforcement actions soared last year
to 115, roughly triple the number in 1988. Penny-stock promoters have become adept at
exploiting loopholes in the new rules. "There was some amount of glee among regulators that
we had won, that we'd thrown the bums out," admits Colorado Securities Commissioner Philip A. Feigin. "Maybe we planted the flag too soon."
CLOSE TIES. Some of the fastest growth in penny-stock trading, according to law enforcement officials, is coming from firms captained by top aides of the promoters the SEC thought ithad driven out of the business. Hibbard Brown & Co., which is run by several former aides toFirst Jersey Securities Chairman Robert Brennan, has grown to more than 400 brokers in eight states. A smaller New York firm, F. N. Wolf, has so many former Brennan brokers thatregulators dubbed it "First Jersey II." And employees of Stuart-James Co., which was forcedinto bankruptcy two years ago, are now running Franklin-Lord Inc., based in Scottsdale,Ariz. Many of Stuart-James' former brokers have joined forces with an ex-Blinder Robinson executive to create Chatfield Dean & Co. The Englewood (Colo.) firm has 500 brokers and nowranks as the largest U.S. penny-stock dealer. "It's like hitting mercury with a hammer," moans Ohio Securities Commissioner Mark V. Holderman. "You close one firm and four or five open in its place."
Hibbard Brown and Franklin-Lord couldn't be reached for comment. An F.N. Wolf official
declined to say whether many Wolf brokers came from Brennan.
In some cases, ties between the older firms and the offspring are so close that authorities are concerned that the older firms simply shut down and then reorganized to dodge legal
liabilities. Such questions have dogged Chatfield Dean since it took control of eight
Stuart-James offices with 200 brokers last year after Stuart-James liquidated. One lawyer
familiar with the bankruptcy proceedings believes that Chatfield Dean never paid for the
Stuart-James offices, and that Stuart-James quietly transferred at least $1.2 million in
cash to the new firm.
Chatfield Dean President Sanford Greenberg, formerly a top sales executive for Blinder
Robinson, insists that he has transformed the firm into a mainstream operation and is being
unfairly tarred with prior associations. "The biggest problem we have is that I once worked
for Blinder Robinson and that we acquired offices from Stuart-James," says Greenberg. By
acquiring the Stuart-James accounts, "we helped keep 60,000 investors from going through a
government liquidation."
Perhaps naively, regulators thought the new firms wouldn't be able to duplicate the tactics
of predecessor firms. That's because of SEC rules that took effect in January, 1990,
governing the sale of stocks trading for less than $5. Under those rules, brokers generally
must get an investor's consent in writing before each stock transaction can be closed. That
was supposed to end the abuses of boiler room "cold calls" to hundreds of prospects, who
were enticed into buying stocks over the phone without seeing a prospectus.
But according to the government, that hasn't stopped some firms. In a March, 1990,
nationwide sweep of 188 brokerage offices by a penny-stock task force, regulators found
violations at 23% of the firms serious enough to warrant enforcement investigations. Some
firms, authorities say, manipulate stocks--or engineer reverse stock splits--to boost the
price above $5 to exempt the securities from the cold-call rules. Regulators say some
penny-stock brokers have been using the same heavy-handed approaches penny-stock hustlers have employed in the past. According to an SEC suit filed last March, managers at StrattonOakmont Inc. in Lake Success, N.Y., implore young brokers to act like "phone terrorists" and to "stay on the phone 'til they die or buy." After Stratton brokers made sales, the SEC contends, they often engaged in rapid-fire trading--often unbeknownst to customers--that generated hefty commissions.
Take Bernard M. Simon, a 59-year-old retired retailer from Elmwood Park, N.J. In May, 1991,
he got a call from a Stratton Oakmont broker who convinced him to buy 2,000 shares in an
obscure medical testing firm. After the stock ran up, a Stratton broker persuaded Simon to
flip his profits into other speculative stocks. That's when his broker began making
unauthorized trades in stocks that quickly collapsed, costing Simon $12,000. "It was a
bait-and-switch game," he contends. "They put me into stocks they were ready to dump."
Stratton Oakmont is contesting the charges. Stratton's attorney, Ira Lee Sorkin,
acknowledges that every brokerage might have a few overzealous brokers, but "wholesale
charges of a boiler room have no support."
Some firms seem simply too fleet for the regulators. After the National Association of
Securities Dealers charged First Securities Group of California Inc. with selling millions
of dollars' worth of nonexistent municipal bonds in September, 1988, the Beverly Hills-based
firm simply moved several buildings away and continued operating illegally as FSG Financial
Services Inc., the U.S. Attorney in Los Angeles says. By the time government investigators
closed FSG down, in July, 1991, FSG Financial customers had lost $27 million. In June, 1992, the U.S. Attorney charged John Anthony Genetti with masterminding "a complex racketeering and securities fraud scheme" at FSG. Genetti's attorney says his client pleaded not guilty.
Although the new rules have had some impact, a number of firms have become adept at taking advantage of loopholes, regulators say. Take Chatfield Dean. Greenberg says his firm now sells mostly John Hancock mutual funds and NASDAQ securities, rather than the small-
capitalization stocks that aren't eligible for a NASDAQ listing and are subject to the most
abuse by brokers. But regulators believe that many dealers sell such mainstream products
only long enough to exploit an exemption from the SEC's cold-call rules. The rules say that
a broker can get a customer to trade without written consent only after the customer has
bought three stocks or has held an account for a year. BUSINESS WEEK has learned that one state already is investigating whether Chatfield Dean has switched investors from mutual
funds into speculative stocks after the required period. Greenberg denies the practice.
Penny-stock dealers in Ohio have found yet another way around the law. Unlike other states,
Ohio exempts brokerages from joining the NASD and being subject to its membership rules if
the brokers sell stocks only to Ohio residents. Brokers contend that not even the SEC
cold-call rules apply to them, though the SEC disagrees. It's no surprise, then, that mainstream Ohio-based brokerage firms are complaining that some dealers have turned the
state into a free-trade zone for penny-stock hustles.