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FINRA

NASD Investor Protection Initiatives - as of 01/09/98

For many years, one of NASD Regulation’s top priorities has been to combat market manipulation and sales practice abuses in the Nasdaq SmallCap and over-the-counter (pink sheets and OTC Bulletin Board) markets.

 

In July of 1995, the organization launched a major SmallCap sales practice initiative which is still underway. The focal point was approximately a dozen firms suspected of being among the worst actors in this market. With the assistance of District offices around the nation, NASD Regulation commenced investigations into these firms. Over 100 examiners, attorneys and supervisors spent nearly 20,000 workdays on these investigations. In two recent cases that were brought under this initiative—D.H. Blair and GKN—more than 4,300 investors in 48 states and the District of Columbia, will receive more than $3.8 million in restitution.


In 1996, NASD Regulation brought 1,200 disciplinary actions, an increase of 12 percent over 1995, and collected disciplinary fines increased by almost two-thirds. Thirty-one firms were expelled or suspended from membership, while 598 individual brokers were either barred or suspended.


Market Manipulation, Sales Practice and Fraudulent and Excessive Markup Cases

 

In addition to numerous ongoing investigations in this area, NASD Regulation has brought and completed the following major cases:

 

Stratton Oakmont (December 1996)

  • Firm expelled from the securities industry; President and Head Trader barred
  • Nearly $1 million in fines and restitution for excessive markups in a SmallCap security they underwrote
  • Second complaint filed against the firm and individuals alleging stock manipulation resulting in $28 million in illicit profits during the first day of aftermarket trading of five microcap offerings
  • In October 1997, disciplinary action instituted against 33 former Stratton principals and brokers alleging endemic sales practices abuses in the sale of microcap securities

D.H. Blair & Co. (August 1997)

  • Fraudulent and excessive markups in sixteen securities as to which the firm dominated and controlled immediate aftermarket trading
  • Fines and restitution of almost $5 million
  • Significant fines and suspensions for the firm’s CEO and Head Trader

GKN Securities (August 1997)

  • Fraudulent and excessive markups in eight securities as to which the firm dominated and controlled immediate aftermarket trading
  • Fines and restitution in excess of $2.1 million
  • 29 officers, executives and brokers sanctioned, including the firm’s CEO, President, EVP and Head Trader
  • Significant suspensions and fines for responsible individuals

Sterling Foster & Co. (September 1996)

  • Firm alleged to have made in excess of $50 million in illicit profits in three SmallCap underwritings in 1995
  • Fourteen principals, executives and brokers named
  • Violations included securities fraud, manipulation, and corporate finance rules
  • Followed by SEC asset freeze and two criminal actions against individuals

La Jolla Capital (September 1997)

  • Penny Stock Bars against the firm and its President
  • Nearly $1 million in fines and restitution
  • 27 officers, executives and brokers named
  • Initial decision, under appeal

Other NASD Regulation Cases

  • Hibbard Brown (Expelled and fined $10 million for manipulative activity and fraudulent markups in two microcap securities; 25 former Hibbard managers and brokers also named in other actions)
  • A.R. Baron & Co. (Unauthorized trading, excessive and fraudulent markups; fines and restitution in excess of $1.5 million; disciplinary actions ultimately brought against 23 principals, executives and brokers)
  • Chatfield Dean & Co. (Manipulation resulting in $700,000 in illicit profits during first three days of aftermarket trading of microcap IPO)
  • H.J. Meyers (Excessive and fraudulent markups and markdowns in four securities and excessive compensation to brokers; over $1 million in restitution ordered; 33 individuals named)

One of our enforcement priorities is to provide manpower and technical assistance to federal, state and local law enforcement agencies. NASD Regulation has received recognition for its contributions in many criminal securities actions, including the following:

  1. Meyers Pollock Robins, Inc./HealthTech Int’l (November 1997)
    US Attorney SDNY; FBI; SEC; New York Police Dept.
    Indictment of two high-level members of organized crime and 17 other defendants, including several registered persons for racketeering. securities fraud, extortion, and wire fraud.
  2. Baron & Co. (May 1997)
    Manhattan DA
    Indictment and arrest of 13 individuals and financial investment company for cheating thousands of investors out of more than $75 million. Charges include enterprise corruption, scheme to defraud, and grand larceny.
  3. Globus Group, Inc. (April 1997)
    US Attorney EDNY; FBI
    22 count indictment of ring (18 individuals) comprised primarily of Russian émigrés for massive securities fraud violations and conspiracy to commit murder.
  4. "Test Takers for Hire" (January 1997)
    Manhattan DA
    53 people indicted for cheating on broker licensing exams.
  5. Teletek, Inc. and United Payphone Services, Inc. (November 1996)
    US Attorney District of Nevada; IRS Criminal Investigation Division; Postal Inspectors US Customs Service
    Two indictments of 19 individuals under RICO Act with 40 separate counts of securities fraud and nine counts of money laundering.
  6. Illegal Payments to Brokers (October 1996)
    Joint Press Release of US Attorney SDNY; NASD Regulation; FBI; SEC.
    45 defendants charged variously with conspiracy, securities fraud, and criminal contempt in connection with sales to customers of OTC and Nasdaq securities.
  7. Illegal Payments to Brokers (September 1996)
    US Attorney SD Florida; FBI; Postal Inspectors’ IRS Criminal Investigation Division; SEC
    Five registered persons charged with conspiracy to commit securities fraud and wire fraud.

Micro-Cap Rule Proposals Under Consideration

 

Over-the-Counter Bulletin Board—Considering proposal to limit quotation on the OTCBB to companies filing periodic reports with the SEC


Disclosure Requirements—Considering proposal to require specific disclosure to investors of the differences between the OTC market and The Nasdaq Stock Market


Broker Recommendations—Considering proposal to require brokers to have reviewed current financial and other information about an issuer before recommending an OTC security


Clearing Firm Rule
—Proposal for member comment to require clearing firms to provide information that will allow self-regulators to better monitor the firms they clear trades for


Taping Rule—Rule proposal pending at the SEC that would require a brokerage firm to tape all customer sales calls if a specified percentage of the firm’s brokers worked for firms that have been expelled for telemarketing fraud or sales practice abuse


Cold Calling Rule—Proposal for member comment that would require all persons making cold calls to be registered with the NASD and subject to our regulation and sanctions