Hibbard Brown & Co., Inc., Fined $10 Million and Expelled from Membership
Washington, D.C.--The National Association of Securities Dealers, Inc. (NASD), the self-regulatory organization for The Nasdaq Stock Market and the over-the-counter securities market, announced that it has expelled Hibbard Brown & Co., Inc. ("Hibbard Brown"), levied a fine of $10 million, and imposed other sanctions against Hibbard Brown, Richard P. Brown (Brown), its president, and DeJuan Stroud (Stroud), its compliance officer for defrauding retail customers in the sale of the securities of two public companies.
Pursuant to the disciplinary action taken by the NASD Market Surveillance Committee, respondents Hibbard Brown (which is currently in Chapter 11 bankruptcy), Brown and Stroud submitted an Offer of Settlement in which they consented to findings of facts and violations while neither admitting nor denying the allegations in the Complaint. Sanctions imposed against Hibbard Brown include a censure, expulsion from membership in the Association and a fine of $10 million.
Stroud is censured, barred from association with any member in any principal capacity, suspended from association with any member of the Association in any capacity for one year; and fined $25,000.
Brown is censured, barred from association with any member in any capacity, barred from directly or indirectly owning more than 5 percent interest in any Nasdaq company or serving as an officer, director or control person of a Nasdaq company, and is fined $300,000.
All of the funds recovered from regulatory fines assessed by the NASD against Hibbard Brown, Brown, and Stroud will be deposited into a special settlement pool, administered through the bankruptcy proceeding, that will be used to compensate investors.
Hibbard Brown and Brown consented to findings that during the period September through October 1990, Hibbard Brown, Brown and others, directly or indirectly, willfully or recklessly, engaged in a manipulative, fraudulent and deceptive scheme in connection with transactions in the common stock of First National Realty Associates, Inc. ("FNRA"). During this same period Hibbard Brown, Brown and others sold FNRA stock to customers in approximately 6,305 principal transactions at unfair prices that were not reasonably related to the prevailing market price for the securities, and failed to disclose to customers such facts. Such excessive charges to customers were 100 percent to 145 percent over the prevailing market price of these securities.
Hibbard Brown and Brown also consented to findings that during the period January 17 through February 15, 1990, Hibbard Brown, acting through Brown and/or other persons associated with Hibbard Brown sold the common stock of Linkon Corporation ("LKON") in 3,551 principal transactions to customers at fraudulently excessive prices that were not reasonably related to the prevailing market price and failed to disclose to customers such facts. Customers were charged excessive markups of 140 percent over the prevailing market price of the securities.
Hibbard Brown and Stroud consented to findings that Hibbard Brown failed to make filings with the SEC as required by Securities Exchange Act Rule 13d-1(b)(1) when Hibbard Brown had ownership of securities exceeding ten percent of the outstanding shares of FNRA. Stroud was responsible for reviewing the firm's trading positions to determine if such filings were required.
Hibbard Brown, Brown and Stroud also consented to findings that they failed to establish, maintain and enforce written supervisory procedures to detect and deter the conduct alleged in the other causes of the complaint.
Additionally, Hibbard Brown consented to findings that it failed to disclose to its customers that it controlled or was under common control with FNRA; that its representatives expressly or impliedly represented to customers that FNRA and LKON common stock was being offered "at the market" when Hibbard Brown dominated and controlled the market for both stocks and had no reasonable grounds to believe that a market existed for either FNRA and LKON other than those made, created or controlled by Hibbard Brown. Further, Hibbard Brown consented to findings that it sold FNRA and LKON common stock, underlying FNRA and LKON warrants, prior to FNRA and LKON updating post-effective amendments registering those securities; that it failed to preserve and maintain records related to commission payments to it representatives; and, that Hibbard Brown permitted an individual that was not active in its investment banking or securities business to remain in a registered capacity.
Finally, as part of the settlement agreement, Hibbard Brown and Brown also agree to withdraw their appeals in the U.S. Court of Appeals for the Third Circuit of an SEC Administrative proceeding. In this case, the SEC affirmed a 1994 NASD disciplinary action that expelled Hibbard Brown as an NASD member, ordered it to pay $8.7 million in restitution to defrauded customers and barred Brown in all capacities.
"This enforcement action by the NASD is a victory for every investor who is defrauded by Hibbard Brown," said John E. Pinto, Executive Vice President, Regulation. "The interests of the investing public have been well served by the severe sanctions imposed in this matter. And although the firm is now under the protection of the bankruptcy court, this fine increases the portion of the bankruptcy proceeds that will be used to pay investors."
This matter was investigated by the Market Surveillance Department and the Association's District 10 office in New York, New York. This disciplinary action was taken by the NASD Market Surveillance Committee, which consists of professionals from securities firms around the country. The Committee is responsible for maintaining the integrity of The Nasdaq Stock Market and over-the-counter markets and for disciplining NASD members and their associated persons who fail to comply with market-related securities laws.