NASD Fines Stratton Oakmont $325,000 for Fraud and Other Violations;Suspends and Fines Head Trader
Washington D.C.--The National Association of Securities Dealers, Inc. (NASD) announced today that it has fined Stratton Oakmont, Inc., of Lake Success, N.Y. $325,000 for fraud and other violations in connection with its underwriting of an initial public offering (IPO). The firm's head trader and manager of its trading department, Steven P. Sanders, was also suspended and fined $50,000.
The settlement announced today requires Stratton and Sanders to pay their fines by April 15. Sanders will be suspended for 45 days from associating with any NASD member, and has agreed not to engage in any trading-related activities for any NASD member firm for 50 days. The settlement also requires that Stratton file certain new supervisory procedures with the NASD.
Mary L. Schapiro, NASD Regulation, Inc., President, said, "By violating the integrity of the capital raising process, Stratton abused underwriting procedures and benefited at its customers' expense."
This settlement results from a joint investigation by the NASD District No. 10 Office in New York and its Enforcement Department in Washington, D.C.
Without admitting or denying the alleged violations, Stratton and Sanders consented to the NASD's entry of findings that Stratton served as lead underwriter in the IPO of IPS Health Care, Inc. units, and sold more than 70 percent of the offering to its own customers. At the same time, Stratton's registered representatives encouraged their customers to purchase units in the IPO before the SEC declared the registration statement effective. By accepting payments from customers before the SEC declared the IPO effective, Stratton violated NASD rules and federal securities laws. During this pre- effective period, Stratton sold 64,975 units--13 percent of the total units it sold--to 71 customers for a total of $573,562.50.
Additionally, the NASD found that Stratton solicited and received customer sale orders from more than 300 customers for 236,650 IPS Health Care warrants, which were a component of the IPO units. These trades, totalling 306 orders, were solicited before the offering was effective, and thus violated federal securities laws because Stratton was bidding for securities before completing its role in the distribution. In the two weeks following the offering, Stratton resold these warrants, profiting by approximately $300,000.
Stratton and Sanders were also found to have violated SEC and NASD anti-fraud provisions. Stratton, acting through Sanders, fraudulently purchased IPS Health Care warrants from its customers in a rising market at arbitrary prices shortly after trading in the warrants began. Stratton, through Sanders, arbitrarily gave certain customers, whose sell orders were received early in the morning, at $1.00 a share, while other customers, whose sell orders were received hours later, received $.50 per share, even though the market had risen during the day.
Separately, in more than 700 transactions, Stratton failed to disclose to its customers that it was a market maker in IPS Health Care securities.
The NASD also found that Stratton and Sanders failed to establish and enforce written supervisory procedures and that they failed to provide adequate supervision in violation of the NASD Rules of Fair Practice.
The federal securities laws require that IPO sales occur only after the SEC declares the registration statement effective. Sales by a firm during this pre-effective period undermine the purpose of these restrictions--to enable investors to become thoroughly apprised of information concerning the issuer and to arrive at a reasoned decision concerning the merits of the investment. In addition, an underwriter is prohibited from soliciting sales while engaged in a distribution. During this period, the market for a security is especially sensitive and susceptible to artificial price influences by those involved in the distribution.
NASD Executive Vice President for Regulation John Pinto said: "Stratton's violations are serious. The rules are designed to prevent premature selling as well as soliciting purchases during a distribution. Both are essential to ensuring the integrity of the underwriting process. It is critical that firms remain vigilant in their adherence to these rules. Those that don't will face NASD enforcement actions."
The terms of the settlement were approved by District Business Conduct Committee for District No. 10. The Committee's acceptance of the settlement was approved by the NASD's National Business Conduct Committee.