NASD Orders Fines and Restitution of Nearly $600,000 Against Josephthal, Lyon & Ross, Inc; Imposes Additional Sanctions
Washington, D.C. -- The regulatory arm of the National Association of Securities Dealers, Inc. (NASD) announced today that it has fined Josephthal, Lyon & Ross, Inc. nearly $350,000 and, in addition, ordered the firm to pay more than $225,000 in restitution to customers who were victimized by the firm's excessive mark-ups.
Josephthal's Chairman and Chief Executive Officer, Dan David Purjes, was censured in connection with these violations and its head trader, Frank Garriton, was suspended for 15 business days and fined $10,000.
The settlement between NASD Regulation (NASDR) and Josephthal requires the firm to return $152,853 in excessive mark-ups, plus $72,364 in accrued interest, to customers in connection with the sale of the common stock of ACTV, Inc.
This disciplinary action results from three separate investigations conducted by NASD District offices in New York and Boston.
"Protecting the nation's investing public means guaranteeing that every broker/dealer treat their customers fairly," said NASDR President, Mary L. Schapiro, "and not profiting by willfully overcharging investors is a key element of that protection. I am especially pleased that we were able to develop and implement a program to help investors recover their losses along with the interest due them."
Based in New York City, Josephthal was also charged with other significant violations in addition to the mark-ups in ACTV stock. As part of the settlement agreement, Josephthal must conduct a comprehensive review of its supervisory procedures under the guidance of an independent consultant not unacceptable to NASDR. The review will focus on areas cited in this action, and will make recommendations (which the firm must accept or propose a reasonable alternative) designed to remedy deficiencies in Josephthal's supervisory and compliance system.
NASD Executive Vice President for Regulation John Pinto said, "I view the protection of investors as our primary enforcement mission. The restitution portion of this settlement insures that harmed investors are not only reimbursed for amounts that they were overcharged, but that they also receive over four years of interest for their lost opportunity costs. And the retention of an outside consultant insures that the review conducted of the firm's compliance and supervisory structure is not only comprehensive, but an objective assessment of the firm's procedures."
Without admitting or denying the alleged violations, Josephthal, Purjes and Garriton consented to NASDR's findings that the firm, acting through Purjes and Garriton, dominated and controlled the common stock of ACTV between July 23, 1991 and August 21, 1991. As a result, Josephthal was able to charge its customers excessive mark-ups of between 5.26 percent and 41.7 percent over the firm's contemporaneous cost in 387 separate transactions.
As part of the settlement, the affected customers will be reimbursed more than $225,000, representing the amount that the customers were overcharged ($152,853.48) plus pre-judgment interest dating back to the violative conduct ($72,364.15). Mark-ups in excess of 10 percent are deemed fraudulent, and therefore violate Article III, Section 18 of the NASD Rules of Fair Practice. Section 18, the NASD counterpart to SEC Rule 10b-5, prohibits the use of manipulative, deceptive, or other fraudulent devices in connection with the purchase or sale of any security.
In addition, Josephthal, acting through Purjes and Garriton, distributed ACTV while bidding for and/or purchasing the same securities for the firm's account, and induced others to purchase the securities, prior to the completion of the distribution. This conduct violates SEC Rule 10b-6 which prohibits anyone engaged in the distribution of a particular security or securities from selling or purchasing (for any account in which they have a beneficial interest) any security which is part of that distribution, or attempting to induce others to purchase the particular security or securities in question, until they have completed their participation in the distribution.
Josephthal also consented to NASDR findings that in two separate public offerings it failed to comply with the NASD Board of Governors' Free-Riding and Withholding Interpretation. This policy requires that a bona fide distribution be made to public investors of any new issue which immediately trades at a premium over the public offering price. In this matter, Josephthal placed shares of two new issues (Medsonic, Inc. and Sciclone Pharmaceuticals), which traded at higher prices in the immediate after-market, in the firm's error accounts and later in the firm's trading account. As a result, the firm garnered improper profits and concessions of more than $33,000.
Josephthal also consented to findings that for nearly two years (between November 11, 1992 and August 31, 1994) it failed to register its branch office in Providence, R.I. and did not designate it as a supervisory office, as required by the NASD. During the two year period, Josephthal also improperly paid compensation belonging to certain registered representatives to a non-member for investment banking activities conducted at the branch office, a practice which violates Article III, Section 25 of the NASD Rules of Fair Practice.
Purjes also consented to NASDR findings that as the former president and current CEO of the firm, he was responsible for the Josephthal's failure to establish and maintain a system to supervise the activities of its employees. In addition, Josephthal and Purjes agreed to NASDR's findings that the firm failed to establish, maintain, and enforce adequate supervisory procedures designed to prevent and detect violations described in this settlement.