NASD Regulation Expels Stratton Oakmont; Principals Also Barred
Washington, D.C.--NASD Regulation, Inc., today announced it has permanently expelled the New York-based firm Stratton Oakmont from the securities industry.
The announcement was made today after market close following a decision by the NASD Regulation National Business Conduct Committee (NBCC). The NBCC ruling follows an appeal filed by Stratton Oakmont of an April 1996 decision by the New York District Business Conduct Committee (DBCC). The NBCC increased the sanction against Stratton Oakmont to expulsion from the original DBCC sanction of a one-year prohibition against effecting any principal retail transactions.
The NBCC decision also barred Stratton Oakmont President Daniel M. Porush and head trader Steven P. Sanders. In its decision, the NBCC increased Sanders' original penalty from a one-year suspension to a bar and affirmed the bar for Porush. Porush was also fined $250,000 and censured, while Sanders was fined $25,000 and censured.
Stratton Oakmont was ordered by the NBCC to pay $416,528 in restitution to customers, fined $500,000, and censured.
All of Stratton Oakmont's customer accounts will continue to be held by J.B. Oxford, a separate broker/dealer firm that has performed all of Stratton Oakmont's clearing operations. Anyone with questions about their accounts should contact at J.B. Oxford's Customer Service Department at (310) 777-8888, ext. 289. J. B. Oxford is a Los Angeles-based firm.
"With this expulsion, NASD Regulation has rid the securities industry of one of its worst actors," said NASD Regulation President Mary L. Schapiro. "With Stratton Oakmont's extensive and serious regulatory history, and an obvious disregard for all rules of fair practice, today's actions make the securities industry a better place for investors."
Barry R. Goldsmith, NASD Regulation's Executive Vice President of Enforcement added, "In less than a decade, Stratton Oakmont amassed one of the worst regulatory records of any broker/dealer firm. The firm has been the subject of numerous disciplinary actions brought by the NASD, the Securities and Exchange Commission (SEC), and state regulators involving fraud, market manipulation, sales practice abuses, and failures to adequately supervise its employees."
The NBCC found that "The firm must be, and hereby is, expelled from membership due to the number and gravity of the violations which we have sustained, and the number and gravity of the firm's relevant prior disciplinary incidents. We find that this history establishes a coherent pattern of willful disregard for regulatory requirements and regulatory authority, as well as a failure of lesser steps to remediate the firm's conduct."
The 23-page decision also noted that the bars of both Porush and Sanders were necessary because: "[They] continue to deny responsibility and exhibit no remorse for [their] misconduct, and, but for the bar, would continue to pose an on-going risk to the investing public."
The SEC and a number of state securities regulators around the nation have also sanctioned Stratton Oakmont. In early 1994, the SEC settled an enforcement action against Stratton Oakmont and Porush, after alleging that the firm engaged in securities fraud through its "boiler room" sales operation. By late 1994, the SEC had charged Stratton Oakmont with violating the settlement agreement and obtained a permanent injunction against the firm requiring future compliance.
Numerous states have taken action against Stratton Oakmont.
The April 1996 DBCC decision resulted from a complaint filed by NASD Regulation in late 1995 and early 1996. The complaint charged:
Excessive and Fraudulent Mark-ups - From October 18, 1993 through November 17, 1993, Stratton Oakmont, acting through Sanders, effected more than 150 principal retail sales of Class A and Class B warrants for the initial public offering of Master Glazier's Karate International Inc. that were marked-up excessively or fraudulently (greater than 10 percent above the prevailing market price).
Deficient Supervision - During the period and activity in question, Stratton Oakmont and Porush failed to establish, maintain, and enforce a supervisory system to prevent the violations in question.
The DBCC found that Stratton Oakmont - which underwrote the offering - controlled the market for Master Glazier, finding that no other broker/dealer made even a single purchase or sale of Class A or Class B warrants on a principal basis during the review period.
In its ruling, the NBCC stated: "Stratton, through Sanders, intentionally structured and participated in an IPO with a view toward retaining a high percentage market share for the purpose of economic gain." It also said that "the firm and Sanders engaged in abusive pricing" and actions that "discouraged the sales force from allowing customers to sell their securities back to Stratton, thus reducing the firm's risk and enhancing its ability to dictate prices arbitrarily."
The NBCC also found that Porush did not satisfy his responsibility to establish supervisory procedures as the firm's President and supervisor of the firm's retail sales force and trading and compliance operations. The NBCC added "we do not accept Porush's defense that he was a mere figurehead as President." According to the NBCC decision, Porush also was the salesperson with the largest individual allocation in the Master Glazier underwriting, had access to real-time pricing information, and as a result "had an obligation to assure that the retail products marketed by his sales force were in compliance with all relevant legal requirements, including those prohibiting excessive pricing."
Prior to today's order, Stratton functioned as a Market Maker for 23 securities listed on The Nasdaq Stock Market's Small Cap Market and 4 on The Nasdaq National Market. As a result of its expulsion, Stratton will cease all of its market making functions immediately.
A more complete litany of Stratton Oakmont's disciplinary history can be found in the NBCC's decision on pages 17-20.
Selected Regulatory History
Stratton Oakmont joined the NASD in April 1987 and has a long-standing disciplinary history.
Since June 1989, the firm has been the subject of twelve disciplinary actions brought by the NASD and NASD Regulation. The charges encompassed in these proceedings include securities fraud, manipulation, unlawful markups, violations in connection with initial public offerings, breach of market making restrictions, inducing customers not to cooperate in Association investigations, and failures to supervise.
On June 9, 1996, NASD Regulation issued a complaint alleging that Stratton, its President, Daniel M. Porush, and its head trader, Steven P. Sanders, engaged in manipulative, fraudulent and deceptive acts in connection the initial public offerings and aftermarket trading of five securities. The complaint alleges approximately $28 million in illegal profits. The case is scheduled for hearing in January, 1997.
NASD Regulation has issued a complaint and will hold a hearing in December regarding allegations that Stratton failed to comply with NASD Regulation rules requiring the firm to timely report its customer complaints, and failed to have adequate supervisory procedures.
In February and March 1994, Stratton settled an SEC enforcement action brought against it and several of its principals, including Daniel M. Porush. The Commission alleged that Stratton engaged in securities fraud through its "boiler room" sales operation. It was alleged that Stratton made material misrepresentations to its customers in the sale of speculative over-the-counter securities. As part of the administrative settlement, Stratton agreed to retain an independent consultant to review its policies, practices and procedures and to adopt his recommendations.
Stratton failed to comply with the terms of its settlement with the Commission. In December 1994, the SEC filed a complaint against Stratton alleging that it violated the terms of the March 1994 settlement by failing to adopt the recommendations of the independent consultant. After obtaining temporary and preliminary relief against Stratton, in February 1995, the Commission obtained a permanent injunction against Stratton enjoining it from violating the terms of the March 1994 administrative order. In so doing, the Court found that Stratton had failed to adopt the independent consultant's recommendations.