NASD Regulation Disciplinary Committee Bars La Jolla Capital From Penny Stock Transactions; and Orders Fines and Restitution of More Than $950,000
Washington, D.C.--NASD Regulation, Inc., today announced that its Los Angeles District Business Conduct Committee (DBCC) has ordered that San Diego-based La Jolla Capital Corp. be permanently barred from selling penny stocks and that five of its senior officials should be sanctioned for circumventing the penny stock rules. Penny stocks are unlisted securities that trade over-the-counter and are priced under $5 per share.
As a result of a 16-day hearing by the DBCC, La Jolla Capital and its President Harold B.J. Gallison were fined more than $400,000 and are jointly responsible for repaying more than 100 investors from 26 states, the District of Columbia, and British Columbia almost $400,000. The remaining four senior officials were fined a total of more than $150,000.
Initial actions, such as this, by an NASD Regulation District Committee are final after 45 days, unless they are appealed to NASD Regulation’s National Business Conduct Committee (NBCC), or called for review. The sanctions are not effective during this period. If the decision in this case is appealed or called for review, the findings may be increased, decreased, modified, or reversed.
The sales practice abuses at La Jolla Capital were uncovered after a lengthy investigation by NASD Regulation’s District Offices in Los Angeles, San Francisco, and Denver. The DBCC found that from January 1994 through May 1995, La Jolla Capital and certain senior officials circumvented investor protection laws in approximately 140 transactions involving 15 separate securities. All of the transactions involve penny stocks.
The violations occurred at La Jolla Capital’s offices in San Diego, CA; New York, NY; Las Vegas, NV; Bethesda, MD; and Modesto, CA.
The following senior officials were sanctioned:
- Harold B.J. Gallison, President, and La Jolla Capital were fined a total of $401,380. He was also suspended in all capacities for 30 days; permanently barred from participating in penny stock transactions; permanently barred from acting as a supervisor; and censured.
- Robert C. Weaver, Executive Vice President and Chief Legal Counsel, was fined $25,000; suspended as a supervisor for 15 business days; ordered to retake the qualifying examination to become a supervisor, and censured.
- Gregory K. Mehlmann, National Branch Compliance Officer, was fined $10,000; suspended as a supervisor for 10 business days; ordered to retake the qualifying examination to become a supervisor; and censured.
- Christopher S. Knight, Branch Manager, was fined $120,854; permanently barred from acting as a supervisor; permanently barred from participating in penny stock transactions; and censured.
- Gerald J.R. Budke, Branch Manager, was fined $5,150; suspended from participating in penny stock transactions for one year; ordered to retake the qualifying examination to become a supervisor; and censured.
- Gallison, Weaver, and Budke are still employed by La Jolla Capital.
The 15 securities involved and sold by La Jolla Capital were: Affordable Housing Constructors, Inc.; Ambra Royalty, Inc.; Drucker Industries, Inc.; Environmental Recovery Systems, Inc.; Exten Industries, Inc.; HEARx Limited; InfoServe, Inc.; Interactive Telesis, Inc. (formerly known as INN Investment News Network Limited); Largo Vista Group Ltd.; Longport, Inc.; Modern Records, Inc.; Peppermint Park Productions, Inc.; Photo Acoustic Technology, Inc.; Quadratech, Inc.; and XO Corp. There is no allegation that the affected companies knew of, or were involved in, these violations.
The DBCC found that La Jolla Capital designed a system to circumvent the Securities and Exchange Commission’s (SEC) strict penny stock rules which ensure that investors receive honest and candid information about risk disclosure and suitability issues before they invest. La Jolla Capital had investors sign a misleading document that purported to exempt the transactions from the penny stock rule requirements. The letters were portrayed to investors as a "formality," and in some cases investors’ signatures were forged. La Jolla also was found to have implemented misleading and deficient supervisory policies and procedures designed to foster the improper claim of this exemption.
Between February 1996 and October 1996, 22 other La Jolla Capital brokers and supervisors, without admitting or denying liability, were fined and disciplined in connection with this case. La Jolla Capital employs 140 brokers in 11 offices in California, New York, Georgia, Utah, Nevada, and Texas.
The DBCCs are comprised of elected representatives from the securities industry who serve three-year terms.
NASD Regulation oversees all U.S. stockbrokers and brokerage firms. NASD Regulation, along with The Nasdaq Stock Market, Inc., are subsidiaries of the National Association of Securities Dealers, Inc. (NASDÒ), the largest securities-industry self-regulatory organization in the United States.