Maidstone Financial Fined, Expelled; Four Brokers Also Settle Fraud Charges; Investors to Receive Restitution
Washington, D.C.—NASD Regulation, Inc., today expelled Maidstone Financial Inc., from the National Association of Securities Dealers (NASD) and sanctioned two of its senior executives – along with two more senior executives of HGI Inc. (formerly known as the Harriman Group) – in connection with fraud in the underwriting of three securities. Maidstone and the four individuals, all of whom were barred, were fined a total of $14.8 million.
Nearly $1 million has already been deposited by the four executives into an escrow account for disbursement to hundreds of defrauded investors from 15 states and three countries. Maidstone’s Chief Executive Officer and Chairman, Marshall Bernstein, was barred, fined $1.9 million, and censured; and its President, Stuart Litman, was barred, fined $1.9 million, and censured. HGI’s Vice President and Director, Brian Douglas Scanlon, was barred, fined $5 million, and censured; and Secretary and Chairman Mark Arthur Hanna was barred, fined $5 million, and censured. Maidstone was fined $1 million and censured. The case against HGI remains pending.
Investors entitled to restitution need not contact the NASD directly, as they will be contacted in writing by a consultant hired by Maidstone (and approved by NASD Regulation) shortly. Maidstone and the four individuals all neither admitted nor denied NASD Regulation’s findings.
The complaint in this case, filed by NASD Regulation in December 1997, alleges that as underwriters of three securities (Sims Communications, Inc., Natural Health Trends Corp., and International Cutlery, Ltd.) HGI and Maidstone made more than $16.2 million in illicit profits, defrauding investors in the process. The two firms, working through the four individuals, illegally profited by purchasing stock at below-market prices to cover large short positions each firm had intentionally created in their inventories. In each offering, the firms purchased the covering shares from shareholders who had received their securities prior to the initial public offerings (IPOs) through private placements and bridge financing arrangements. In registration statements and amendments filed by the two firms with the Securities and Exchange Commission (SEC), the shares of these "selling shareholders" were restricted and therefore could not be sold for up to two years after the IPO, unless the lead underwriter granted permission.
The complaint also alleges that both firms entered into private transactions with the "selling shareholders" to purchase their shares to cover the short positions in their inventories. In addition, it is alleged that, acting through the four principals, the two firms engaged in fraud by failing to disclose the private transactions with the selling shareholders; the firms’ plans to distribute the selling shareholders’ securities to the public; and the receipt of excessive underwriting compensation.
HGI, according to the complaint, made $12 million in excessive and undisclosed underwriting compensation, and Maidstone Financial, Inc. received more than $4.2 million in excessive and undisclosed underwriting compensation.
This case was brought by NASD Regulation’s District 10 office in New York with assistance from the Corporate Financing Department in Washington, D. C. Neither HGI, Inc., nor Maidstone currently operates a securities business. In September 1997, HGI, which was then based in Jericho, N.Y., withdrew from the NASD. Maidstone, formerly based in New York City, also withdrew from the NASD in November 1997.
Investors can obtain the disciplinary record of any NASD-registered broker or brokerage firm by calling (800)-289-9999.
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. (NASD®), the largest securities-industry self-regulatory organization in the United States.