Wednesday, January 19, 2005
Nancy Condon (202) 728-8379
Herb Perone (202) 728-8464
NASD Panel Expels Florida Brokerage LH Ross, Orders Nearly $12 Million in Fines, Restitution; Issues First Permanent Cease and Desist Order
Washington, DC – An NASD Hearing Panel has expelled Boca Raton, FL-based brokerage LH Ross for fraud and other violations related to the sales of unregistered self-offerings that the panel called “little more than a scheme to defraud investors.” The panel ordered the firm to pay a $500,000 fine, more than $11 million in restitution to investors, prejudgment interest of at least $450,000 and hearing costs of more than $18,000.
The panel also imposed NASD’s first-ever permanent cease and desist order, which replaced the temporary cease-and-desist order (TCDO) that NASD imposed in August 2004 to stop LH Ross’s ongoing fraudulent and illegal sales activities. This case represents the first time NASD has used its TCDO authority, which was approved by the SEC in June 2003.
The Hearing Panel found that LH Ross brokers, acting with the intent to “deceive, manipulate or defraud investors,” made material misrepresentations and failed to provide important information to investors in connection with private sales of LH Ross stock in 2003 and 2004. At least 150 investors in 27 states purchased the preferred stock. The panel also found that LH Ross invested at least one customer’s funds in the firm’s stock without that customer’s knowledge or consent.
“In essence, LH Ross operated a boiler room,” the panel’s decision said. “The firm engaged in a concerted, high-pressure telephone campaign to sell unregistered securities in the form of units of convertible preferred LH Ross stock, showing little concern for the customers’ investment needs or objectives. The firm employed false and deceptive means to solicit customers, who had no independent way to verify representations made by the brokers about the firm… This case involves widespread, significant and identifiable customer harm, and the panel believes that LH Ross and (its president) have retained substantial ill-gotten gains.”
According to the panel’s decision, LH Ross’s transgressions include: a pattern of failing to send the private placement memorandum to customers or sending it well after the purchase; failing to reflect the acquisition of preferred stock on customers’ monthly account statements; telling customers their investment had doubled without divulging that the firm had simply doubled the price of the preferred stock in another offering; making additional material misstatements to customers who posed questions about the offering; completely ignoring many customer complaints about the offerings; and dissipating or misappropriating a significant portion of the millions of dollars raised in the self-offerings, “which appear to be little more than a scheme to defraud investors.”
The panel also noted that LH Ross and Franklyn Michelin – the firm’s CEO, CFO, COO, President and Chief Compliance Officer – had knowingly hired several brokers from firms with regulatory problems, including abusive sales practices. One of those individuals, who was hired as vice president for investment banking, was awaiting sentencing for his felony conviction for conspiracy to commit mail and wire fraud. The panel said Michelin knew from customer complaints he had received personally that his salesman were making false claims, but took no corrective action.
“Respondent’s argument that it is not responsible for fraud committed by its registered representatives – particularly under these circumstances – is utterly specious,” the panel said in its decision.
The Hearing Panel found that LH Ross failed to respond to repeated NASD requests for information and documents related to funds raised during the private placement offerings and how those funds were used. Among the information LH Ross failed to provide: the name of the escrow and/or bank account in which proceeds from the preferred stock sales were deposited; the financial institution at which the account is held; the account number; the person or persons with authority to withdraw funds from the account; the date and amount of withdrawals from the account; and to whom the withdrawals were payable.
In its decision, the panel said it “believes that Respondent’s lack of cooperation was an attempt to obstruct NASD’s investigation of this ongoing fraud.” Noting that to date, LH Ross has “offered no reasonable explanation for its complete failure to respond… the panel concludes that the Respondent has refused to provide the requested information because it does not exist or contains information that is detrimental to the firm.”
In imposing the permanent cease and desist order prohibiting LH Ross from engaging in a wide range of activities, the panel said, “Any future attempt by LH Ross to solicit customers to invest in unregistered securities issued by the firm poses an extreme threat to the investing public.” In imposing an obligation on the firm to pay restitution of over $11 million and prejudgment interest, the panel rejected Michelin’s assertion that all of the money raised had been spent on business related activities.
The Hearing Panel’s decision can be appealed to the NASD’s National Adjudicatory Council (NAC) within 25 days. NAC decisions can be appealed to the Securities and Exchange Commission (SEC). SEC decisions can be appealed to U.S. District Court.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web site at www.nasd.com.