NASD Regulation, Inc. Bars Penny Stock Broker; Orders $7.8 Million in Customer Restitution
Washington, D.C.--NASD Regulation, Inc., (NASDR) today announced that penny stock broker Franklin N. Wolf, former President and owner of F.N. Wolf & Co., Inc., has been ordered to pay almost $7.8 million in restitution to hundreds of investors who purchased penny stocks. He was also fined $250,000 and barred for life from the securities industry.
Richard T. Sullivan, Vice President and Director of Compliance for F.N. Wolf & Co., was fined $10,000, censured, and suspended from acting in any supervisory capacity in the securities industry for one year. To regain his status as a general securities principal, Sullivan will have to requalify by examination.
"We consider the violations so serious that ordering the almost $8 million in restitution and barring Wolf from the securities industry for life are necessary to protect the investing public and serve as a deterrent to anyone thinking about taking advantage of investors now or in the future," said NASD Regulation, Inc., President Mary L. Schapiro.
John E. Pinto, NASDR Executive Vice President agreed. "Less than two years ago, the NASD brought a major disciplinary action against the firm, Wolf, and others--also for sales practice abuses in the sale of penny stocks to investors. Shortly after that NASD action, F.N. Wolf closed its doors and went out of business."
Today's action is important because even though Wolf Financial and Wolf & Co., filed for bankruptcy court protection in August 1994, the restitution ordered by the NASD positions the affected investors to recapture some of their money.
The focus of the NASD disciplinary action concerned F.N. Wolf's sales of Nacoma Consolidated Industries, Inc., an over-the-counter security, in violation of penny stock rules established by the Securities and Exchange Commission (SEC) designed to reduce high-pressure sales tactics and increase customer awareness of the sale of penny stocks by broker/dealers. After an extensive investigation, the NASD found that Wolf effected more than 2,500 sales of Nacoma to customers without complying with required penny stock sales-practice rules, designed to protect investors.
During a six-month period, F.N. Wolf sold more than 2.5 million shares of Nacoma to customers, generating $7.8 million in proceeds. The SEC's penny stock rules require that prior to each retail sale, every customer must be provided with a written determination regarding that particular sale, which the customer then must sign and return, confirming that the security in question is a suitable investment.
Furthermore, the firm must obtain written authorization from the customer to purchase a particular penny stock. The SEC has said this rule is designed to regulate the sales practices of broker/dealers active in the market for low-priced securities that are not listed on Nasdaq or the stock exchanges, and is intended to be a "means reasonably designed to prevent fraud."
The NASD also found that Wolf and Sullivan failed to establish, or enforce, adequate supervisory procedures requiring compliance with the Penny Stock Rule.
According to the NASD findings, Wolf understood the requirements of the highly-publicized Penny Stock Rule, despite his protests that he did not comprehend the rule's implications. Furthermore, Wolf was deemed responsible for making the ultimate decision to market Nacoma to his customers. The NASD also decided that Wolf "well knew that compliance with the Penny Stock Rule would effectively kill the lucrative plan which had been set up for Nacoma."
Finally, the NASD found that given the gravity of Wolf's misconduct and his extensive disciplinary history, the public's best interest could only be served by barring him from the securities industry for life.
The case was decided by the District Business Conduct Committee for District 10 in New York, and affirmed on appeal by the NASD National Business Conduct Committee. These Committees are responsible for disciplining NASD members and their associated persons who fail to comply with NASD rules and related securities laws. The decision stems from an investigation conducted by the NASD New York District Office.
This enforcement action is part of an on-going effort by the NASD to eradicate abusive sales practices in the sale of penny stock to investors.
Wolf is appealing his case to the SEC.