NASD Regulation Issues Complaint Against HGI, Maidstone Financial, and Principals of Both Firms; Fraud and Illegal Profits of $16.2 Million Alleged
Nancy A. Condon - (202) 728-8379
Washington, D.C.--NASD Regulation, Inc., today issued a complaint against HGI, Inc. (formerly known as The Harriman Group, Inc.), Maidstone Financial, Inc., and four principals of the two firms alleging fraud in connection with three public offerings, which resulted in more than $16.2 million in illegal profits.
The complaint names HGI; Maidstone; and HGI’s Vice President and Director, Brian Douglas Scanlon, and Secretary and Chairman, Mark Arthur Hanna. Maidstone’s Chief Executive Officer and Chairman of the Board, Marshall Bernstein, and President, Stuart Litman; were also named.
The complaint alleges that, as underwriters of three securities, HGI and Maidstone made more than $16.2 million in illicit profits, defrauding scores of investors in the process. The three securities are: Sims Communications, Inc.; Natural Health Trends Corp.; and International Cutlery, Ltd. The violations occurred in 1995, shortly after the commencement of trading in each security.
According to the complaint, 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 (IPO) through private placements and bridge financing arrangements. In registration statements and amendments filed by the two firms with the 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 further alleges that both firms entered into private transactions with the "selling shareholders" to purchase their shares to cover the short positions in their inventories. The firms’ undisclosed distribution of these securities violates federal securities laws and NASD rules.
As alleged, the two firms, acting through the four principals, 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 unlawful 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.
Neither firm currently operates a securities business. In June 1997, HGI (which was based in Jericho, N.Y.) filed to withdraw its membership from the NASD. In early December 1997, Maidstone (which was based in Manhattan) also filed to withdraw from the NASD. Scanlon left HGI in February 1997, and Litman left Maidstone in October 1996. Hanna remained at HGI until the firm closed its doors, and Bernstein remained at Maidstone until the firm filed to withdraw from the NASD earlier this month.
The issuance of a disciplinary complaint represents the initiation of a formal proceeding by the Association in which findings as to the allegations in the complaint have not been made and does not represent a decision as to any of the allegations contained in the complaint. Because this complaint is unadjudicated, you may wish to contact the respondents before drawing any conclusion regarding the allegations in the complaint.
Under NASD Regulation rules, the individuals and the firms named in the complaint can file a response and request a hearing before an NASD Regulation disciplinary panel. Possible sanctions include a fine, suspension, bar, or expulsion from the NASD.
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, and 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.