Florida Brokerage Firm LH Ross Expelled, Owner Franklyn Michelin Barred for Life to Settle NASD Charges of Widespread, Ongoing Fraud
Washington, D.C. — NASD announced today that it has expelled Boca Raton, FL-based brokerage firm LH Ross from the securities industry and barred its owner and president, Franklyn Michelin, for life to resolve charges of manipulation, fraud, excessive markups, sales of unregistered securities, books and records violations and supervisory violations in two pending enforcement actions against the firm. Both matters were scheduled to go before NASD hearing panels in coming weeks.
As part of the settlement, LH Ross and Michelin agreed to withdraw their appeals of three previous NASD hearing panel decisions that found, among other things, that LH Ross and Michelin had engaged in widespread fraud in the sales of unregistered self-offerings and had failed to cooperate with NASD investigators. Those previous decisions imposed sanctions that included expelling LH Ross (twice), barring Michelin, ordering the payment of more than $11.45 million in restitution and interest to harmed investors, and imposing $550,000 in fines. With the appeals dropped, those sanctions are now final.
In recent months, NASD has used two of its emergency powers for the first time to protect investors from LH Ross's ongoing fraudulent and illegal sales activities - by issuing its first temporary cease and desist order last August, and it first summary suspension of a securities firm in February.
"Using its cease and desist authority, NASD put an immediate halt to the firm's continuing fraudulent sales activity," said NASD Vice Chairman Mary L. Schapiro. "Later, NASD used its summary suspension authority to halt the firm's remaining operations. Through its vigilance and dedication to investor protection, NASD succeeded in bringing this fraudulent enterprise to an end."
At its peak, LH Ross operated 17 branch offices around the country and employed approximately 180 brokers.
As part of its settlement with NASD, LH Ross and Michelin have also agreed to:
- Provide, within 60 days, a complete and accurate sworn accounting of the use of proceeds raised in the 2003 and 2004 self-offerings of preferred LH Ross stock. The accounting must detail the precise amounts raised in the self-offerings; every deposit and disbursement of those funds; every movement of those funds after their initial deposit into an account; and, the identity and contact information for every investor in the preferred stock, along with the amounts of their investments.
- Execute consent directives giving NASD direct access to LH Ross's and Michelin's bank account records.
- Cooperate in NASD's ongoing investigation of individual LH Ross brokers, as well as any other investigation or disciplinary proceeding concerning monies raised through the 2003 and 2004 preferred stock offerings.
The two pending cases resolved in the settlement announced today involve:
- The "pump and dump" manipulation in 2003 of the common stock of Trident Systems International, Inc., a shell company with virtually no assets or operating history. NASD found that LH Ross and Michelin engaged in an unregistered distribution of Trident stock, using fraudulent sales practices that included unauthorized trading, failure to execute customer sell orders, and material misrepresentations and omissions of material facts. NASD also found that LH Ross and Michelin charged customers fraudulent and excessive markups.
- Fraudulent trading of six stocks on five trading days in 2003 that generated more than $360,000 in immediate financial gains. NASD found that LH Ross, Michelin and two LH Ross brokers would identify a stock that had declined significantly during the course of a trading day, acquire a block of that stock late in the afternoon, and then sell the stock to unsuspecting retail customers at the stock's earlier, higher price. To facilitate the scheme, they falsified order tickets by time-stamping them early in the trading day.
LH Ross and Michelin have dropped their appeals of NASD hearing panel decisions in these cases:
- On January 14, an NASD hearing panel expelled LH Ross from the securities industry for fraud and other violations related to its sales of unregistered self-offerings in 2003 and 2004. At least 150 investors in 27 states purchased the preferred stock. Saying LH Ross's fraud had caused "widespread, significant and identifiable customer harm" and calling future sales solicitations by the firm an "extreme threat to the investing public," that hearing panel also fined the firm $500,000 and ordered it to pay restitution and interest of more than $11.4 million. It also imposed a permanent cease-and-desist order to replace the temporary order that had been in place since Aug. 31, 2004.
- On January 25, in another disciplinary proceeding against the firm, an NASD hearing panel expelled LH Ross and barred Michelin, for failing to provide requested information to NASD investigators and thus impeding an NASD investigation.
- On Dec. 15, 2004, a hearing panel found that LH Ross and Michelin had failed to pay an arbitration award and had filed a meritless defense in opposing NASD Dispute Resolution's suspension notice for that failure to pay. The panel ordered LH Ross and Michelin to pay nearly $70,000 in restitution to the arbitration claimant, fined them $50,000 and suspended Michelin for six months.
The brokerage is also at the center of numerous state disciplinary actions. In recent weeks, citing a variety of securities violations, regulators in Texas, Connecticut, New Hampshire and Maine have revoked LH Ross's licenses to do business in their states. Utah regulators recently issued an emergency order suspending LH Ross's license, while regulators in Colorado have scheduled an April 8 hearing on possible revocation the firm's license.
LH Ross and Michelin settled the two pending enforcement actions without admitting or denying the allegations, but consented to the entry of NASD's findings. By dropping their appeals of the prior hearing panel decisions, LH Ross and Michelin are no longer challenging the findings of fraud and other violations in those cases.
NASD's investigation of individuals associated with LH Ross and its fraudulent sales activities is continuing.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2004, members of the public used this service to conduct more than 3.8 million searches for existing brokers or firms and requested more than 190,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
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.