Toluca Pacific Toes Line on Penny Stocks

When it comes to his attire, stockbroker Peter Blowitz flouts convention. On a typical day, he roams his Toluca Lake office dressed in jeans, tennis shoes and an open-collar, long-sleeve shirt without tie. No pinstripes here.

But when it comes to trading stocks, Blowitz, president and half-owner of Toluca Pacific Securities Corp., is a stickler for rules--not just those set by regulators, but also his own. His Rule No. 1? Never trade stocks of new companies that were organized in Newport Beach or in Florida. “If they’re from Florida or Newport Beach, I throw them in the trash,” Blowitz said. “It’s a reflex action. There’s just too many bad deals down there.”

Blowitz, 45, can’t afford to take chances. Toluca Pacific specializes in trading over-the-counter stocks, including high-risk, thinly traded “penny stocks” that typically sell for $1 or less. The penny-stock market long has been marked by manipulation, fraud and sorry investors who were hoodwinked by fast-talking brokers and bought worthless shares.

But with the problem getting worse, the Securities and Exchange Commission, state authorities and the National Assn. of Securities Dealers, or NASD, which governs the over-the-counter market, have cracked down on penny stocks, and Newport Beach and Florida are hotbeds of foul play, authorities say.

There are roughly 300 firms that deal in penny stocks nationwide. But in the last three years, the NASD has disciplined 25 of the firms, filed a total of 182 disciplinary actions against firms and individuals, and handed out penalties ranging from expulsion from the NASD to $250,000 fines. An additional 135 investigations are in progress, said NASD spokesman Enno Hobbing.

Toluca Pacific itself has a pretty clean record. Since Blowitz founded the company in 1983, the NASD has cited the firm for only one minor violation: One day in 1985, the firm left out a stock when it gave the NASD the firm’s trading volume for that day, and it was fined $250. The California attorney general’s office has never taken action against the firm.

It’s unknown if any investors have pursued successful complaints against Toluca Pacific, mainly because most stockholder disputes are settled by an arbitration panel of either the stock exchanges or the NASD, and those disputes are not formally made public.

But Blowitz figures that penny stocks account for somewhat less than half his company’s $3.5 million in annual revenue, and with all the turmoil in penny stocks, he tries to stay out of harm’s way by taking the high road with low-priced stocks. How? Besides avoiding stock promoters from Newport Beach or Florida, Blowitz insists that he or his assistant personally execute every trade made by Toluca Pacific--even though the firm has 90 brokers, five branch offices and 3,500 to 10,000 customers a year. This way, Blowitz knows every stock handled by his firm.

“The buck rests here,” said Blowitz, pointing a finger at himself. Blowitz, born and raised in Studio City, started the firm with $250,000 of mostly borrowed money. Before then, he had spent 14 years trading stocks in Los Angeles for small- and mid-sized brokerage firms, including Wedbush Corp. and Morgan Olmstead Kennedy & Gardner Capital, two firms that have since merged to become Wedbush Morgan Securities.

Even at those firms, Blowitz specialized in small, over-the-counter stocks, so he maintained that specialty with his own firm. Customers rely on Toluca Pacific not so much to trade IBM, but to trade such penny stocks as Meditech Pharmaceuticals (20 cents a share); United Leisure (87.5 cents), a recreation concern, and Warner Technologies (16 cents), a florescent lighting company.

New Stocks

Toluca Pacific does not underwrite new stocks; that is, it does not buy all of the shares from a company and then try to sell them to the public. The firm is foremost a broker and trader, but its success in generating commissions rides in large part on finding successful stocks that enrich an investor, so he or she will come back and do business with Blowitz again.

So Blowitz’s brokers hunt for little-known stocks with promise. When a broker finds a prospect, three or four of Toluca Pacific’s brokers will discuss the stock, perhaps invest in some shares and then decide whether to pitch it to customers.

One of Toluca Pacific’s past winners was Air Cargo Equipment, a Long Beach maker of conveyor belts and other cargo-handling equipment. Toluca Pacific began buying the stock for $3 a share in 1986, and then Zero Corp. bought the company in 1988 for the equivalent of about $18 to $20 per share for those early investors, Blowitz said.

Toluca Pacific does not advertise--a brief stint in the Yellow Pages drew a couple of investors who skipped on their bills--but rather relies on recommendations for new clients. Toluca Pacific rarely makes cold calls, and that is unusual for a penny-stock brokerage firm. Such firms often rely on salesmen making high-pressured, cold calls to names out of phone books or various mailing lists.

“Someone who has more money and more investment savvy is not going to look up a broker in the Yellow Pages,” Blowitz said. “They’re going to ask somebody who a good broker is, and then they’re going to get our name.”

That might depend on whom they ask. Some brokerage executives in Blowitz’s back yard, including the manager of Shearson Lehman Hutton’s Burbank branch, said they had never heard of him.

Respected Among Traders

Still, some of Blowitz’s competitors said his approach works. “He is well-respected among the traders in our industry,” said Norma Yaeger, president of Yaeger Securities in Encino. She said Blowitz “does try to associate himself with a better quality of people” and that he “keeps his integrity above reproach.”

In many ways, Blowitz is only as good as his brokers, since the brokers are the ones who serve Toluca Pacific’s customers. He often urges brokers not to rush into a new penny stock, even if the company looks solid, because the stock’s initial price is usually inflated relative to the company’s prospects.

“I tell them, ‘Just wait,’ ” Blowitz said. Recently, for instance, his brokers were hot to buy the stock of a new mining company at $1 a share. “Six months went by, and the stock was a quarter. They wanted to buy it. I said wait. Six months later, the stock was an eighth,” or 12.5 cents a share. “Then we bought it.”

Ironically, the authorities’ crackdown has meant that some firms have been shut down by regulators or have closed shop under pressure--with both actions leaving stockholders with worthless shares.

Types of Scams

Typically penny stock scams work in two main ways. First, many penny stocks are issued by “blind pools,” shell companies that sell the stocks to raise cash for some unidentified future purpose. Many blind pools are legitimate, but many also are simply vehicles for crooks to quickly raise cash and then disappear, leaving their stockholders with empty promises.

“It’s the guys behind the deals, that put these things together, that are making the real money,” Blowitz said. “And they just disappear and show up somewhere else.”

In many cases the pool operators need a brokerage firm to peddle their penny stocks to the public, and that’s where the second major scam occurs. Some penny stock firms are nothing more than “boiler rooms” where banks of brokers make 100 or more cold calls a day to entice people into buying the stocks.

Because the market for many penny stocks is often controlled by just that one broker, the broker can rip off investors by marking up the stock by 100% or more.

If the brokerage is crooked, it might buy thousands of shares of a penny stock itself when the stock first appears and help bid its price higher over the next few days. That makes the stock’s public buyers happy because they have paper profits, and it encourages others to buy.

But then the brokerage will sell its shares for an actual profit and refuse to sell shares for customers so they can profit too. And when the customers try to insist that their shares be sold, frequently they find that the firm has folded tent and disconnected its phones.

Mainstream Stocks

Toluca Pacific, whose other half-owner is Stanley Brooks, its executive vice president, is no boiler room. The firm also is an active trader of such mainstream stocks as MCA, Walt Disney and Lockheed, and it handles options and other traditional brokerage services. Its main office, which is spread over the 11th story of a modern high-rise, resembles any branch of brokerage stalwarts such as Merrill Lynch or Dean Witter Reynolds.

And even though Blowitz often focuses on small-ticket stocks, he refuses to take a back seat to those firms.

“I can do anything Merrill Lynch can do, including commodities,” he said.

But if a customer walks in Blowitz’s door with his child’s piggy bank and cracks it open, Blowitz can do business with him as well.