Fine, Ban Urged in Penny Stock Probe

A securities industry disciplinary body has recommended harsh sanctions against the owner of a defunct Los Angeles penny stock firm accused of overcharging customers for stocks by as much as 200%.

The actions proposed by a committee of the National Assn. of Securities Dealers were based on an investigation into price manipulation and fraudulent markups at Westmont Securities Corp.

The committee recommended that the firm’s president, Azar Aslam Kahn, be banned permanently from the securities business and that he and Westmont be fined $665,000.

Until it closed in March, Westmont operated out of offices at 5757 Wilshire Blvd. and had about 50 brokers who specialized in using telephones to sell inexpensive over-the-counter securities, known as penny stocks.

Two former employees said in interviews that they made an average of 300 calls a day searching for new customers.

Harsh Punishment

The penny stock industry has come under increasing scrutiny from regulators over the past year, but an NASD official in Washington said the disciplinary recommendation against Kahn is one of the harshest in recent memory.

According to a written report on the findings, the NASD group said Kahn made an “unconscionable profit” on transactions in two stocks last year and then engaged in “clumsy attempts” to cover up his activity.

The findings followed a hearing in April by the California business conduct committee of the NASD, the self-regulatory agency for brokers and dealers. The findings do not go into effect until they are approved by the national board, which could alter the sanctions.

A spokesman for the NASD in Washington said the agency wouldn’t comment until the review process is completed.

In an interview Monday, Kahn said he is appealing the findings and denied any wrongdoing. He said he was a victim of discrimination by the regulators because he hired members of minority groups for his sales staff.

“NASD is a good organization, but sometimes they go a little bit crazy,” said Kahn, who lives in Northridge. “We were doing a very clean business.”

A copy of the committee’s report obtained by The Times said Kahn’s firm charged customers $430,000 in excessive markups on two stocks during a three-month period last year.

The markup is the difference between what a brokerage pays for a stock and the price it charges a customer. The report said markups on the two stocks at Westmont were as high as 200% and violated the NASD’s policy.

The report said Kahn also instructed his sales staff to mismark orders for the two stocks to indicate that they had been unsolicited purchases when they had actually been initiated by the staff.

According to the report, Kahn also bought and sold the two stocks within Westmont’s own account, a practice often used to manipulate the price.

The two stocks were identified as Pacific Energy & Mining and Western Energy Inc. The report said both stocks were issued by companies associated with Tariq Imran Ahmad, a cousin of Kahn.

Ahmad had been accused of helping run Westmont without a securities license. Witnesses told the NASD committee that Ahmad ordered employees fired and attended key management meetings. But the committee dismissed the allegation, saying evidence against Ahmad was inconclusive.

In addition to the sanctions and fines against Kahn, the committee recommended expelling Westmont from the NASD and fining one of its former vice presidents, David Phillip Munoz, $2,500 for selling securities without being registered properly.