Shearson Indicted in Stock Fraud Case

Shearson Lehman Bros. Inc. and two former employees in Cleveland have been indicted on charges of defrauding investors by making unauthorized trades, state officials said Friday.

The Cuyahoga County, Ohio, grand jury Thursday issued 42 indictments each against Shearson, a unit of American Express Co.; Sheldon Strauss, a former account executive; and Stephen Weinberg, former branch manager of the firm’s Cleveland office, Ohio Division of Securities Commissioner Mark Holderman said.

The indictments charge Strauss with violating the Ohio Securities Act through fraud and false representation in the sale of securities. The corporation and Weinberg are accused of complicity.

“He (Strauss) would place his investors in highly speculative stocks, some not even recommended by Shearson Lehman Hutton,” Holderman said. “Sometimes, he put them into margin accounts, so they would be highly leveraged.”

Buying on margin entails putting down a small percentage of a stock’s price on a particular day, with the understanding that the balance will be paid weeks later--based on the stock’s price at the time the margin money was committed.

If the stock price goes up in that period, the investor makes a tidy profit. If it goes down, the investor is forced to buy the stock at a price considerably higher than the price it is trading for.

“When we had the market crash, people found they not only lost their investment, a lot found their (purchases) were in margin accounts and that they owed money. This was a surprise to many people.

“Whenever you are leveraged like that and the market goes down, you lose your equity, and you lose money you, in a sense, borrowed. People thought they were investing, say, $30,000. All of a sudden, they are losing that $30,000 and considerably more.”

Strauss, Holderman said, was buying and selling stocks without authorization and buying on margin without his customers’ knowledge.

Ohio has investigated about 150 complaints that investors filed against Strauss the last two years, he said.

Many of the alleged violations were discovered during the market crash in October, 1987, Holderman said. He said Shearson already has settled more than $4.9 million in claims by Strauss’ former clients.

Weinberg and Shearson were charged because they “knew there were problems” with Strauss’ accounts but didn’t try to stop the practices, Holderman said.

The company will not comment until it has reviewed the indictments, said Steve Fagan, a spokesman for Shearson in New York.