The National Assn. of Securities Dealers said Monday that it is reviewing stock trading in three Irvine companies that recently had public offerings underwritten by a small New York brokerage that is under investigation by federal regulators.
Company and association officials said high trading volume and fluctuations in the share prices of Ropak Laboratories, International Physical Systems Inc. and DVI Financial Corp. attracted market regulators’ attention.
“Some price and volume parameters have been broken,” NASD spokesman Enno Hobbing said. “When there is no ready explanation in the form of news, we look for other things that might have happened.”
None of the companies could offer an explanation for the unusual activity in its stock.
But several analysts said Monday that there were rumors on Wall Street about a Securities and Exchange Commission investigation of trading practices at Stratton Oakmont Inc., a Lake Success, N.Y., brokerage that specializes in underwriting high-risk public stock offerings. One rumor, analysts said, was that Stratton Oakmont’s offices had recently been searched by FBI agents and that the firm was about to be shut down.
Neither the FBI nor the SEC would comment on the rumors.
Stratton Oakmont President Jordan Belfort confirmed that the company has been under investigation for some time, but he said there was no truth to the rumor that the FBI had searched the company’s offices or that the firm was quitting business.
“I’m looking out my office right now, and all I see are traders,” Belfort said. “The rumors are not true. What’s happening is that there are a lot of aggressive short-sellers right now. . . . In these types of situations, when the shorts get involved, it’s who can get out first and sell first.”
Belfort said he expected all three stocks to rebound once the short-sellers cover their positions.
In short sales, a person or firm borrows stock and then sells it, expecting that the price will drop. Later, the short seller buys back the stock and, if the price indeed has dropped, pockets the difference.
In the case of Ropak Laboratories, short-sellers could have made a killing over the past week.
The company, which manufactures skin and eye product laboratory test kits that serve as alternatives to animal testing, saw its stock lose almost half its value Monday. It fell $3.75 a share to close at $4.25.
“Whenever a stock makes a move as dramatic as that,” the NASD “market surveillance gets involved,” said William Curtis, Ropak Laboratories’ chief financial officer.
The company sold nearly 2 million shares in its initial public offering May 16 at a unit price of $4.50, which included one share of stock and a warrant good for the purchase of an additional share at $5.
Two days after the offering, the units were selling for $16, and Ropak shares were selling for prices as high as $10 each as recently as June 3. That is an impressive performance for a company that earned just $72,000 on sales of $1.3 million for the fiscal year ended Feb. 28. The stock dropped $2 last week before it plunged further on Monday.
Curtis said he knew of no company news that would explain the sharp changes in the stock price.
“The company was satisfied with the pricing agreed to in the (initial) offering,” Curtis said. “In terms of why it went up afterward and why it went down after that, none of that can be attributed to what’s happening here.”
The Ropak prospectus for its stock offering stated that Stratton Oakmont was under investigation by the SEC but provided no further details. Curtis said Monday that he knew no details of the investigation.
The price of shares in DVI Financial Corp., which provides financial services to health-care companies, has fallen from $12.375 a share to $8 over the past week.
“We are looking into it ourselves,” said Cynthia Cohn, a DVI vice president. “It’s all speculation at this point.”
DVI sold 500,000 shares of stock in a secondary offering through Stratton Oakmont last February.
The third company, International Physical Systems Inc., is a provider of medical imaging services. Its offices are next to those of DVI Financial, from which it obtains much of its financing. IPSI stock has plummeted from about $10 a share in late May to just $4.3125 at close of trading Monday. Company officials were unavailable for comment.
Stratton Oakmont underwrote an offering of 500,000 IPSI units last January. Each unit consisted of two shares of stock and a warrant and sold for $6. Individual shares later rose to $7 each.
“You see this from time to time,” said a Bay Area stock analyst who did not want to be identified. “One underwriter wholly controls the stock at first, and then once they slide away, it’s an avalanche.”
Belfort of Stratton Oakmont said his company does not control stock prices.
“We trade with the Street,” Belfort said. “They loved them last week, and this week they’re going down. . . . I believe over the long term, the fundamentals will dictate higher prices for these companies.”
Stocks’ Plunge Under Review The National Assn. of Securities Dealers is investigating the price and volume fluctuations of three stocks recently sold in initial public offerings underwritten by Straton Oakmont Inc., a small New York brokerage that is under investigation by federal regulators. DVI Financial Corp. Price per share June: $8.00 International Physical Systems Inc. Price per share June: $4.31 Ropak Laboratories Price per share June: $4.25