PaineWebber Is Fined $900,000 for Sales Abuses
The New York Stock Exchange said Wednesday that it imposed its second-largest fine ever--against PaineWebber Inc.--under a settlement of charges that the brokerage victimized retail customers through illegal sales practices nationwide.
Although disciplinary actions against brokerages for sales abuses are not uncommon, the Big Board said that PaineWebber’s offenses were more extensive than most others and that its senior executives were informed of the infractions but failed to stop them.
The exchange said it censured the New York-based firm, fined it $900,000 and took disciplinary action against nine local supervisors, including three in Southern California. The fine includes $800,000 against the firm and $100,000 in fines PaineWebber will pay on behalf of the supervisors. Under the settlement, the firm and the supervisors neither admitted nor denied guilt.
The nine supervisors will also be suspended from supervisory duties for periods ranging from one to three weeks.
Although a stock exchange statement said some of the dozens of alleged incidents individually “resulted in hundreds of customer complaints,” a PaineWebber spokesman asserted that in total only about 200 customers were involved. He said Paine-Webber so far has reimbursed more than $5 million. The settlement of NYSE charges was reached in November but wasn’t disclosed until Wednesday.
The sales practice abuses allegedly happened from 1984 to 1987, with additional violations of NYSE rules continuing until 1990. The alleged abuses included allowing individual brokers to recommend unsuitable, high-risk securities to investors; encouraging unsophisticated customers with limited financial means to participate in an extremely risky form of options trading, and churning customer accounts. Churning involves excessive trading to generate sales commissions.
A stock exchange hearing panel found that the firm failed to stop abuses even after PaineWebber’s management was alerted to them by stock exchange examiners.
The Times obtained a copy of an internal memo circulated to branch managers Wednesday in which PaineWebber President Paul B. Guenther called the alleged improprieties “isolated occurrences” and said the problems had been remedied. “In short, this is now a matter of history,” he said.
The nine individuals named included seven current or former branch office managers and two regional division managers. The three from Southern California are Robert B. Fuller, former branch manager of PaineWebber’s Pasadena office, who is currently with Bateman Eichler, Hill Richards; David W. Stanger, Santa Barbara branch manager, and Gary P. Evans, manager of the firm’s southern Pacific division. The three individuals, as well as their lawyer, John R. Loftus, declined to comment on the charges.
The violations specifically referred to in the NYSE settlement occurred in branch offices throughout the country, from Connecticut to California. Although the far-flung violations appears to suggest that the firm’s top management allowed widespread improprieties to occur, the exchange declined to comment on why no one higher than the level of local division manager was singled out for failure-to-supervise charges. NYSE spokesman Ray Pellecchia declined to address the question directly but said, “After a thorough investigation charges were brought against certain individuals as indicated by the evidence.”
The exchange said related disciplinary proceedings are pending against individual brokers believed to have committed the violations. The firm’s general counsel, Robert M. Berson, said the brokers in question were fired “a long time ago.”
The largest fine imposed by the Big Board was $1.3 million against Salomon Bros. Inc. in January, 1991, for allegedly shortchanging customers on program trades. In July, the exchange fined Shearson Lehman Bros. $750,000 for alleged sales practice abuses by a large branch office in Manhattan against retail customers.
