COLUMN ONE : Brokers Who Break the Rules : Even the most prestigious stock brokerages employ sales people with long records of violating securities laws. They often go on to abuse customers again.

When William and Donna Bryce went to the Century City office of PaineWebber Inc. in 1985 to invest their nest egg, they were put in touch with broker Rodney A. Davis. A few years later, after following Davis’ financial advice, the Bryces had lost $200,000, and a series of limited partnerships they had invested in were virtually worthless.

In an arbitration case Paine-Webber settled last week, the Bryces accused Davis of forging their signatures on documents and of giving them false information about how their account was doing.

No one told the Bryces that PaineWebber--the nation’s fifth-largest brokerage house--had hired Davis despite his long record of complaints and disciplinary action by the New York Stock Exchange. The firm allowed Davis to appear regularly on Channel 22, a local financial news station, to solicit new business. And Paine-Webber kept Davis on its payroll even after the New York exchange filed a new round of charges against him in March, 1991, alleging fraud, misrepresentation and making unsuitable investments for customers.

Davis was fired last January--not because of any wrongdoing against customers, the firm says, but because he stopped showing up for work.

PaineWebber declines to comment on the Bryces’ case because it is pending. Davis contends he has done nothing wrong, and specifically denies the Bryces’ allegations. He is still fighting the New York exchange’s charges, which he blames on “unsophisticated” enforcement lawyers.

But, as a broker with a long record of complaints and disciplinary actions, Davis is not alone. An examination of hundreds of records obtained from state securities regulators, lawyers and court files shows that some of the nation’s biggest and most prestigious securities firms hire and continue to employ brokers who have long records of violating securities regulations. And even when brokers are booted out of one firm, they often find new jobs with equally large brokerage houses. There, they often break the rules again.

The issue of brokers’ integrity has taken on increasing importance as booming stock prices have lured hordes of small investors into the market, many of them for the first time. Many are retirees who built sizable nest eggs during the 1980s but have seen their incomes plummet because of steep drops in interest rates.

But while regulators and law enforcement officials have focused attention on high-profile Wall Street personalities such as Michael Milken and Ivan F. Boesky, they have paid scant notice to problem brokers who routinely handle accounts for small investors.

“To me this is 10 times worse than what Michael Milken was doing because this is pension and retirement money, this is money for putting kids through college,” says Joel H. Bernstein, a New York lawyer whose firm represents customers in claims against brokers.

Some state securities regulators have criticized the securities industry and its regulator, the Securities and Exchange Commission, for not being more aggressive in cracking down on questionable brokers. Government records show that the SEC does pursue cases involving direct theft of customer funds, filing nearly 1,200 actions between 1988 and 1991. But the agency over the last four years has pressed only a half-dozen cases involving other kinds of wrongdoing--such as excessive trading in customer accounts and unauthorized trading by brokers at major firms.

Arbitration System

Critics contend that the industry’s controversial system for resolving investor disputes--through arbitration rather than civil lawsuits and criminal prosecution--has exacerbated the problem. The securities industry has long favored arbitration as a cheaper and speedier alternative to lengthy legal proceedings.

In arbitration cases, three-member panels--including at least one industry member--usually rule on the disputes. Investors’ lawyers complain, however, that arbitration tends to favor brokers over clients. And they say the process makes it difficult for the public to learn about bad brokers because evidence and testimony in arbitration cases usually aren’t made public.

Like many lawyers and regulators, Lionel Z. Glancy, a Beverly Hills attorney who represents brokerage customers, sees an inherent conflict between the way most brokers are paid and the interests of customers. Most brokers’ earnings depend on the sales commissions they generate, not on how well their customers’ investments do. Brokers who fail to generate enough commissions risk being fired. So for salesmen with a dishonest bent, there is temptation to trade excessively and put customers into unsuitably risky investments that pay bigger commissions.

But the main reason dishonest brokers are allowed to stay with big firms, industry insiders say, is that many are top money-makers for their employers. Critics say there is little financial incentive to weed out “big producers” who resort to unethical salesmanship.

Caroline Baumel, who retired in 1990 as the Shearson Lehman Bros. executive in charge of registering brokers with regulatory agencies, says that--despite stepped-up screening procedures in recent years--she was often frustrated in attempts to prevent the firm from hiring brokers with bad records, or to get rid of bad brokers already there. “In general, sales managers who did the hiring were dazzled by the numbers a salesman would put on the books, and they didn’t care how bad he was,” Baumel says.

Brokerage firms strongly deny this, saying that the damage from lost customers and the cost of arbitration awards and legal fees are strong deterrents.

PaineWebber chief spokesman John Lampe, says, for instance, that his firm recently fired several members of its “Chairman’s Council” of top brokers because of unethical behavior. Nevertheless, Lampe also notes that all of them were hired almost immediately by other big firms. “They sure as hell didn’t have any trouble getting jobs” he says. “Production obviously overcomes all kinds of problems in our industry.”

Alan F. Leavitt, a broker fired in 1988 by Shearson, provided one dramatic example of the possible consequences when a broker with a known bad record is hired by another firm. Shearson fired Leavitt after it discovered that he had defrauded customers. Leavitt had moved some losing options investments from his personal account to clients’ accounts, in effect having them pay for his losses. But regulators took no action against Leavitt. And he was immediately hired by Prudential-Bache (now Prudential Securities), even though documents show Prudential knew Leavitt was fired for violating Shearson’s rules.

It wasn’t until late 1991 that Prudential discovered Leavitt had done the same thing to customers there, defrauding them of close to $1 million. Shortly after Prudential confronted Leavitt, he committed suicide.

Little Follow-Up

Just how many unethical brokers are out there doing business is hard to pin down. The SEC doesn’t keep track of brokers with histories of violations and the nation’s stock exchanges, which are charged with watchdog duties over the brokerage industry, do not make public such statistics.

But one sign of a reluctance by the industry to permanently remove brokers with bad records is that the National Assn. of Securities Dealers, an industry self-regulatory group, says it allows 255 “statutorily disqualified” brokers to remain in the business. These are brokers who previously were banned for violations, or normally would be disqualified because of a record of felony convictions. The NASD gives them special dispensation to return to work after their firms promise to monitor them closely.

Clearly, the vast majority of the nation’s 200,000 licensed stock brokers are honest and strive to represent the best interests of their clients. Mary Calhoun, a Boston consultant who frequently testifies as an expert witness in arbitration cases, says it’s not uncommon for a broker to have one customer complaint or arbitration case on his record over a 10- to 15-year career.

In court settlements, firms and brokers typically neither admit nor deny guilt. But Calhoun says that multiple cases, involving significant awards or settlements, almost always are a sign of serious misconduct. Richard Greenfield, a Philadelphia lawyer who represents small investors, estimates that about one-quarter of the brokers involved in disputes with customers have a prior history of disciplinary problems.

“I’m completely dissatisfied with regulators’ follow-up in terms of disciplining brokers,” says David E. Shellenberger, a former senior enforcement attorney with the New York Stock Exchange who is now in private practice. “ . . . There are just too many bad brokers who have long histories of abusing customers’ rights who remain with big and small firms.”

In a six-month review of the U.S. securities industry, The Times obtained records of more than 40 brokers who still work for major Wall Street firms, despite records of repeated settlements, judgments and arbitration awards stemming from customer complaints. In many cases, the records of repeated complaints and disciplinary action reach back a decade or more. And once disciplined, the brokers had little trouble finding new jobs in the industry.

Compliance Questions

A study published last year by the Securities Arbitration Commentator, a New Jersey-based publication, found that Shearson, a unit of American Express, had the worst record of any big firm in terms of the number of arbitration cases filed by customers in recent years, and the size of awards. Shearson denies that the statistics are accurate, but acknowledges that its own training and discipline of brokers in the past may have been uneven. Shearson grew over the years by acquiring many diverse firms, absorbing their existing sales forces. These included E. F. Hutton & Co., which securities lawyers and former Shearson executives say brought in many brokers with problems on their records.

But Peter T. Kujawski, a Shearson executive vice president, maintains that major management changes over the last two years have all but eliminated these problems. He says Shearson also is now hiring lawyers to supervise efforts to ensure compliance with regulations in each of the firm’s 14 regional divisions.

Joseph J. Grano Jr., PaineWebber’s head of retail sales, says the industry has matured to the point where internal enforcement efforts are a top priority. He says the firm has doubled the size of its compliance department since 1988. Grano contends that there are few truly unethical brokers, even among the small group that makes “mistakes” resulting in complaints and settlements with customers. “And when you find that,” he says, “I will tell you, the industry will throw them down a flight of stairs. Or at least should.”

But The Times’ investigation raises questions about how adequately the industry is policing its brokers. Firms hire, and keep on for years, brokers who are exceptions to the image of trustworthiness and rock-solid dependability they advertise.

Stephen T. Rangen, 43, was a Shearson broker in Los Angeles from 1988 until two months ago. Shearson asked for Rangen’s resignation about a month after The Times presented the firm with a detailed list of questions about Rangen’s record.

A printout of Rangen’s record from the National Assn. of Securities Dealers’ database shows that Rangen had been a broker with various big firms since 1973. Routinely entrusted with other people’s money, Rangen has filed for personal bankruptcy three times since 1985. It is an unusual record, considering that federal law allows individuals to be discharged from their debts only once every six years. But the bankruptcy filings have had the beneficial effect for Rangen of tying up or blocking legal claims against him by his clients.

And the trip to bankruptcy court enabled Rangen to maintain a flamboyant lifestyle. His wife testified that on the day after their first bankruptcy filing in 1985, they spent $76,000 to buy each of them new Jaguar cars. They still live in an expensive house on a private street in Bel-Air.

Complaint Record

Rangen also has a record of disciplinary action against him by regulators, as well as lawsuits, arbitration actions and complaints by customers. He was fined $35,000 in 1984 by NASD after he settled charges of improper trading in a customer’s account.

Rangen allegedly even wiped out much of the assets of the pension fund of his own father’s company, a small farm products concern in Idaho. After persuading his father to let him handle the fund’s investments, Rangen, then with brokerage firm A. G. Becker in Los Angeles, invested much of the assets in a highly risky strategy of selling short stock.

Short selling involves selling borrowed stock, and in this case allegedly violated laws restricting the kind of investments pension funds may make. In one short sales transaction alone, the pension fund allegedly lost over $355,000. In a settlement of a federal lawsuit, A. G. Becker ended up reimbursing the pension fund for most of its losses.

Rangen moved on to Drexel Burnham Lambert, but resigned in 1988 after Drexel officials became unhappy with his record of customer complaints and personal bankruptcy. That record evidently didn’t disturb Shearson. Not only did it immediately hire Rangen, but Shearson confirms that it gave him a $60,000 loan it describes as a “sign-on bonus.”

But Rangen’s record did alarm the state of Florida. The state rejected a routine request to license him there, telling him, “Your disciplinary history within the securities industry constitutes prima facie evidence of your unworthiness” to be a broker. He also dropped applications to two other states after they raised questions about his record.

Nevertheless, Rangen until two months ago continued to sell securities from Shearson’s office on Century Park East. Among those who entrusted their money to him were Joseph Farrell, a retired construction supervisor in Phoenix, who has been treated for cancer, and Farrell’s wife, Billie. Rangen’s sales assistant had “cold-called” them in early 1989, and the broker hit pay dirt when he discovered that the Farrells were desperately worried about their dwindling retirement nest egg.

According to an arbitration case in which the Farrells were recently awarded $35,000, Rangen persuaded them to pull their money out of secure certificates of deposit and invest nearly everything into a highly leveraged junk bond trust. In phone conversations Farrell tape-recorded, Rangen assured him that “you’re in effect giving yourself more safety,” and falsely claimed that the trust was rated “Triple-A.”

The Farrells’ investment in the Prospect Fund went from $116,536 in the summer of 1989 to $36,909 when they sold their shares in October of 1990.

“I’ve never done anything intentionally wrong,” Rangen said in an interview. Why are there so many items on his record? “We did a lot of business,” he said. “If you’re out there making decisions for clients, you’re going to have a mistake.”

Before Rangen resigned, Shearson said in response to an inquiry that the firm hired Rangen because the firm “reviewed the matters disclosed on Mr. Rangen’s employment application as well as his regulatory history and was satisfied with Mr. Rangen’s background.” Before Rangen’s resignation, Shearson said the firm monitored him, as it does with all its brokers.

Rangen says that at the same time he received an official notice from Shearson listing the reasons he had been asked to leave, the mail brought a separate form letter congratulating him on being named to the firm’s President’s Council, which honors big-producing brokers.

Rangen has now resurfaced at another firm. Records show that he is employed by the Century City office of another brokerage, Gilford Securities, and a secretary confirms that he works there. In New York, Ralph Worthington, Gilford’s chairman and chief executive, declined to comment on Rangen. “As a matter of practice we don’t discuss hiring practices with the press,” he said, and then hung up before a reporter could ask further questions.

A considerable number of brokers with problem records seem to have nine lives.

In his career as a broker, Kenneth G. Catanella, 47, has had little trouble moving from one big Wall Street firm to another. Since December, he has been back at Paine-Webber, the firm where he started out as a broker in 1969 and where, during his very first year in the business, he earned a formal censure by the New York Stock Exchange. His NASD file shows that he was penalized for making trades that a customer had never authorized.

Since then, with a few years out of the business in the 1970s, Catanella has been at Shearson, at Hutton and then back at Shearson when Hutton was merged into the firm. After a 1979 federal court judgment, Catanella and his employers paid over $500,000 to three customers who had sued him. U.S. District Judge Cale J. Holder ruled that Catanella had made heavy, unauthorized purchases of commodities, churned accounts and engaged in “manipulative, deceptive and fraudulent” conduct.

For Catanella, 1980 marked the dawn of a new decade for profiting at the expense of customers. Based in New Jersey and later Philadelphia with Hutton, Catanella gave a daily stock market analysis during a talk show on radio station WWDB-FM. Frank Ford, host of the show, says Catanella also was one of the show’s sponsors. He regularly bought advertising time, promoting “investment seminars” he gave at local hotels and in Atlantic City. The tall, dark, athletic-looking Catanella was a persuasive speaker, and his seminars drew in huge amounts of business.

They soon drew in massive complaints and lawsuits as well. The lawsuits were so big and so numerous that a dozen of them were consolidated by the federal courts and handled as special “multi-district litigation.” The suits alleged repeated instances of unauthorized trades, churning and misrepresenting the risks and costs of options trading. (Churning represents the rapid buying and selling of securities for no reason other than to generate brokerage commissions.)

Hutton and Shearson settled the lawsuits. The settlements that have been disclosed in public records add up to over $500,000. Catanella’s career has continued without serious interference from regulators. The SEC’s Philadelphia office launched a major investigation of him in the 1980s. But sources say that when the agency’s enforcement staff recommended filing civil charges against him for churning customers’ accounts, the commission rejected it.

PaineWebber confirmed that it rehired Catanella in December over the objections of its own compliance department. Grano says the firm did so because PaineWebber’s branch manager in Philadelphia recommended him strongly. Who is the branch manager? Elliott Goodfriend, who also recently joined PaineWebber after serving since 1982 as Catanella’s branch manager at Hutton and Shearson.

“Elliott is a very good manager,” says Grano, adding that Goodfriend assured PaineWebber, “I was there and had managed him and I’m telling you that in my judgment he is a credible, good broker.”

PaineWebber says Goodfriend agreed to manage Catanella closely. The firm says that since the mid-1980s Catanella has mainly directed clients to professional money managers for a fee, and hasn’t handled many conventional brokerage accounts. The firm said complaints against Catanella are old, and that he has had no complaints since joining PaineWebber. However, a Shearson spokesman confirmed that within the last year it settled a new customer complaint involving Catanella for $13,000. The spokesman declined to give details.

A review of the records of brokers with big arbitration awards against them and settlements with customers shows that it is the inexperienced who are often victimized.

In the early 1980s, Shearson broker Henry J. Boulbol became the guardian angel of most of Beatrice La Bozzetta’s worldly savings. La Bozzetta was a retired nun. Concerned about having enough to live on when she was no longer able to work, La Bozzetta, after 21 years in convents, went to work as a high school guidance counselor and also did menial jobs. Through frugal living, she saved most of her earnings. When she was nearly 60, she dropped into a brokerage office and was introduced to Boulbol. He allegedly persuaded her to turn $88,000 over to him to invest, more than two-thirds of her total assets.

In 1984, Shearson settled a federal lawsuit against the firm and Boulbol on La Bozzetta’s behalf, for $52,000. Boulbol had allegedly bought and sold stocks without her authorization and against her explicit instructions. He also allegedly churned her account, rapidly trading securities in a way that depleted the account but generated heavy commissions. By November of 1983, the suit charged, her account not only had dwindled to nothing but Shearson claimed she owed the firm over $50,000 for securities Boulbol had bought for her “on margin”--with borrowed money.

The incident, however, apparently had no negative effect on Boulbol’s career. He has since moved to Shearson’s office in Boca Raton, Fla. Since 1989, three arbitration cases involving his customers have cost him and Shearson at least $400,000. All involved allegations of putting inexperienced investors with limited resources into highly risky “naked” options trading, a strategy that involves risk of losses vastly greater than the amount invested.

One such Boulbol client was Ray E. Whyte, who was left severely disabled and unable to work after a motorcycle accident. Whyte turned over to Boulbol virtually all of his assets, $217,000 received as a settlement from the accident. Arbitrators in 1989 ordered Boulbol and Shearson to jointly pay $100,000 to Whyte after Boulbol lost all of Whyte’s investment.

Boulbol declines to comment on his record. Shearson says the La Bozzetta case was resolved “to the satisfaction of all parties.” The firm says “the transactions in the Whyte account were consistent with Mr. Whyte’s investment objectives and were suitable in light of Mr. Whyte’s financial wherewithal and his understanding of the risks.”

Despite the arbitration awards, there is no indication that Boulbol has been the subject of any disciplinary action or investigation, or that he was ever penalized or censured by Shearson.

Shearson failed to respond to a written question asking if the firm believes Boulbol is a broker in whom Shearson’s customers should have complete confidence.

In some cases, firms keep brokers on even though complaints end up costing prodigious amounts.

Thomas W. Alison, for example, has been a broker in PaineWebber’s Atlanta office since 1983, and remains there today. From 1983 through 1990, Alison cost Paine-Webber over $3.4 million in settlements and arbitration awards. He was the subject of at least 10 federal lawsuits, five arbitration cases and an unknown number of complaints to the firm.

Alison heavily promoted a risky options strategy he advertised as offering “a more consistent return on investment” than stocks. In fact, his customers lost millions. Both Alison and PaineWebber were penalized by regulators because Alison misrepresented the risks involved in options trading.

Grano acknowledges that Alison “was dead wrong and, yeah, it cost us a lot of money.” But he characterizes Alison as “a good broker.” Grano says Alison has been kept on because the firm has determined that “the man wasn’t unethical.” Robert M. Berson, the PaineWebber general counsel, confirms that in recent years Alison has been a member of the firm’s Chairman’s Council, which honors about 100 of the firm’s very top producing brokers. Alison’s branch manager declined to allow him to comment.

Not infrequently, new investors have been burned by young brokers trying to make as much money as possible off very small accounts.

Edna Tona, 69, of Los Angeles, learned to her detriment what can happen when an inexperienced investor is handed over to a new broker.

David Stewart, now 28, had been a broker for less than a year, at Prudential’s office in Century City, when he was asked to open an account for Tona. Tona has worked for 41 years in a low-paying job as a dietitian’s assistant at the Veterans Administration hospital in Westwood. But her expenses were small and she saved most of what she earned. In 1989, when her savings account at Home Savings passed the $100,000 mark, her banker urged her to invest some of her money.

She was put in touch with Prudential and ended up in the hands of Stewart. Account records show that Stewart embarked on a course of rapidly turning over the securities in her account. He frequently bought and sold the same stocks within days, sometimes even on the same day, earning commissions on each trade. On June 1, 1990, Tona’s account statement shows, Stewart bought 1,000 shares of LA Gear, an over-the-counter stock, for $37,722. He sold them the same day for $29,579. The transaction generated over $1,000 in commissions for Prudential and Stewart. In short order, while Stewart generated over $25,000 in commissions from the account, Tona lost about half of her investment.

Glancy, Tona’s lawyer, says his client is nearly illiterate and was incapable of reading or understanding the monthly account statement Prudential sent out. Tona confirms that she reads little. Glancy also says that virtually all of the trades by Stewart were unauthorized--Tona never gave her permission.

When Glancy filed a claim on Tona’s behalf, Prudential agreed to settle by reimbursing part of her losses, $37,000.

Meanwhile, a Prudential spokesman acknowledges that the account was handled improperly. But he says that Stewart subsequently was closely monitored and has “an unblemished record otherwise.” Stewart, reached by phone, declined to comment.

In April, Stewart left Prudential and is now a broker in the Beverly Hills office of Merrill Lynch & Co.

Next: A look at one Wall Street office that is a case study in abuses and light punishment.

Brokerage Disputes

The Securities Arbitration Commentator found that at least from May, 1989, to August, 1990, Shearson Lehman Bros. had the worst record of judgments against it in arbitration cases filed by customers. Lawyers representing Shearson customers say the figures show inadequate supervision of brokers at Shearson and a tendency by the firm to fight cases--while other firms were more likely to settle claims. Shearson says the statistics are skewed because more types of Shearson accounts are subject to arbitration agreements.

Awards against brokerage firms in customer disputes by arbitration panels of the stock exchanges and National Assn. of Securities Dealers, May, 1989-August, 1990:

Number Number Percentage Total Brokerage of cases of customer of cases won awards firm decided wins by customers (in millions) Shearson Lehman Bros.* 302 182 60% $15.8 Merrill Lynch 185 88 48% $5.2 Prudential-Bache (now Prudential Securities) 135 71 53% $4.9 PaineWebber 92 56 61% $3.5 Dean Witter Reynolds 83 40 48% $2.4 All brokerage firms** 2,279 1,325 58% $67.8

* Doesn’t include cases filed only against E.F. Hutton & Co., which was acquired by Shearson Lehman.

** Figures for all brokerage firms in the SAC database, including the five listed above.

Source: Securities Arbitration Commentator