Brokerage Punished for Alleged Misconduct : Fraud: SEC says the sanctions against PaineWebber, its toughest in years, are a sign of a new crackdown on Wall Street.
In what Securities and Exchange Commission officials called their toughest enforcement action against a leading Wall Street brokerage in years, the agency imposed stiff sanctions Thursday on PaineWebber Inc. for allegedly defrauding investors at offices in Beverly Hills and elsewhere across the country.
SEC officials described the alleged wrongdoing by PaineWebber brokers and supervisors--which it said took place from 1986 to 1990 and stretched from California to Texas, Alabama and Illinois--as “egregious” and “widespread.”
The nation’s fifth-largest brokerage agreed to the sanctions--which include a one-month ban on new accounts at the Beverly Hills office and three others starting March 1--without admitting or denying the charges.
SEC enforcement chief William R. McLucas said the case is a sign that the agency intends to crack down on big Wall Street firms that repeatedly allow brokers to cheat small investors.
After a series of articles in The Times last July reported that PaineWebber and other firms knowingly employed brokers with long records of defrauding customers, the SEC launched a major inquiry into the conduct of a dozen of the country’s biggest brokerages. The agency is known to be investigating the sales practices of Prudential Securities and Shearson Lehman Bros., both of which have denied wrongdoing.
SEC officials said, however, that the investigation that resulted in Thursday’s action against PaineWebber was underway before the articles appeared.
The action marks the second time in just over a year that PaineWebber has been penalized for a nationwide pattern of similar alleged misconduct. In January, 1992, the New York Stock Exchange fined the firm $900,000--the second-largest fine ever imposed by the exchange--for alleged wrongdoing in nine offices from coast to coast.
The SEC charges all involve separate incidents--and offices--from those cited by the NYSE, although the allegations are similar. The charges included direct theft of customer funds, trading in the accounts of customers known to be dead, making trades that customers never wanted, excessively trading accounts simply to generate commissions, lying to customers about the value of their accounts, fraudulently filling out customer account documents and selling unregistered stock.
The SEC alleged that all of the incidents resulted not just from misconduct by individual brokers, but from supervisors failing to enforce securities rules or PaineWebber’s own internal regulations.
“This wasn’t one office and one (broker) but five different offices, with conduct that ran the gamut,” McLucas said. “You come away with the impression that somebody wasn’t minding the store.”
Joseph J. Grano Jr., PaineWebber’s president of retail sales and marketing, described the incidents as isolated wrongdoing by a small number of brokers.
“My reaction is that we’re very sorry that a few people can hurt the image of an organization our size and cause the SEC to take such action,” Grano said.
Yet Grano added that the firm supports the SEC’s efforts and asserted that PaineWebber has greatly enhanced its compliance efforts since 1988.
“I don’t believe there are any systemic problems,” he said.
Besides the new-account ban, the agency formally censured PaineWebber. And--in a step that SEC officials said they believe is unprecedented--it required PaineWebber to hire an outside consultant to review half a dozen settlements reached with customers to determine if the clients were paid enough for their losses.
Ellen N. Hersh, assistant administrator of the SEC’s Chicago office, which handled the case, said PaineWebber reimbursed some victimized customers for only 50% or 60% of their losses.
The outside consultant will also review PaineWebber’s sales practices, and the firm will be required to implement the consultant’s recommendations. PaineWebber must also conduct seminars on rules and regulations for supervisors from all of the firm’s 267 offices.
Hersh said the SEC wasn’t able to fine PaineWebber because a new law authorizing the agency to impose fines in such cases did not go into effect until 1991, after the alleged misconduct occurred.
Agency officials said their investigation of PaineWebber is continuing, and sources said the SEC is likely to file separate charges against individual brokers and possibly supervisors as well.
On Thursday, Grano flew from the firm’s headquarters in New York to Los Angeles to address the 29 brokers and their supervisors in the Beverly Hills office. His purpose, he said, was to tell them “that I understand that many of them weren’t even working in the office” when the alleged wrongdoing occurred.
“Unfortunately, this is guilt by association,” he said.
The SEC charged that one broker in the office directly stole $114,500 from three customers in 1987 and 1988 by having PaineWebber employees draw checks on the customers’ accounts and deposit them in his personal bank account. PaineWebber confirmed that the broker later committed suicide. Both the firm and the SEC declined to name him.
The El Camino Drive office opens, on average, only about 100 new accounts a month, Grano said, so the economic impact of the one-month ban on new accounts will be small. But he said the penalty will “damage the image” of the branches.
The other PaineWebber offices cited by the SEC are in Houston; Birmingham, Ala., and Oakbrook and North Brook, Ill.
The Times reported last summer that PaineWebber employed brokers in Century City, Boston and elsewhere, even though the brokers were the subject of numerous serious customer complaints.
PaineWebber had paid out hundreds of thousands of dollars in judgments and settlements because of the brokers’ actions.
