Bonds Again Trip PaineWebber : Investment: Broker claims he was fired for telling clients they might be due money for sale of unregistered securities.
Sales of risky, unregistered securities by PaineWebber Inc.’s Santa Barbara office helped get the Wall Street brokerage in trouble with regulators before. But that didn’t stop the high-producing branch from doing it again.
In a lawsuit filed Friday, a former broker in the office charged that he was threatened, punished and finally fired by PaineWebber earlier this year because he told clients they could be entitled to get back money they paid for bonds that weren’t registered for sale in California.
PaineWebber denied that the broker, Charles M. Bloom, was punished for advising clients of their rights, saying he was “terminated” in January “due to the low level of production that he generated.”
But the brokerage confirmed that the Santa Barbara office sold several hundred thousand dollars’ worth of unregistered R.H. Macy & Co. junk bonds in 1991--the bulk of the more than $1 million worth that PaineWebber sold without registration in California.
A “purchase advisory” the firm sent to its brokers nationwide in June, 1991, did not warn that the bonds were not registered for sale in every state. The advisory noted that the bonds were “highly speculative” but said they were “attractive for total-return investors, and we recommend purchase.”
Seven months later, the bonds became virtually worthless when Macy’s filed for Chapter 11 bankruptcy reorganization.
Bloom--who alone sold $395,000 of the bonds to 20 clients--said he believed at the time that the securities were properly registered. His suit, filed in Santa Barbara County Superior Court, alleges that PaineWebber repeatedly ordered him to remain silent after he learned of the problem.
Documents filed with the lawsuit include a Sept. 14, 1992, letter from a PaineWebber lawyer warning Bloom he would be violating the firm’s policies if he let his clients know about a settlement the brokerage had reached with another Macy’s bond investor.
In response to questions from The Times, PaineWebber said the bonds were sold improperly because “a number of investment executives in California (erroneously) assumed the Macy’s bonds qualified for an exemption” from the state’s registration requirements, which are known as Blue Sky laws.
The firm noted that once investors learned the bonds were not registered and filed a class-action lawsuit against the firm in February, 1993, PaineWebber settled the following August, reimbursing investors for most of their losses.
Under David W. Stanger, the same branch manager who supervised Bloom, the Santa Barbara office has been accused before of illegally selling high-risk, unregistered securities and defrauding clients.
The allegations were part of wide-ranging charges by the New York Stock Exchange and the Securities and Exchange Commission accusing PaineWebber of wrongdoing in retail branch offices across the country, including charges of brokers stealing customers’ money, selling unregistered securities and making trades customers hadn’t authorized.
A 1992 settlement of wide-ranging charges against PaineWebber by the NYSE--which resulted in a $900,000 fine--included allegations against the Santa Barbara office and Stanger. Stanger was officially responsible for approving every trade in his branch, and the NYSE alleged that he allowed brokers in the late 1980s to load up the accounts of small investors with risky, unregistered stocks that ultimately produced huge losses.
PaineWebber and Stanger accepted punishment without admitting or denying wrongdoing.
Stanger’s branch had heavily promoted the stocks of three companies whose principal backer was a convicted felon. The companies made wildly false claims about their financial prospects. One falsely told investors it had discovered a cheap process for extracting vast amounts of gold from the black sand beaches of Costa Rica.
In a separate 1993 settlement with the SEC, PaineWebber’s Beverly Hills branch office was banned for one month from opening new accounts.
A PaineWebber spokesman said the firm had not taken any disciplinary action against Stanger in connection with the sale of the Macy’s bonds. The spokesman said the sale was the firm’s fault, not Stanger’s, and that a new monitoring system has been put in place to prevent the sale of unregistered securities.
Stanger declined to comment, citing company policy.
