Regulators Fine Alex. Brown and Broker

A Los Angeles stockbroker and his firm were censured and fined Monday for allegedly violating rules regarding the sale of “Regulation S” stock, a controversial capital-raising tool used by some cash-starved small companies.

The penalties were the first ever handed down by the National Assn. of Securities Dealers Regulation in a case involving Regulation S shares, but NASDR officials hinted there could be a broader crackdown in the offing.

Monday’s action was against brokerage Alex. Brown & Sons and Beaumont Bianchi, a broker in the firm’s Los Angeles office.

NASDR said the firm and Bianchi allowed a customer to buy shares in six separate Regulation S offerings between July 1993 and April 1994, then dump the shares on the U.S. market earlier than Securities and Exchange Commission rules permit.

Regulation S allows companies to offer securities overseas without registering them with the SEC. But after their initial sale overseas, the shares aren’t supposed to be resold in U.S. markets for at least 40 days.

One reason for that rule is that smaller companies desperate for cash often quietly issue Regulation S shares at 10% to 15% discounts to the U.S. market price. If the foreign buyers could sell those shares immediately at the U.S. market price, they could potentially reap an instant gain.

Meanwhile, U.S. shareholders of such companies suffer dilution of their ownership because of the Regulation S share offering, and they may not even be aware that foreign buyers got a much better deal than the market price, securities regulators concede.

NASDR said Bianchi and Alex. Brown allowed 117 transactions by the customer in this case, through several offshore accounts.

Bianchi was fined $50,000 and Alex. Brown was fined $100,000. Bianchi and the firm also agreed to return $150,000 in commissions related to the sales.

In addition, Alex. Brown was cited for failure to have adequate supervisory procedures.

Bianchi and Alex. Brown consented to the NASDR censure without admitting or denying guilt, but the firm said that “we have learned from this experience.”

Neither the customer nor the six stocks were named. Asked why investors shouldn’t know the names of the stocks, NASDR cHief Operating Officer Elisse B. Walter said the agreement with Alex. Brown was to withhold the stock names but that the NASDR “will take a hard look in the future” at whether such information should in fact be kept secret.

She also warned that “this settlement makes it clear that all [National Assn. of Securities Dealers] member firms are responsible for educating their staffs about the need to prevent abuses associated with Regulation S offerings.”