La Jolla Barred From ‘Penny Stock’ Trades
A San Diego brokerage Thursday was ordered permanently barred from the “penny stock” business and, along with five executives, slapped with fines and restitution that could approach $1 million.
The sanctions against La Jolla Capital Corp., which was involved in last year’s highly publicized surge and crash of the stock of tiny Comparator Systems, came in an unrelated case in which the firm allegedly dodged federal securities disclosure rules by having customers sign misleading forms.
The penalties were ordered by a National Assn. of Securities Dealers disciplinary panel in Los Angeles after a 16-day hearing that capped a lengthy investigation, the NASD said.
La Jolla will appeal the order to the regulatory body’s Washington headquarters, said the firm’s lawyer, Irving Einhorn of Los Angeles. The penalties will be suspended pending the appeal, he said.
“This is a mechanism to unduly punish and put the firm out of business,” Einhorn said, adding that the penalty amounts were “pulled out of thin air.”
La Jolla and its president, Harold B.J. Gallison, were fined a total of $401,380. Gallison, like the firm itself, was permanently barred from participating in penny stock transactions. He also was barred from acting as a brokerage supervisor.
Gallison and the firm are jointly responsible for repaying more than 100 investors in 26 states, Washington, D.C., and British Columbia, for losses of up to $400,000, the NASD said. The exact amount is uncertain because investors will be given the choice of rescinding trades or keeping the stock they bought.
Also sanctioned were:
* Christopher S. Knight, former branch manager, fined $120,854 and permanently barred from penny-stock transactions or from acting as a supervisor. NASD records indicate he left the firm last April and is no longer employed in the industry.
* Robert C. Weaver, executive vice president and chief legal counsel, fined $25,000 and suspended as a supervisor for 15 days.
* Gregory K. Mehlmann, national branch compliance officer, fined $10,000 and suspended for 10 days. Mehlmann left La Jolla in June 1995 and now works for Merrill Lynch, the NASD said.
* Gerald J.R. Budke, branch manager, fined $5,150 and suspended from penny-stock transactions for one year.
Thursday’s order came on top of fines and disciplinary actions meted out last year against 22 other La Jolla brokers and supervisors in connection with the same case.
The violations occurred between January 1994 and May 1995 at La Jolla offices in San Diego, Modesto, Las Vegas, New York City, and Bethesda, Md., the NASD said.
The NASD alleged that La Jolla executives cooked up a scheme to circumvent Securities and Exchange Commission rules meant to inform investors about the risks of trading penny stocks--securities sold over-the-counter at prices below $5.
Often issued by obscure, poorly-capitalized companies--penny stocks are sometimes manipulated by scam artists and, even in the best of circumstances, can be difficult for investors to sell.
According to the NASD, La Jolla would induce customers to sign a document that the firm hoped would exempt it from penny-stock trading rules. It would then sell the securities to the investors without adequate disclosure.
The NASD said the transactions involved shares of 15 companies: Affordable Housing Constructors Inc., Ambra Royalty Inc., Drucker Industries Inc., Environmental Recovery Systems Inc., Exten Industries Inc., HEARx Ltd., Info-Serve Inc., Interactive Telesis Inc., Largo Vista Group Ltd., Longport Inc., Modern Records Inc., Peppermint Park Productions Inc., Photo Acoustic Technology Inc., Quadratech Inc. and XO Corp.
The companies, whose Thursday stock prices ranged from one-tenth of a cent to $1.94, were not alleged to have been involved in or even to know of the violations, the NASD said.
La Jolla, which has a lengthy record of fines, suspensions and cease-and-desist orders by state and federal securities regulators across the country, was in the news last year for its involvement in the Comparator Systems fiasco.
In a wild ride on the Nasdaq stock market in May 1996, shares of Comparator, a Newport Beach fingerprint technology firm, suddenly leaped 30 times in value and then crashed just as abruptly.
The collapse whipsawed investors who bought at the top, and it prompted a probe by the SEC. The agency closed its probe of Comparator in September 1996 without levying fines or major penalties.
La Jolla, which sold a heavy volume of Comparator stock during the run-up, was also reported to be under investigation, but so far nothing has come of it. Neither the SEC nor the NASD would comment.
