U.S. Sues Irvine Brokerage Over Shopping.com
In a nationwide crackdown on the allegedly fraudulent trading of small-company stocks, federal regulators Thursday filed 13 lawsuits, including one against an Irvine brokerage suspected of inflating the shares of troubled Internet shopping service Shopping.com.
A Securities and Exchange Commission suit charged that Waldron & Co. and its former president, Cery B. Perle, illegally boosted Shopping.com shares by executing unauthorized trades for the brokerage’s clients, parking stock in fictitious customer accounts and restricting its clients from selling shares in the Corona del Mar-based company.
From November 1997 to March 1998, Waldron realized more than $4.1 million in gains from its stock fraud, the suit alleges.
Tom Fehn, an attorney for both Waldron and Perle, denied any wrongdoing.
“Many of the things in the complaint are based on fabrication and fantasy,” Fehn said. “The lawsuit is based on a misguided attempt by the [SEC] staff to file something that will get in the paper.”
SEC officials said Thursday’s actions are an attempt to focus attention on an increase in the fraudulent trading among so-called “microcap” stocks during the recent bull market. “We wanted to send a strong message about this segment of the market,” said Richard Walker, SEC director of enforcement. “The bull market has attracted a lot of unsavory types who have chosen to ‘follow the money,’ if you will.”
The SEC alleged that 41 businesses, brokerages, promoters and publishers manipulated stocks by falsely claiming medical breakthroughs, hotel renovations, nutritional supplements and other advances.
All told, investors were bilked of $25 million in the 13 cases, which included an alleged Ponzi scheme that cheated 350 investors of $15 million put into a Florida company, Legend Sports Inc., that builds golf entertainment facilities.
Four of the 13 alleged frauds occurred in Florida, where the large population of retirees is considered a good target, Walker said.
In the case of Shopping.com, the SEC alleged that Waldron at one point controlled more than 90% of the company’s 1.3 million publicly traded shares.
Waldron accomplished this, the suit charges, by a maneuver known as “parking,” in which a broker uses customer accounts to hold a block of a company’s stock, masking the stock’s true owner. By controlling a large chunk of Shopping.com, Waldron could dictate the price of the stock, the suit said.
“Waldron clients would call up to ask to sell and Waldron would say no,” said Clifford Hyatt, Los Angeles branch chief for the SEC. “In one instance, they actually refused to sell the stock for a customer, forcing them to transfer their account to another firm.”
Fehn, Waldron’s attorney, said at no point did the company restrict customers from trading or park Shopping.com stock in customers’ accounts.
“We have never had a complaint from any customer about sales being restricted. Never. Not once,” Fehn said.
The SEC’s Walker said the number of incidences of stock fraud appears to be on an upswing, noting that this year the agency has suspended trading of 17 companies, compared to 11 during all of last year and eight in 1996.
In both 1996 and 1997, the SEC acted on at least 50 cases of stock fraud involving microcap companies, and the agency expects to file a similar number of cases this year, Walker said.
Small companies can be susceptible to stock manipulation because there tend to be fewer people watching the company, and stock tends to be in relatively fewer hands.
“They’re usually companies with low share prices without proven, demonstrated products,” Walker said. “The game is to get the stock cheap, hype it and promise riches, and then get out before people discover the fraud.”
The Internet has been a boon to both legitimate and fraudulent investing by making it “very convenient and easy to provide false information, which is one of the hallmarks of many frauds,” Walker said.
Providing false information is one of the key allegations against Waldron, which had been Shopping.com’s lead underwriter.
The SEC accused Waldron of issuing false and misleading press releases designed to inflate Shopping.com shares, specifically pointing to a March 12 statement that touted the company’s growth potential while not revealing that Waldron was the company’s single largest customer.
Fehn denied that Waldron was ever Shopping.com’s largest customer, with the exception of a one-time order that Waldron had placed before taking Shopping.com public.
Short sellers have been particularly hurt by Waldron’s practices, the SEC’s suit said. “Shorts,” as they are known, bet that a stock’s price will fall by borrowing stock, selling it and promising to replace it later. Their goal is to make a profit on the difference between the price at which they borrowed the stock and the price at which they replace it.
By controlling the supply of Shopping.com shares, Waldron was able to profit when short sellers were forced to buy the company’s stock in order to replace the shares they had borrowed.
Last week, the National Assn. of Securities Dealers ordered brokerages that sold Shopping.com stock, including Waldron and Los Angeles-based Wedbush, Morgan Securities, to pay $400,000 in compensatory damages for artificially boosting the stock price.
The SEC has been investigating both Waldron and Shopping.com since March and continues to investigate Shopping.com. The company was not a party to the suit announced Thursday.
Shopping.com shares fetched $9 in their November 1997 debut and soared to $32.13 by March 1998, before the SEC suspended trading in the stock for two weeks.
Since mid-August, Shopping.com stock has fallen from $25 to its Thursday close of $1.
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Scam Allegations
The SEC’s suit against Irvine-based Waldron & Co. accuses the brokerage and its former president, Cery B. Perle, of inflating Shopping.com’s stock through illegal practices, resulting in $4.1 million in profits for the brokerage. Waldron is alleged to have created artificial demand for Shopping.com stock by:
1. Masking large purchases of Shopping.com stock, holding shares in its own account or accounts of those friendly to Waldron. The purchases reduced the number of shares available to the public.
2. Executing unauthorized trades and “parking” stock in customer accounts without their knowledge.
3. Stashing shares in fictitious accounts.
4. Restricting customers from selling Shopping.com stock in their accounts.
5. Issuing a false and misleading press release urging investors to buy the stock. The release allegedly failed to indicate that Waldron, the stock’s underwriter, was also the company’s largest customer.
Rise and Fall
Shopping.com’s stock climbed from less than $10 to more than $30 before plunging to just $1. Here’s how events unfolded and the company’s value declined:
Key Events
1997
Nov. 25: Waldron brings Shopping.com public; shares begin trading over-the-counter
Dec. 10: Waldron begins purchasing shares in quantity, becoming company’s predominant stockholder, according to SEC lawsuit
1998
March 12: Waldron issues press release announcing its “buy” recommendation for Shopping.com stock
March 24: SEC suspends trading of Shopping.com for 10 trading days, citing concerns that stock price may have been manipulated
June 5: Shopping.com President/CEO Robert McNulty resigns; he is retained as a consultant--receiving more money than he was paid as CEO
June 23: Shopping.com severs ties with Waldron
Aug. 27: Shopping.com’s stock plunges 60% after Waldron stops trading
Aug. 28: Waldron fires President Cery B. Perle
Thursday close $1.00
Source: Securities and Exchange Commission, Bloomberg News; Graphics reporting by JANICE JONES DODDS and JONATHAN GAW/Los Angeles Times
