O.C. Brokerage, Restricted by Regulators, Will Shut Down

A boutique Orange County brokerage, spotlighted in a U.S. Senate investigation of day-trading abuses and subsequently severely restricted by regulators, said Tuesday it will cease operations.

Providential Securities Inc., which caters to Asian immigrants, will close its remaining 1,500 investors’ accounts, transfer them to other brokerages and withdraw from the National Assn. of Securities Dealers, the industry’s self-regulating body.

Providential had 10 offices in Southern California, Oregon and New York when the eight-month Senate investigation into day trading was made public in February. Henry Fahman, chairman of Providential Securities’ holding company, said Tuesday it now has just three--its Fountain Valley home office and branches in New York and Alhambra.

Fahman said, however, that it was the NASD that had effectively shut down Providential’s business in August, when it placed restrictions that allowed the firm only to liquidate clients’ accounts. He said the NASD took the action after reviewing Providential’s accounting practices.

According to Fahman, Providential had about 5,000 accounts with more than $100 million when NASD restricted it in August; it was down to about 1,500 accounts with less than $20 million Tuesday.

Nancy Condon, a spokeswoman for NASD’s regulatory arm, declined to discuss the case. “We can’t comment on ongoing investigations,” she said.

Fahman said that Providential’s parent company, Providential Holdings Inc., will continue with its plans to acquire a San Francisco investment firm, Holt & Collins, which has no day-trading operations. He added that he hopes former customers will one day return and open accounts at that firm.

Acquiring Holt & Collins would require the approval of NASD regulators, Condon said.

Fahman said that if his company completes its agreement to acquire Holt & Collins, it will not conduct day trading--the controversial practice that allows individual investors to make rapid-fire trades in search of short-term profits.

The Senate staff investigation on day trading found the industry rife with “disturbing business practices.” The main problem was operations that overstated the potential for profits and understated risks, the Senate report said.

The report made Providential a case study, examining the practices of some of its employees as examples of the abuses in the day-trading industry.

One case involved a part-time clerk at a record store in Orange County’s Little Saigon area who said she was guaranteed a 20% annual return if she allowed a Providential day trader to handle her investment. She lost $35,000 of the $48,000 invested, part of it borrowed from her elderly mother. An NASD arbitration panel awarded her $38,000 in a claim against Providential, its employee and others.

Fahman denied wrongdoing, saying the employees in question had begun the questionable practices at another firm before joining his company.

Providential Holdings, the parent company, became a publicly held business in February by merging with a public consulting firm. The accounting dispute that resulted in the NASD restriction occurred after the books of the two enterprises were merged; regulators objected to Providential’s inclusion of illiquid real estate assets, such as its offices, in its calculations of its net worth, according to Fahman.

Providential Securities, which is Providential Holdings’ principal business, had an operating loss of $647,000 on $5.87 million in commissions and fees during calendar 1999, according to SEC filings.

Providential’s stock, which trades over the counter, closed at 22 cents a share Tuesday, down 3 cents. Its high, recorded March 10, was $3.66.

Another day-trading firm--All-Tech Direct Inc.--on Tuesday agreed to stop doing business in Massachusetts for at least two years after being charged by state regulators with violating an earlier settlement, Bloomberg News reported.

Montvale, N.J.-based All-Tech also agreed to pay a $25,000 fine, regulators said.