Beverly Hills Brokerage Could Face Penalties
JB Oxford Holdings Inc., a Beverly Hills-based brokerage, is telling its investors that the firm could face “substantial” penalties or other costs because of its involvement in the mutual fund trading scandal.
The company, which had a number of run-ins with securities regulators under previous management in the 1990s, has been struggling to compete in the brokerage business since 2000 amid shrinking stock trading volume.
The warning came in a filing last week with the Securities and Exchange Commission, related to 10 million new shares the firm said it might issue over time for acquisitions.
JB Oxford operates a discount brokerage and also provides trade processing for other investment firms. The company was named, but not charged, in New York Atty. Gen. Eliot Spitzer’s Sept. 3 court complaint that exposed mutual fund industry trading abuses.
The complaint centered on alleged improper or illegal trading by hedge fund Canary Capital Partners in recent years. For example, Spitzer said Canary had agreements to routinely trade in mutual fund shares after the 4 p.m. EST close of regular trading each day, while still receiving that day’s final fund share prices.
Such “late trading” is illegal under federal securities laws.
Spitzer said JB Oxford in August 2002 entered into a contract with Canary to handle some of its late trading of fund shares. JB Oxford agreed to take orders as late as 4:15 p.m. EST, according to the court complaint.
Canary agreed to pay JB Oxford 1% of assets traded as compensation for its services, Spitzer said.
On Nov. 6, the SEC sent JB Oxford a so-called Wells notice, which warned that the SEC’s Los Angeles staff was recommending civil charges against the company related to the fund scandal.
A Wells notice allows a targeted company to explain its actions and offer reasons why it shouldn’t be charged with wrongdoing.
In its filing last week, JB Oxford said it had “cooperated fully” with state and federal regulators in their investigations of fund trading abuses. The firm also said it responded to the Wells notice “and is hopeful that its response will lead to a satisfactory resolution of these matters, although there is no assurance that such resolution can be reached.”
The brokerage warned that “we could incur substantial penalties and/or legal fees due to the industrywide mutual fund trading investigations and potential incumbent litigation matters.”
In 2000, JB Oxford agreed to pay $2 million to settle a federal criminal investigation into its relationship with convicted stock swindler Irving Kott. Authorities had focused on whether Kott had secretly controlled the brokerage in the mid-1990s.
JB Oxford’s predecessor company, RKS Financial Group, also had ties in the early 1990s to Rafi Khan, a Southland-based stock promoter who in 2001 settled stock-manipulation charges by agreeing to a five-year ban from the securities industry.
New management, led by current Chief Executive Christopher L. Jarratt, took over JB Oxford in 1998, and wasn’t targeted as part of the government’s criminal probe in 2000.
JB Oxford has been losing money since the beginning of 2001. The company lost $1.1 million, or 73 cents a share, in the quarter ended Sept. 30 on revenue of $4 million. Revenue has shrunk from a peak of $34.5 million in the first quarter of 2000.
In its latest SEC filing, the brokerage warned that “we may never generate sufficient revenues to achieve or sustain profitability or generate positive cash flow.”
Jarratt could not be reached for comment Monday.
The company’s shares, which slid 29 cents to $3.01 on Nasdaq on Monday, have fallen from a 2003 peak of $6.10 in July.
