At JB Oxford, a History of Run-Ins
In the 1990s, some of the sleaziest brokerage firms ever to darken Wall Street’s door also had some of the business’ most elegant names -- Stratton Oakmont Inc., for example, and Biltmore Securities Inc.
Many of them had something else in common too: They employed JB Oxford Holdings Inc., a Beverly Hills-based brokerage, to handle the paperwork for their stock trades as the so-called clearing agent.
It was a relationship that troubled securities regulators, but they never brought charges against Oxford, even as the boiler-room brokerages were shut down, one by one.
Last week, however, Oxford and its trade-processing business were named as defendants in a civil securities fraud suit filed by the Securities and Exchange Commission.
The agency alleged that Oxford in 2002 and 2003 was an enabler for clients who wanted to make improper or illegal trades of mutual fund shares.
For a fee, Oxford agreed to submit trades received from investors after markets closed, the SEC said. The firm also schemed to circumvent fund companies’ rules against in-and-out trades so that clients could engage in market-timing strategies, the suit said.
Shareholders of Oxford must be wondering whether there’s something in the drinking water at the company’s offices. Early in 2000, when new management of Oxford agreed to pay $2 million to end a Justice Department investigation of previous management’s links to a convicted stock swindler, the settlement called for the company to stay out of trouble.
Yet by June 2002, according to the SEC, Oxford was figuring out a way to give certain clients an illegal advantage in their mutual fund trading: Oxford would allow them to enter their trades after markets closed while still getting them that day’s closing price.
From June 2002 to September 2003, Oxford processed more than 12,000 such “late” trades, the SEC said.
In the same period, the company facilitated about 25,000 market-timing trades for clients, even as some fund companies sought repeatedly to stop the transactions because they were disruptive to portfolio managers, the government said.
In all, Oxford’s clients earned at least $8 million from the illicit trading, the SEC said.
For its efforts, Oxford took in almost $1 million in fees for the trades over the 15 months covered in the suit, the SEC alleges. That was no immaterial sum for a company that lost $7.5 million in 2002 as the savage bear market in stocks caused other revenue to dwindle.
The SEC now wants some money back. It hasn’t yet specified an amount, but “we think this is a case that requires significant monetary penalties,” said Randall R. Lee, SEC regional director in Los Angeles.
“This is a firm with a long history of regulatory problems,” Lee said. Although Oxford’s management changed in 1998, “it’s a new regime, and yet there still are serious failings at the top,” he said.
Joseph Dehner, a Cincinnati attorney whose firm in 2002 won a $3-million award for investors in an arbitration case against Oxford, put it another way: “This is one of those stories about how a company has an unbelievable history but is never put out of business by regulators.”
An attorney for Oxford didn’t return a call last week. Neither did Christopher Jarratt, Oxford’s chief executive. He wasn’t named in the SEC suit.
Jarratt, 42, now seems intent on ending Oxford’s life as a discount brokerage and clearing operation. In June, Oxford agreed to sell its brokerage accounts to Ameritrade Holding Corp. Last week, one day before the SEC filed its suit, the company said it would jettison its remaining unit, the clearing arm.
And then what? If the sales succeed, Oxford has said in financial filings with the SEC, it would “have cash to address various legal matters.”
Although Oxford said the brokerage unit sale is supposed to bring in as much as $26 million, and the clearing business could be worth as much as $2.5 million, investors don’t seem to be betting that there will be much left after legal issues are settled: Oxford stock fell to a record low of $1.23 a share on Nasdaq last week.
Yet the company has shown an amazing ability to survive horrid publicity.
Its predecessor, RKS Financial Group, was best known in the early 1990s as the home of broker Rafi Khan, who earned a reputation as a promoter of thinly traded stocks -- the kind that often would rocket, suck in hapless investors, then collapse.
Khan, who left RKS in 1993, settled an SEC stock-manipulation suit in 2000 by agreeing to a five-year ban from the securities business.
RKS, renamed JB Oxford in 1994, set its sights on being a discount brokerage. Behind the scenes was a stock promoter named Irving Kott, who was convicted of stock fraud in his native Canada in 1976.
Federal authorities long suspected that Kott secretly controlled Oxford. Kott has always insisted that he was only a consultant to the company.
Whoever was running the show at Oxford in the mid-1990s saw an opportunity in the booming boiler-room brokerages of that era, including Stratton Oakmont, Biltmore Securities and Monroe Parker Securities Inc.
Those now-defunct firms, which made up their WASPy names to gild their images, were notorious for “pump-and-dump” schemes. Their brokers would cold-call investors and pitch them on highly speculative stocks often owned by the brokerages’ principals. As the stocks surged, the insiders would unload their shares. You can guess the rest.
Oxford became the clearing--house for those and other pump-and-dumpers, earning fees for processing their trades.
Regulators never chose to hold Oxford accountable for the boiler rooms’ activities. But attorney Dehner’s firm won its $3-million arbitration award in 2002 by arguing that Oxford was an accomplice to fraud that investors suffered at the hands of Monroe Parker Securities.
A securities expert who testified in the arbitration said he “had never seen a case where a clearing broker had as much knowledge, gave as much material assistance and participated as actively in a fraud as was true of [Oxford],” according to federal Judge S. Arthur Spiegel’s order affirming the award.
The arbitration penalty came two years after Oxford’s $2-million settlement with the Justice Department over Kott’s role at the company in the 1990s.
To Oxford’s new management, led by young Nashville investor Jarratt, those deals may have amounted to tying up loose ends. Jarratt’s group, Third Capital Partners, injected $6 million into Oxford in 1998 and took control. “We thought it was a grossly undervalued firm with a bright future,” he told BusinessWeek magazine in 1999.
Oxford’s discount brokerage revenue zoomed in 1999 and 2000 as online trading soared with the tech stock boom. But when the market cracked in 2000, so did Oxford’s bottom line. It has been losing money ever since. Jarratt’s stake in the firm has plunged in value, but Third Capital also took some money out along the way: Oxford has lent the group $2.5 million.
Even as it is reduced to a shell, Oxford has told shareholders that it has no plans to liquidate and expects to look for “a new business opportunity.” Given its history, it may surprise no one if Oxford lives again.
*
Tom Petruno can be reached at tom.petruno@latimes.com.
