by Gary Carleton, Carleton Law PLLC
Welcome to finraFlashback! Live and Learn. All of us go through difficult experiences. The smart people learn from their prior experiences. The really smart people can also learn from the experiences of others.
As a former securities regulator, where I spent more than 30 years, first at the SEC and then FINRA, I investigated and prosecuted securities brokerage firms and their brokers for everything from insider trading, to stock market manipulation, to straight out stealing from little old ladies. There were also plenty of simple, avoidable problems made worse by falsifying documents and lying to regulators to cover up what may have been an initial mistake.
There are lessons learned all along the way. My hope is that these FINRA Flashbacks will give others a chance to learn from the experiences of others. We start out with FINRA’s ultimate good cop catches bad guy story – Stratton Oakmont.
FLASHBACK to STRATTON OAKMONT
Even after 25 years, FINRA’s high water mark in effectively shutting down notorious bad brokerage firms has got to be Stratton Oakmont. You wouldn’t have known by reading Jordan Belfort’s book “The Wolf of Wall Street” or watching the movie version of it, that it was FINRA’s investigation and successful prosecution of Stratton Oakmont that finally closed the firm.
Many of the state and Federal securities regulators and criminal investigators were looking for an angle to finally bring down this giant of bad firms but it was FINRA that closed Stratton’s doors for good. And it was accomplished with a relatively small case – of overcharging customers by approximately $425,000 in the sale of a single security – Master Glazier’s Karate, International, Inc. (stock symbol KICK).
In the early 1990s, as Stratton’s antics of selling penny stock and other low-value securities through high-pressure sales tactics ramped up, the firm began to the get the attention of many law enforcement and regulatory organizations including the FBI, Federal and state regulators, the SEC and FINRA. Although its founder, Jordan Belfort left Stratton in February 1994, the antics continued unabated under the new firm president and Belfort protégé, Danny Porush.
Barry Goldsmith, then NASD Regulation’s [now FINRA] Executive Vice President of Enforcement described Stratton, saying, “In less than a decade, Stratton Oakmont amassed one of the worst regulatory records of any broker/dealer firm.
The firm has been subject of numerous disciplinary actions brought by NASD , the Securities and Exchange Commission, and state regulators involving fraud, market manipulation, sales practice Abuses, and failures to adequately supervise its employees.”
Stratton was a juggernaut of initial or secondary public offerings, confident of its ability to sell just about any offering through its sales force. Stratton had developed a system of often selling to certain favored clients in offerings, allowing a modest increase in the immediate aftermarket from the public offering price, with a prearrangement that those favored customers would “flip” the stock back to Stratton within a matter of days.
Those customers would get a built-in profit and Stratton would get the stock back in inventory to sell back out to unsuspecting investors, and earning even more profits along the way. Stratton would use its sales force to employ high pressure sales tactics to push this stock.
Stratton’s source of companies for these offerings even included friends of Stratton’s owners. For example, Danny Porush was childhood friends with Steve Madden, and so Stratton conducted the public offering for Steve Madden shoes.
Belfort was friends with Mark Glazier. Glazier ran a few karate studios on the East coast. Friends being as they are, and Belfort eager for business, Stratton underwrote a public offering for Master Glazier Karate. It was the aftermarket trading in Master Glazier warrants that would turn out to be Stratton’s downfall.
In the early 1990s, I was fortunate to be selected to join the special FINRA team set up to investigate and then prosecute Stratton. In a highly unusual move for the time, FINRA set up a dedicated “war room” in its New York offices and staffed it with experienced investigators, a supervisor and an attorney.
While we were putting all the pieces of the “flipping” scheme was taking time, the team developed a relatively small case involving Stratton’s trading of Master Glazier stock in the marketplace. As it turns out, Stratton had been excessively marking up its stock to public investors well beyond what was allowable under NASD rules and Federal law. In other words, FINRA determined that Stratton had been selling Master Glazier to customers at an excessive price over what was determined to be the prevailing market price.
In all, it amounted to approximately $425,000. In the 1990s, FINRA’s ability to investigate and prosecute excessive markups was down to a science and its analysis in this case was bulletproof. For every trade, we identified every buyer and seller of Master Glazier and scheduled every trade, including the price and markup, in exact chronological order, with backup documentation for every trade.
With each trade in place, FINRA was able to calculate the percent of transactions and volume being affected by Stratton and determined that the firm dominated and controlled the market for Master Glazier during the relevant period.
When a firm is found to dominate and control the market or a security, it means that normal market forces are disrupted. This requires brokers to use their own contemporaneous purchase prices for the securities as the basis for determining the “prevailing market price” and use that price rather than the posted market price as the basis for a markup.
There would be no settlement of the Complaint filed by FINRA and the matter went to hearing before the District Business Conduct Committee in New Your (“DBCC”). The DBCC issued its decision in April 1996, finding against Stratton, its President, Danny Porush and its head trader, Steven Sanders. The firm was sanctioned with a one-year prohibition against effecting any principal retail transactions. The DBCC also barred Porush and suspended Sanders for one year.
Stratton and its principals appealed the decision to the National Business Conduct Committee (“NBCC”) (since reconstituted as the National Adjudicatory Council). On December 5, 1996, the NBCC issued its decision in which it expelled Stratton, affirmed the bar for Porush and increased the sanction for Sanders to a bar.
Stratton was ordered to pay restitution and was fined $500,000. Porush and Sanders were also fined and censured. The SEC would subsequently deny a request to stay the sanction pending appeal and then issued a decision upholding FINRA’s decision.
After the NBCC decision, NASD Regulation President, Mary Shapiro proclaimed, “With this expulsion, NASD Regulation has rid the securities industry of one of hits worst actors. With Stratton Oakmont’s extensive and serious regulatory history, and an obvious disregard for all rules of fair practice, today’s actions make the securities industry a better place for investors.”
In Case You Missed It – You can find prior blogs on the FINRA investigative and disciplinary process at www.carletonlaw.net and go to the Blog tab.
The prior topics include:
* Where Have all the FINRA Members (and disciplinary actions) gone? https://carletonlaw.net/where-have-all-the-finra-members-and-disciplinary-actions-gone/
- Special Considerations for Small Firms when Negotiating Settlements with FINRA https://carletonlaw.net/special-considerations-for-small-firms-when-negotiating-settlements-with-finra/
* Receiving that First Request for Information (a Rule 8210 Request) https://carletonlaw.net/receiving-that-first-request-for-information-a-rule-8210-request/
* Pre-Wells Notices – An Early Opportunity to Discover FINRA’s Evidence and Present Your Case https://carletonlaw.net/pre-wells-notices-an-early-opportunity-to-discover-finras-evidence-and-present-your-case/
* Understanding the Significance of FINRA’s Limited Jurisdiction; https://carletonlaw.net/315-2/ and
* How Old is Too Old for a FINRA Disciplinary Action https://carletonlaw.net/how-old-is-too-old-for-a-finra-disciplinary-action/
About Carleton Law PLLC
Getting a call from FINRA or SEC Enforcement telling you that your work as a securities broker is under investigation could be the worst day of your life. You have worked hard for years building your business. Now, with one wrongful allegation you can see it all swept away. But with expert counsel, it does not have to end that way.
For more than 30 years, Gary Carleton was the one conducting those investigations at FINRA and SEC and now his firm, Carleton Law PLLC, brings that savvy experience to bear to advocate for brokers and FINRA firms who find themselves in that dreaded position. Carleton Law focuses on the individual needs of each client to guide them through the maze of the investigative and disciplinary process.
Carleton Law PLLC | 1015 15th Street NW, Suite 1025 Washington, DC 20005 | info@carletonlaw.net
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Readers of this article should contact their attorney to obtain advice with respect to any particular legal matter. No reader should act or refrain from acting on the basis of information contained herein without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this article does not create an attorney-client relationship between the reader or user and the article author or law firm.
Attorney Advertising – Gary Carleton, Principal of Carleton Law, is admitted to practice law in the State of New York and the District of Columbia. This article may be considered attorney advertising.